By SUSAN W. LANHAM, PH.D., CFFA
Forensic economists are often asked to determine the dollar value of economic losses sustained by plaintiffs in personal injury and wrongful death cases. Economic losses can include earnings and benefits related to the labor market, services unrelated to the labor market provided to their households, and future medical expenses.
Economists must first determine the plaintiff’s pre-injury or pre-death earnings situation. They do this by reviewing the individual’s earnings history from documents provided by the hiring attorney.
The documents preferred by the forensic economist include copies of complete federal income tax returns for, at a minimum, five years prior to the year of incident and any year including and after the year of incident. All W-2s and 1099s should be included with each corresponding tax return.
Although less ideal, a plaintiff’s earnings history can also be obtained from the Social Security Administration. Any individual may log onto “My Social Security” online to access his or her own personal information including a history of reported earnings.
Tax returns are preferred given the need to determine whether job-related expenses were deducted or, in the case of a self-employed individual, whether normalization adjustments need to be made to income because of certain depreciation expenses.
Fringe benefit information is typically more difficult to obtain. Fringe benefits include health insurance, dental insurance, vision insurance, defined-benefit retirement plans, defined-contribution retirement plans, and employer contributions to Social Security.
Fringe benefits are typically valued based on the monetary benefit to the individual plaintiff, which can be valued as the amount the plaintiff would have to pay to replace the benefits.
Given that the replacement cost of comparable benefits can be difficult to obtain, the monetary benefit is more commonly valued as the employer’s direct cost of providing fringe benefits to the plaintiff. This information can be obtained from employee handbooks or printouts provided by the employer detailing total employee compensation.
Often, forensic economists will use labor-market and employment data obtained from government sources such as the U.S. Bureau of Labor Statistics to determine an appropriate salary fringe benefit multiplier. Other items that could be helpful in determining lost earnings and fringe benefits are employer-provided paystubs and 401(k) statements.
The wrongful death of an individual who had already retired also involves a valuation of lost benefits as part of economic damage calculations. The monthly Social Security and pension income that was lost would be valued through the individual’s normal life expectancy with considerations made for any survivor benefits that have been or will be received.
A valuation of the lost Social Security benefits of the deceased is often more involved than it would appear. A review of the spouse’s social security entitlement on his or her own earnings record would be needed.
If, for example, the husband had been earning $1,500 per month and his wife had been earning $1,000 per month, the wife would be entitled to the higher $1,500 monthly benefit upon the death of her husband, depending on her age.
Given the husband’s death, the loss would, therefore, be equal to the wife’s pre-death entitlement, or $1,000 per month. Valuations of this type are common in asbestos-related cases.
A valuation of economic damages in personal-injury and wrongful-death cases will often include a review of those services that have been lost in caring for the household.
The forensic economist must determine the cost to the family if the family members were to go out into the marketplace to replace those services provided by the injured or deceased person. Each service that was reduced or eliminated as a result of the cause of action must be analyzed and an appropriate value for the service determined.
Future medical expenses, as established by a physician or life-care planner, involve the progression of cost components into the future. The duration of the progression is often an issue; however, future medical expenses will typically be valued through the plaintiff’s anticipated life expectancy.
Assumed growth rates and discount rates are always an issue with these valuations and must be well supported.
A valuation of economic damages in past periods is often straightforward. Future damages, however, must be reduced to a present-day dollar value and are, therefore, much more involved.
Efforts must be made to ensure that all economic losses are included in the valuation and that the valuations are reasonable and inclusive of appropriate offsets and other considerations. It is often wise to consult a forensic economist regarding such a valuation. The results of a professional review of the economic damages are typically well worth the initial investment.
Dr. Lanham is owner of Lanham Economics in Scott Depot and has been working as a forensic economist for more than 18 years. She has prepared more than 1,000 economic loss valuation reports.