Calculating damages in your case

Calculating damages in your case

Overview of damage components

In calculating damages for a personal injury or wrongful death case, you typically start with the economic damages and then progress to the non-economic damages. The non-economic damages are often the largest damages, but you start by quantifying what you can and then move on to non-economic damages.

For economic damages, the largest positive value is loss of earnings or earning capacity. Loss of or damage to property may also be involved, and in some jurisdictions some consequential damages such as loss of insurability or loss of credit are potentially quantifiable and recoverable, because they are losses of a positive value proximately caused by the defendant.

The negative costs incurred for economic damages consist of past and future medical costs, rehabilitation costs, and special accommodation costs resulting from the defendant’s breach of duty. Funeral costs are commonly included in a wrongful death case.

For non-economic damages, there is a semantic issue of whether they are regarded as positive values lost or as negative costs incurred. It is often more powerful to speak of them as positive values lost, because jurors are more receptive to placing a significant value on health and wellness than on pain and suffering. The non-economic damages are pain, mental suffering and anguish, physical disfigurement and impairment, mental impairment, loss of enjoyment of life, and loss of society and companionship.

Steps for computing lost earnings and earning capacity

Loss of earnings or earning capacity is often the largest component of the economic damages in a personal injury or wrongful death case.

At its simplest level, loss of earnings is the difference between the earnings an individual would have received but for the defendant’s breach and the actual earnings received or likely to be received, reduced to present value. However, this concept can be complicated by the fact that many jurisdictions allow for recovery of loss of earning capacity even if there has been no loss of actual earnings.

The basic steps for computing future loss of earnings or earning capacity are:

  1. Estimate by year the future earnings that likely would have been available but for the occurrence.
  2. Estimate the number of years (the work life expectancy) during which earnings likely would have been available.
  3. Estimate the actual (mitigating) earnings available after the occurrence.
  4. Estimate the present value of future net earnings loss (the difference between “but for” earning capacity and mitigating earnings).
  5. For wrongful death cases, estimate the personal consumption expenditures of the decedent.

Step 1: Future earnings

If the plaintiff or decedent was fully employed at the time of the occurrence, start with the individual’s base earnings at that time. It is important to account for all categories of earnings that were affected, including:

  • Salary or hourly wage;
  • Overtime compensation;
  • Incentive compensation such as commissions or bonuses;
  • Fringe benefits such as health care and allowances for housing or transportation; and
  • Deferred benefits such as pensions or stock options.

Go back through several years of earnings history to establish fully what the individual was making, was capable of making, and what increases in earnings might reasonably be expected in the future. Also ask about future employment plans and opportunities for advancement. Several factors drive increases in future earnings:

  • Promotions or changes in responsibilities or jobs that bring increased earnings.
  • Merit increases in compensation within the same job.
  • General wage inflation within the company, the industry, or the economy as a whole.

For individuals with an inadequate earnings history (e.g., individuals not fully employed or who have only been fully employed for such a short time that past earnings provide an inadequate basis for projecting future earnings) project a life-cycle pattern of earnings based on generally accepted demographic information. Average increases vary based on race, level of education, age, occupation, geographical location, and a host of other possible variables.

For instance, there is an age-earnings cycle that varies for different demographic groups, but within a given demographic group it is common for earnings to increase on average until a certain age, at which point the average earnings for that demographic group level out or start to fall.

Use government statistics to develop a rough damages model. The numbers will only be averages, but those averages can be used to project percentage increases or decreases in average wage rates for the demographics of the plaintiff or decedent at various ages.

To obtain the latest governmental income population statistics, go to www.census.gov and then:

  • Click on “People & Households: Income.”
  • Click on “Income Statistics.”
  • Click on “Tables of Income by Detailed Socioeconomic Characteristics.”
  • Click on “Person.”
  • Click on Table No. “PINC-04 (Educational Attainment – People 18 Years Old and Over, by Total Money Earnings in 2008, Work Experience in 2008, Age, Race, Hispanic Origin, and Sex”).
  • Choose the demographics that match the plaintiff or decedent, and then use the different averages at different ages to roughly calculate the average age-earnings cycle (the extent of average percentage increase or decrease in earnings by age for a given demographic group) for the plaintiff or decedent.

Apply this resulting age-earnings cycle to the base earnings information you have to make a rough approximation of future earning capacity of the individual.

Example

Assume the individual in this example was permanently injured in early 2007. If this individual is a white male with a bachelor’s degree, aged 24 at the beginning of year 2007, with one year of full-time earnings before injury in the amount of $32,000, you would have gone to the table PINC-04 for the year then available (2006) and have obtained these average earnings numbers for white males whose highest educational attainment is a bachelor’s degree:

Age Earnings
18 to 24 years of age 28,250
25 to 29 years of age 48,384
30 to 34 years of age 70,327
35 to 39 years of age 79,691
40 to 44 years of age 82,310
45 to 49 years of age 84,238
50 to 54 years of age 88,873
55 to 59 years of age 76,263
60 to 64 years of age 67,053
65 to 69 years of age 54,123
70 to 74 years of age 45,115

Using these numbers, you would have then approximated the average age-earnings cycle for this demographic group by seeing how much percentage increase there is in average earnings as age increases past the base year of age 24. The resulting table looked like this:

Age Earnings Percentage increase
18 to 24 years of age 28,250 100%
25 to 29 years of age 48,384 171%
30 to 34 years of age 70,327 249%
35 to 39 years of age 79,691 282%
40 to 44 years of age 82,310 291%
45 to 49 years of age 84,238 298%
50 to 54 years of age 88,873 315%
55 to 59 years of age 76,263 270%
60 to 64 years of age 67,053 237%
65 to 69 years of age 54,123 192%
70 to 74 years of age 45,115 160%

Then you would have plugged in $32,000 for the base year (age 24) income and applied these same percentages. This provided a starting projection of expected future earnings based on the average age-earnings cycle. This is only a “starting” projection because you have not yet applied two key limitations of work-life expectancy and present value.

Age Earnings Percentage increase Projected future earnings by age
18 to 24 years of age 28,250 100% 32,000 (actual)
25 to 29 years of age 48,384 171% 54,807 (projected)
30 to 34 years of age 70,327 249% 79,662 (projected)
35 to 39 years of age 79,691 282% 90,269 (projected)
40 to 44 years of age 82,310 291% 93,236 (projected)
45 to 49 years of age 84,238 298% 95,420 (projected)
50 to 54 years of age 88,873 315% 100,670 (projected)
55 to 59 years of age 76,263 270% 86,386 (projected)
60 to 64 years of age 67,053 237% 75,954 (projected)
65 to 69 years of age 54,123 192% 61,307 (projected)
70 to 74 years of age 45,115 160% 51,104 (projected)

These projected earnings are then spread on a year-by-year basis. The example assumes that the client was age 24 at the beginning of the year 2007.

Year Age Earning Capacity
2007 24 32,000
2008 25 54,807
2009 26 54,807
2010 27 54,807
2011 28 54,807
2012 29 54,807
2013 30 79,662
2014 31 79,662
2015 32 79,662
2016 33 79,662
2017 34 79,662
2018 35 90,269
2019 36 90,269
2020 37 90,269
2021 38 90,269
2022 39 90,269
2023 40 93,236
2024 41 93,236
2025 42 93,236
2026 43 93,236
2027 44 93,236
2028 45 95,420
2029 46 95,420
2030 47 95,420
2031 48 95,420
2032 49 95,420
2033 50 100,670
2034 51 100,670
2035 52 100,670
2036 53 100,670
2037 54 100,670
2038 55 86,386
2039 56 86,386
2040 57 86,386
2041 58 86,386
2042 59 86,386
2043 60 75,954
2044 61 75,954
2045 62 75,954
2046 63 75,954
2047 64 75,954
2048 65 61,307
2049 66 61,307
2050 67 61,307
2051 68 61,307
2052 69 61,307
2053 70 51,104
2054 71 51,104
2055 72 51,104
2056 73 51,104
2057 74 51,104
Total = 3,976,082

Step 2: Work life expectancy

There are two significant things about the Step 1 numbers showing projected earning capacity by age:

  • In real life, earnings do not typically make a large jump or dive every fifth year. A valuation expert will make more refined calculations.
  • These numbers are derived from averages of people who are still in the workforce at each of these ages. However, the odds are against any one person still being in the workforce at age 74. Therefore, the next step is to estimate the worklife expectancy of the individual.

Personal characteristics of the individual may indicate that the plaintiff probably would not have remained in the workforce for the period of average worklife expectancy. Defense attorneys will look for arguments that an average worklife expectancy is inapplicable in this particular case by examining the pre-occurrence health history of the individual, as well as family-related (e.g. a plan to stay home with children) or work-related (e.g. a plan for early retirement) circumstances.

There are worklife expectancy tables that recognize the impact of (pre-occurrence) disability on the computation of worklife expectancy. The best known set of tables is a publication authored by A.M. Gamboa, Jr., Ph.D. and published by Vocational Economics, Inc., titled The New Worklife Expectancy Tables (6th ed. 2006). It is not imperative to have the latest edition of this book because experts will perform the final evaluation. Averages do not vary greatly from one edition to the next.

Example

Using The New Worklife Expectancy Tables with the previous example of a 24 year old white male with a bachelor’s degree, the average worklife expectancy is an additional 36.9 years. This means you would only compute lost earnings through age 61.

As a result, the computation of future lost earnings now cuts off at age 61 and looks like this:

Year Age Earning Capacity
2007 24 32,000
2008 25 54,807
2009 26 54,807
2010 27 54,807
2011 28 54,807
2012 29 54,807
2013 30 79,662
2014 31 79,662
2015 32 79,662
2016 33 79,662
2017 34 79,662
2018 35 90,269
2019 36 90,269
2020 37 90,269
2021 38 90,269
2022 39 90,269
2023 40 93,236
2024 41 93,236
2025 42 93,236
2026 43 93,236
2027 44 93,236
2028 45 95,420
2029 46 95,420
2030 47 95,420
2031 48 95,420
2032 49 95,420
2033 50 100,670
2034 51 100,670
2035 52 100,670
2036 53 100,670
2037 54 100,670
2038 55 86,386
2039 56 86,386
2040 57 86,386
2041 58 86,386
2042 59 86,386
2043 60 75,954
2044 61 75,954
Total = 3,186,165

Step 3: Actual (mitigating) earnings

In cases of debilitating injury or death, the actual earnings now available in the future will be zero. In cases where the injury is less profound, there will continue to be some residual earning capacity that is available to mitigate the loss.

The projection of likely future earning capacity is often a major battleground area. There are a variety of possible approaches to computing these future earnings. If the individual has returned to work, the new employment can provide new base earnings to do another computation of future earning capacity. However, the prospects for advancement and future increases in earnings may now be more limited, which means that the age-earnings cycle may be flatter now, with fewer and smaller percentage increases.

For purposes of a rough estimation on the front end, a plaintiff’s attorney may want to simply assume a percentage of work disability. The expert involved at trial will probably not do such a simplistic computation, but it is in the plaintiff’s attorney’s interest to get a basic grasp on the range of damages, not to defend the methodology and numbers like the expert will be doing.

Example

In the example, if you simplistically assume that the individual will be able to resume gainful employment at age 26, but will suffer a permanent work disability that you guess to be in the range of 50%, you would add a column to the numbers to reflect a 50% mitigation or offset for earnings that can still be earned.

Also recognize that this is now a disabled employee, and disabled employees have a shorter worklife expectancy. Using The New Worklife Expectancy Tables for disabled white males aged 26 with at least 16 years of education, you see that worklife expectancy has now dropped to 21.4 years, so you cut off future mitigation after age 47.

The resulting computations now look like this:

Year Age Projected Earnings Future Mitigation Net Loss (Undiscounted)
2007 24 32,000 32,000
2008 25 54,807 54,807
2009 26 54,807 27,403 27,403
2010 27 54,807 27,403 27,403
2011 28 54,807 27,403 27,403
2012 29 54,807 27,403 27,403
2013 30 79,662 39,831 39,831
2014 31 79,662 39,831 39,831
2015 32 79,662 39,831 39,831
2016 33 79,662 39,831 39,831
2017 34 79,662 39,831 39,831
2018 35 90,269 45,135 45,135
2019 36 90,269 45,135 45,135
2020 37 90,269 45,135 45,135
2021 38 90,269 45,135 45,135
2022 39 90,269 45,135 45,135
2023 40 93,236 46,618 46,618
2024 41 93,236 46,618 46,618
2025 42 93,236 46,618 46,618
2026 43 93,236 46,618 46,618
2027 44 93,236 46,618 46,618
2028 45 95,420 47,710 47,710
2029 46 95,420 47,710 47,710
2030 47 95,420 47,710 47,710
2031 48 95,420 95,420
2032 49 95,420 95,420
2033 50 100,670 100,670
2034 51 100,670 100,670
2035 52 100,670 100,670
2036 53 100,670 100,670
2037 54 100,670 100,670
2038 55 86,386 86,386
2039 56 86,386 86,386
2040 57 86,386 86,386
2041 58 86,386 86,386
2042 59 86,386 86,386
2043 60 75,954 75,954
2044 61 75,954 75,954
Total = 2,275,501

Step 4: Present value of future net earnings loss

There are many methodologies for reducing future losses to present value, but they are all founded on the same premise. That is, given a choice between obtaining a dollar today or a dollar a year from now it is more valuable to obtain the dollar today for two reasons:

  • The dollar today can generate additional income by earning interest over the course of the next year.
  • If the dollar is received today, there is no risk of it not being received a year from now.

Therefore, most present value methodologies assume that it should take less dollars today to pay for a future loss than it would take to fully pay for that loss in the future. The question is how big the discount should be.

In litigation involving lost profits of a start-up business, defendants are often successful in attacking the plaintiff’s discount rate as being too low because it fails to consider all the risk inherent in a new business. However, in personal injury litigation the question of risk is more easily dealt with because government statistics draw from such a large sample of workers, suggesting that risk has already been adequately dealt with in the averages. As a result, in computation of the present value of future lost earnings, experts often use long-term U.S. Treasury Bonds as the basis. This provides a useful shortcut for plaintiff’s attorneys to use in making a rough estimation of present value at the outset of a case.

Although there are a variety of methodologies for deriving the discount rate on future lost earnings, simply using the historic average difference between the average annual return of long-term treasury bonds and the average annual inflation rate gives a rough benchmark guess of a discount rate. An expert will use a much more refined methodology than this, but this simple number gives you a good guess about the discount rate the expert will ultimately use.

Over the period of years from 1926 to 2003, the average annual return on long-term U.S. Treasury Bonds was 5.5%. Over those same years, the average annual inflation rate was 3.1%. The difference between those two averages (i.e. 2.4%) reflects the average annual real rate of return on U.S. Treasury Bonds (i.e. the amount of interest earned over and above the amount of inflation).

As a result, if you assume that a dollar received today will be worth a dollar plus an additional 2.4% in one year, you can estimate how many dollars it will take today to equal ten dollars in ten years.

So the shortcut for making a rough estimate of the present value of future lost earnings is to simply assume a discount rate of 2.4%. Pick a date (or the year) that you believe is a likely trial date. Start discounting to present value for the years after that projected trial date.

Example

Using the prior example, if you assume that the trial date was mid-year 2009, approximately two years post-injury, for your rough calculations you would start discounting the present value of the first years of losses post-injury, until 2010. The rough computations now look like this:

Year Age Projected Earnings Future Mitigation Net Loss (Undiscounted) PV Percent Present Value
2007 24 32,000 0 32,000 1.000000 32,000
2008 25 54,807 0 54,807 1.000000 54,807
2009 26 54,807 27,403 27,403 1.000000 27,403
2010 27 54,807 27,403 27,403 0.976563 26,761
2011 28 54,807 27,403 27,403 0.953674 26,134
2012 29 54,807 27,403 27,403 0.931323 25,521
2013 30 79,662 39,831 39,831 0.909495 36,226
2014 31 79,662 39,831 39,831 0.888178 35,377
2015 32 79,662 39,831 39,831 0.867362 34,548
2016 33 79,662 39,831 39,831 0.847033 33,738
2017 34 79,662 39,831 39,831 0.827181 32,948
2018 35 90,269 45,135 45,135 0.807794 36,460
2019 36 90,269 45,135 45,135 0.788861 35,605
2020 37 90,269 45,135 45,135 0.770372 34,771
2021 38 90,269 45,135 45,135 0.752316 33,956
2022 39 90,269 45,135 45,135 0.734684 33,160
2023 40 93,236 46,618 46,618 0.717465 33,447
2024 41 93,236 46,618 46,618 0.700649 32,663
2025 42 93,236 46,618 46,618 0.684228 31,897
2026 43 93,236 46,618 46,618 0.668191 31,150
2027 44 93,236 46,618 46,618 0.652530 30,420
2028 45 95,420 47,710 47,710 0.637237 30,403
2029 46 95,420 47,710 47,710 0.622302 29,690
2030 47 95,420 47,710 47,710 0.607716 28,994
2031 48 95,420 95,420 0.593473 56,629
2032 49 95,420 95,420 0.579563 55,302
2033 50 100,670 100,670 0.565980 56,977
2034 51 100,670 100,670 0.552715 55,642
2035 52 100,670 100,670 0.539761 54,338
2036 53 100,670 100,670 0.527110 53,064
2037 54 100,670 100,670 0.514756 51,821
2038 55 86,386 86,386 0.502691 43,426
2039 56 86,386 86,386 0.490909 42,408
2040 57 86,386 86,386 0.479404 41,414
2041 58 86,386 86,386 0.468168 40,443
2042 59 86,386 86,386 0.457195 39,495
2043 60 75,954 75,954 0.446479 33,912
2044 61 75,954 75,954 0.436015 33,117
Total = 1,446,066

Step 5: Personal consumption expenditures

For a personal injury, the plaintiff’s personal consumption expenditures do not need to be estimated because the plaintiff still needs to eat. You will want to compute additional costs made necessary by the injury, such as rehabilitation costs or special needs costs, but for purposes of estimating future lost earnings, the reduction of future earnings to present value is the final step.

However, for wrongful death cases, most jurisdictions permit the defendant to deduct the normal personal consumption expenditures of the defendant. With the death of the decedent, future earnings are lost, but the loss of those future earnings is partially offset by elimination of the personal expenses solely attributable to the decedent. The wrongful death claimants or the estate of the decedent are entitled to seek recovery of the net reduction in future earnings. Typically this is done by estimating the percentage of earnings that would have been consumed solely by the expenditures of the decedent.

Example

If you assume the example case is one for wrongful death rather than personal injury, and assume that the 24 year old decedent was married with one child (personal consumption percentages vary based on both income and family size), you would eliminate mitigating earnings from your calculations, but then deduct a percentage (based on the “Patton-Nelson Personal Consumption Tables, 1997-98 Update”) for the personal consumption of the decedent that will no longer be occurring.

There are different methodologies for computing personal consumption percentages, but for your rough estimation you will simply follow the Patton-Nelson Personal Consumption Tables during the normal worklife expectancy, assuming a three-person family until the age the child is expected to complete the same educational attainment as the parents, and then reverting to the assumption of a two-person family for purposes of personal consumption expenditures. At the end of worklife expectancy, for the remainder of life expectancy, the authors of the Patton-Nelson Personal Consumption Tables recommend assuming that personal consumption is equalized and offset by pension and Social Security receipts (and therefore does not need to be part of your computations).

The resulting rough estimations look like this:

Year Age Projected Earnings Future Mitigation Net Loss (Undiscounted) PV Percent Present Value % Personal Consumption Net PV Loss
2007 24 32,000 32,000 1.000000 32,000 25.5% 23,840
2008 25 54,807 54,807 1.000000 54,807 18.4% 44,722
2009 26 54,807 54,807 1.000000 54,807 18.4% 44,722
2010 27 54,807 54,807 0.976563 53,522 18.4% 43,674
2011 28 54,807 54,807 0.953674 52,268 18.4% 42,650
2012 29 54,807 54,807 0.931323 51,043 18.4% 41,651
2013 30 79,662 79,662 0.909495 72,453 15.0% 61,585
2014 31 79,662 79,662 0.888178 70,754 15.0% 60,141
2015 32 79,662 79,662 0.867362 69,096 15.0% 58,732
2016 33 79,662 79,662 0.847033 67,477 15.0% 57,355
2017 34 79,662 79,662 0.827181 65,895 15.0% 56,011
2018 35 90,269 90,269 0.807794 72,919 14.1% 62,637
2019 36 90,269 90,269 0.788861 71,210 14.1% 61,169
2020 37 90,269 90,269 0.770372 69,541 14.1% 59,736
2021 38 90,269 90,269 0.752316 67,911 14.1% 58,336
2022 39 90,269 90,269 0.734684 66,320 14.1% 56,968
2023 40 93,236 93,236 0.717465 66,894 14.1% 57,462
2024 41 93,236 93,236 0.700649 65,326 14.1% 56,115
2025 42 93,236 93,236 0.684228 63,795 14.1% 54,800
2026 43 93,236 93,236 0.668191 62,300 14.1% 53,515
2027 44 93,236 93,236 0.652530 60,839 14.1% 52,261
2028 45 95,420 95,420 0.637237 60,805 13.7% 52,475
2029 46 95,420 95,420 0.622302 59,380 16.3% [Year when child is assumed to no longer be a dependent.] 49,701
2030 47 95,420 95,420 0.607716 57,988 16.3% 48,536
2031 48 95,420 95,420 0.593473 56,629 16.3% 47,399
2032 49 95,420 95,420 0.579563 55,302 16.3% 46,288
2033 50 100,670 100,670 0.565980 56,977 15.8% 47,975
2034 51 100,670 100,670 0.552715 55,642 15.8% 46,851
2035 52 100,670 100,670 0.539761 54,338 15.8% 45,752
2036 53 100,670 100,670 0.527110 53,064 15.8% 44,680
2037 54 100,670 100,670 0.514756 51,821 15.8% 43,633
2038 55 86,386 86,386 0.502691 43,426 17.4% 35,870
2039 56 86,386 86,386 0.490909 42,408 17.4% 35,029
2040 57 86,386 86,386 0.479404 41,414 17.4% 34,208
2041 58 86,386 86,386 0.468168 40,443 17.4% 33,406
2042 59 86,386 86,386 0.457195 39,495 17.4% 32,623
2043 60 75,954 75,954 0.446479 33,912 18.8% 27,536
2044 61 75,954 75,954 0.436015 33,117 18.8% 26,891
Total = 1,806,936