Measuring Individual Damages…An Overview

Damages are monies claimed by or to be paid to a person as compensation for loss or injury. Damages involving individuals include damages from personal injury, wrongful death and lost employment that may be awarded in a lawsuit or other dispute resolution matter. The role of the forensic CPA in calculating damages involving individuals often relates to economic losses or special damages. This article is intended to provide a basic overview of what should be considered when evaluating a claim for individual damages. The following represents what we believe are the most generally accepted and critical areas of consideration:

The reasonable certainty principle must be addressed and any assumptions may not be speculative.

 

 

The plaintiff in personal injury or employment discrimination must make reasonable efforts to mitigate the loss.

The quantification of lost earnings involving individuals requires an evaluation of what the individual was earning or could have earned, as well as the evaluation of what the individual was expected to earn.

Earning capacity attempts to measure potential earnings and is based upon earnings that an individual could earn considering the individual’s education, training, experience, and whether the individual was ever engaged in such employment.

Vocational rehabilitation experts may be utilized to provide data regarding employment alternatives.

The age earnings profile considers the effect of age on earnings. Studies show that earnings generally increase at greater rates for younger individuals and that earnings growth reaches a peak and may decline for older individuals.

An individual’s income from other sources such as rental properties, interest, dividends or royalties may be examined to determine if it was effected by the loss event.

Lost fringe benefits may also represent an element of loss. Typical fringe benefits may include, profit sharing, retirement plans, employee contributions for health, life, disability insurance premiums, paid time for vacations, holidays and sick leaves, educational assistance, Section 125 Cafeteria plans and Childcare assistance.

Lost retirement benefits relate to an employment fringe benefits of employer funded retirement plan contributions. The employer contribution may be a defined contribution or a defined benefit plan.

Household services that can no longer be performed due to personal injury may represent another component of personal damages. Examples of household services include home maintenance and repairs, managing finances, child care, housekeeping, cooking and shopping.

Medical and rehabilitation costs related to the injury may be an element of the loss calculation. The past medical and past rehabilitation costs are generally based on actual costs incurred and should be supported by invoices or other corroborative documentation. 

Work life expectancy represents the number of years a claimant would have worked but for the loss event. This number is generally taken from tables provided by or based upon data of the Bureau of Labor Statistics.

Life expectancy represents a statistically based number of years the injured party would have lived but for the loss event. This number is generally determined from reference to tables prepared by the Vital Statistics Division of the National Center for Health and Statistics. 

Personal consumption or personal maintenance should be considered in calculations involving wrongful death. A monetary amount that has been used by or on behalf of the decedent and which does not benefit other family members can provide a reduction to be taken in consideration and calculation of damages in wrongful death cases.

A growth rate is generally applied to the base elements of a loss claim to calculate the loss over loss period. The rate of growth may be established by review of the current economic data referenced through the historical information of the injured party, employer industry data and the national and international statistics. 

The jurisdiction governs the treatment of income taxes in calculating damages and legal counsel should be consulted to determine if the calculation should be adjusted for income taxes.

The base elements of the loss as adjusted to reflect growth over loss period should be discounted to present value to provide the lump sum representing the future loss. Generally, the discount rate represents the rate at which the claimant or the survivors can invest the lump sum with no risk of loss.

As mentioned, this article is intended to provide a basic overview of what we believe should be considered in the evaluation of a claim for individual damages. We hope it serves as a useful assessment tool if you are ever involved in the measurement of individual damages. Please stay tuned for future articles that will go into much more detail and supporting case law with respect to the what we feel are the most critical areas of consideration.