Forensic Accountants are often asked to assist attorneys and insurance companies in the quantification of economic losses resulting from personal injury, wrongful death or lost employment.   Individuals are assets that can generate a stream of current and future earnings and factors like age, education/training, geographic location, gender, race, occupation, industry, union membership, and health can impact this future stream.

Whether you’re dealing with a personal injury, wrongful death or lost employment, the positive impact of an accomplished forensic accountant can be significant.  Individual damage cases will often benefit from the services and skills of an experienced forensic accountant, which include: accounting, tax, general business and financial consulting, strong analytical and research skills, as well as legal knowledge. Forensic accountants also bring intellectual curiosity, professional skepticism, attention to detail, persistence and the ability to think creatively and communicate effectively.

At FAZ, we specialize in projecting lost earnings related to personal injury, wrongful death and lost employment.  If you would like to refer a case, please download the FAZ PI Claim Questionnaire.

New Cases can be uploaded to our secure portal.  Please include the FAZ PI Claim Questionnaire, along with any relevant financial records for the Plaintiff.  To upload these documents, click the link below.

The use of reasonable care and diligence to minimize or avoid damages or injury. Under the mitigation of damages doctrine, a person or business who has suffered an injury or loss should take reasonable action, where possible, to avoid additional injury or loss. The failure of a plaintiff to take protective steps after suffering an injury or loss can reduce the amount of the plaintiff’s recovery. The mitigation of damages doctrine is sometimes called minimization of damages or the doctrine of Avoidable Consequences.

Expectation to Mitigate

The Plaintiff in an economic damages case is expected to mitigate losses by making reasonable efforts to offset losses when possible.  But what is reasonable?  It means the injured party must do what a reasonable person under the same circumstances would do, taking all relevant information into consideration.  For instance, a person who injures his back is not required to seek medical treatment from the world’s most renowned back specialist. However, they would be reasonably expected to visit a local board-certified physician shortly after sustaining the injury.   The obligation to mitigate damages simply means that you must do what you can within reason to keep your damages at a minimum.  You are not permitted to allow your damages to pile up excessively.  In both contracts cases and personal injury cases, the purpose of the mitigation of damages rule is to recognize that injured people (whether injured physically or financially) have a responsibility to take care of themselves, and their responsibility to themselves does not evaporate merely because another person is responsible for injuring them in the first place.  In Hamilton v. McPherson, 28 N Y 72, 77, the law, for wise reasons, imposes upon a party subjected to injury from a breach of contract the active duty to make reasonable exertions to render the injury as light as possible.

Mitigation of Damages as an Affirmative Defense

Is mitigation of damages an affirmative defense?  Along these lines, the law recognized that a claim for failure to mitigate damages is an affirmative defense.  What this means is that the Plaintiff does not have to prove that he or she took reasonable steps to mitigate his or her damage, but rather Defendant must prove that Plaintiff did not take those steps.

In Williams v. Bright, 632 N.Y.S.2d 760, the issue raised in this case is the extent of the duty to mitigate damages when a proposed course of treatment would violate a plaintiff’s deeply held religious beliefs. The law is clear that with respect to damages, a plaintiff has a duty to mitigate so as not to unduly penalize a defendant. Normally, that obligation is to do what a reasonable person would have done to alleviate or cure the condition. The key to a successful defense is often proof that plaintiff failed to mitigate damages.  Plaintiff is required to act reasonably to mitigate damage, but failure to do so must be proved by Defendant.

Offsetting Damages

In Brandon and Tibbs v. George Gavorkian Accountancy Corp., an action for damages for breach of a joint venture agreement to establish an accounting practice, the Defendant was found to have wrongfully excluded Plaintiff from the Practice in violation of the agreement.  To mitigate his damages, Plaintiff opened a competing office nearby, but lost money for three years before beginning to earn a profit.  The Court held the reasonableness of the Plaintiff’s mitigation effort was a question of fact, resolved favorably for the Plaintiff at trial. The finding that Plaintiff starting a new business was a reasonable effort at mitigation was affirmed.  Plaintiff was therefore entitled to recover costs of mitigation, but as Plaintiff had recovered 5 years of lost profits, the results of 5 years of mitigation efforts should be offset against those damages.  At trial, only the 3 years of losses had been considered.  The Court concluded that Plaintiff was required to compute costs of mitigation over 5 years, offsetting the first 3 years of losses by the next 2 years of profits, parallel to the 5 years of lost profits damages allowed at trial.  Either net amount of mitigation loss only was recoverable, or Plaintiff would be required to offset net mitigation profit against his damages.

With respect to profits not offset, the distinction made in determining whether other profits must be offset often depends on whether the breach calls for personal services.  For example, if an employee is wrongfully discharged, it is generally understood that other income is to be offset against the employee’s damages.  The employee would not have been free to earn the other income but for the discharge.  Other income earned by a business will not necessarily be offset, as a business may have been able to earn the other income in addition to the income lost.

Factors Affecting the Plaintiff’s Ability to Mitigate

The responsibility of an injured party to make reasonable, good faith efforts to mitigate its losses is the subject of much legal debate. While the burden of proof to prove damages falls on the plaintiff, it is the defendant or party alleged to have harmed the plaintiff that must demonstrate with some level of specificity the injured party’s failure to mitigate damages. In examining a defendant’s claims and/or a plaintiff’s failure to mitigate, the courts consider several factors, including plaintiff’s costs, financial abilities, risk of additional losses, market barriers, supply barriers, timing issues, good faith efforts to minimize losses, as well as the availability of reasonable substitutes to replace lost resources and profits.

• Mitigating damages typically requires a plaintiff to incur some costs, including out-of-pocket expenses to repair harm allegedly caused by the defendant and the costs of time and effort to replace lost goods, parts, customers or suppliers with comparable substitutes. The courts attempt to differentiate between reasonable and excessive costs by freeing a plaintiff from making “substantial expenditures of his own funds or incur substantial risk to avoid the consequences of the defendant’s conduct.” Should a plaintiff choose to incur and claim as damages excessive expenses to mitigate future losses, he or she must be prepared to justify the reasonableness of such expenditures.
• The Plaintiff’s Financial Ability. There are times when financial constraints may hinder a plaintiff’s ability to mitigate damages. This can occur when the plaintiff lacks funding required to take mitigating action, or when mitigation costs exceed the economic damages the plaintiff incurred due to the defendant’s alleged action. The courts have divided opinions in these cases. In some instances, the courts accepted plaintiffs’ lack of funding as sufficient cause for failure to mitigate. In others, the courts ruled that plaintiffs’ financial limitations were not a satisfactory defense when other, less costly options, such as selling the property in dispute, reducing sales staff or non-essential expenses, were available to them.
• Risk of Additional Losses. Like the costs that a plaintiff would incur to mitigate damages, the courts also consider the risk of additional losses when evaluating a plaintiff’s reasonable efforts. Plaintiffs are under no obligation to take on undue risk, which the courts have interpreted broadly as follows:
  • Almost any risk of considerable loss to the injured person if he attempts to mitigate damages should be considered undue. (Franconia Assocs. v. United States, 61 Fed. Cl. 718)
  • While reasonable cost-avoiding steps include affirmative efforts to make substitute arrangements compensating for the lack of contract performance, such arrangements need not be entered if they would expose the party to undue risk or significantly compromise its interests. (Brazos Electric Power Coop., Inc. v. United States, 52 Fed. Cl. 121, 129)
  • The injured party is not obligated to exalt the interests of the defaulter to his own probable detriment. (In re Kellett Aircraft Corp., 186 F.2d 197)

What constitutes undue risk is ultimately based upon the specific facts and circumstances of any given case. The more costly and extraordinary the actions required of the plaintiff, the more likely the undue risk. Conversely, in circumstances in which a defendant can prove that a plaintiff had the ability to take simple steps to avoid exposure to future losses, the more likely the courts will rule that such actions fall within the plaintiffs’ obligations to mitigate damages.

• Good Faith Efforts. Plaintiffs claiming that they were unable to mitigate damages should still demonstrate that they engaged in good faith efforts to minimize future losses, rather than allowing those losses to increase. For example, in Campbell v. Louisiana Intrastate Gas Corp. (528 So.2d 626), the plaintiff prohibited the defendant, a private utility company, from entering his property to restore drainage from underground gas pipes on the plaintiff’s farm. As a result, the property owner incurred additional losses in crop productivity. The courts, considering the plaintiff’s lack of good faith in dealing with the defendant to mitigate losses, reduced the plaintiff’s damage award resulting in an 80 percent decrease in the damage award.
• Market Barriers. The plaintiff’s marketing capabilities, considering its reputation, product quality, and product features, may have been affected by defendant’s breach and affect its ability to mitigate damages.
• Supply Barriers. The defendant’s breach may also have affected the plaintiff’s ability to obtain goods and services from its suppliers necessary for production to mitigate its losses.
• Timing Issues. The plaintiff’s knowledge of the event causing economic harm and the time required to implement a mitigation strategy may also affect mitigation.
• Reasonable Substitutes. One way in which injured parties may minimize future losses is to replace lost goods, parts, services, customers or suppliers with comparable substitutes from alternative sources. However, in most cases, plaintiff and defendant will almost certainly differ in their interpretations of what each considers to be reasonable substitutes. Common wisdom presumes that the more generic or commodity-like the product or service, the easier it presumably would be to find a replacement. However, the fact is that a reasonable replacement may be limited by the type of product being sold, the demand for the product, the intensity of competition from other manufacturers and other factors. Moreover, plaintiffs should be aware that they may unwittingly limit their claims to any damages if defendants can prove the existence of a replacement product at a lower cost.

Personal Injury

When a Plaintiff is unable to work because of an accident, he or she may be able to recover any income that was lost, but the duty to mitigate still applies when it comes to financial losses.  For instance, an injured Plaintiff cannot just sit idly by allowing his or her lost income damages to accumulate without attempting to find alternative employment.  While the Plaintiff may not be able to work in his or her usual occupation, if they can find work doing something else, they have an obligation to mitigate their lost wages by working at another job.  Other experts, such as vocational rehabilitation experts may provide mitigation factors and an offset would generally apply for amounts the plaintiff earned, will earn, or could have earned during the loss period.  The testimony of a vocational expert along with that of a medical expert is often needed to help a Plaintiff figure out what he or she can truly expect to be able to do after an injury and how much money he or she can expect to earn doing it.

The failure to mitigate damages will negatively affect the amount of damages awarded to the Plaintiff.  At a personal injury trial, if the Defendant can successfully demonstrate that the Plaintiff failed to act reasonably in minimizing their losses after an accident, the amount a Plaintiff can receive, even if the Defendant is found liable, will almost certainly be reduced.  An injured Plaintiff is entitled to recover claimed damages that are caused by and attributable to the underlying accident, not claimed damages that result directly from the Plaintiff’s failure to mitigate.

Under New York law, the failure to use a seat belt cannot be introduced into evidence regarding the issue of liability but rather as an element in mitigating damages. In the typical personal injury case in New York, the accepted rule has been that the injured party cannot recover damages for personal injuries he would not have sustained had he used an available seat belt. The failure to use a seat belt is an affirmative defense that must be properly pleaded and proved by the defendant. If sufficient expert testimony is presented by the defense, the jury must determine whether failure to use a seat belt resulted in greater injury, and thus warrants a reduction of the damages awarded based on a failure to mitigate.

Real Estate Damages

In Center Line Investors Company v. Tri Co Industries Inc., a tenant breached its lease for space in a building and vacated the premises.  By agreement, the landlord moved a tenant occupying a different space into the vacant space at a higher rent than the defaulting tenant had been paying.  The landlord sought to recover his damages, the lost rent from the space now vacated by the tenant that had agreed to move.  Citing a scattering of authority that was said to have supported his position, the Court held that the landlord could not recover any damages at all, as damages for the lost rents on the space that was vacated by the tenant that had moved would not have been within contemplation of the parties to the original lease.  This result seems to be wrong.  A landlord that’s penalized for making an economically rational decision that reduces damages and is now left with no recovery at all.  The reduced damages have still been suffered.

There seems to be confusion about whether, under New York law, a residential landlord has a duty to mitigate its damages after the tenant’s breach of the lease.  In other words, does a residential landlord have an obligation to try to re-let the space after a tenant abandons a lease to minimize its damages of lost rents?  The answer currently in New York is no.

Prior to 1995, the consensus of the Courts was that although commercial landlords were under no such duty, residential landlords had a duty to mitigate their damages.  In 1995, however, the Court of Appeals issued a decision in Holy Properties Limited v. Canada Cole Production holding generally that landlords do not have to mitigate their damages.  The Holy Properties case involves a dispute concerning a commercial lease that the Court of Appeals did not make any distinction between commercial and residential leases and this decision did not carve out any exception for residential leases.

Conclusion

Mitigation of damages is discussed in surprisingly few lost profits damages cases.  Maybe the Defendants do not investigate the facts and raise the issue in all circumstances where it may be appropriate.  A Defendant confronted with a claim for damages for lost profits should determine by discovery what other profits Plaintiffs made that could not have been made but for the wrong alleged.  These are part of the Defendants case at trial and could well reduce the Plaintiff’s ultimate recovery, if Plaintiff prevails.  When trying lost profits cases, attorneys must address the defendant’s responsibility to prove or disprove a plaintiff’s efforts to mitigate losses while understanding the limitations plaintiffs may face in doing so. In these instances, damages experts may benefit from supporting testimony from industry experts and fact witnesses who may be better suited to address the rationale behind a plaintiff’s failure to mitigate.