There are lawyers that often do not utilize the services of an expert economist, especially when the earnings portion of the case appears cut and dry. Instead, they choose to calculate the damages in-house in the interest of cutting costs. We are going to discuss a hypothetical personal injury case which seems to have a simple damages calculation and illustrate how often many components of damages may go unnoticed and have a significant impact on the final numbers.
For example, let us assume we encounter a catastrophic injury with the following facts about the Plaintiff:
- Plaintiff is a 45 year old married male with 2 dependent children;
- He has been employed by the County of Los Angeles as a Custodian for 20 years;
- He earns $2,829 per month ($33,948/year) in salary;
- Due to the extent of his injuries, he will never be able to return to any type of employment;
- He was planning on working an additional 20 years and retiring at age 65;
- He will require additional future medical care including at least 2 major surgeries;
At first glance, the damages for this case seem quite simple. If you do not have an expert economist working with you, you will probably calculate the losses by multiplying his annual salary of $33,948 by 20 years and get $678,960.
After determining the loss of earnings, you need to include the future cost of medical care. According to the treating physicians, the costs of the surgeries range between $50,000 – $100,000 each. You take an average of $75,000 and get another $150,000 in future medical care costs for the two surgeries.
Adding the loss of earnings to the future costs of medical care, you get $828,900. You know that the law requires that all damages be paid out in present cash dollars. Not knowing the precise formulas to calculate this off the top of your head, you decide to utilize an online present value calculator and get $458,942 ($828,900 over 20 years at 3% discount rate). Voila! You have a case worth almost half a million dollars (not including pain & suffering).
Now, let’s switch gears and see how an economist at K2 Economics would approach this same exact case.
First and foremost, since the Plaintiff is an employee of LA County and his job is a unionized position, we would begin by researching relevant past and present documents such as Memorandums of Understanding (MOU) between the union and the County. These contracts provide great information regarding the historical salary increases for this position, as well as anticipated wage increases for the near future. Based on historical and contractual future wage increases, the loss of earnings over 20 years is $824,847 with his salary at $49,456 when he retires.
Next, we would analyze the value of the health benefits he received. According to our research, LA County currently contributes $1,837.66 per month towards family health coverage (this figure will increase to $1,938.73 in 2017 and $2,055.05 in 2018). This adds up to $622,731 over 20 years! Everyone knows how expensive health care can be, especially for a family of 4, yet the value of health benefits often get overlooked when calculating damages.
Upon calculating the loss of earnings and health benefits, we then shift gears to determining the value of the Plaintiff’s pension. LA County employees participate in the Los Angeles County Employees Retirement Association (LACERA). Depending on which plan they belong to, the years of service, and anticipated age at retirement, a member can potentially receive 100% of his final salary over the remainder of his/her life expectancy. At 45 years of age, this Plaintiff has a Life Expectancy approximately to age 79. Therefore, if we assume retirement at age 65, he is entitled to collect 14 years of pension benefits at his final salary of $49,456. That will give us $692,384 in pension benefits (this does not even include the annual cost of living increases that are applied to pension benefits). It is important to note that members often are required to contribute towards their LACERA pension while they are actively employed. The contribution rate varies but for the purposes of this case, we will assume it is 10% of earnings.
Putting together all the components of his compensation and using the applicable growth and discount rates, we arrive at over $1.3 million in present value damages.
Finally, the last component of damages is the cost of future medical care. In situations involving catastrophic injuries, it is also very useful to obtain the services of a professional life care planner. The life care planner will discuss all the detailed care the Plaintiff will require with doctors and prepare a report stating the frequency and cost of each component of future medical care. When a doctor provides a range of $50,000-$100,000, he/she is simply providing an estimate. A Life Care Planner will use the most up to date prices and lay out all the care in detail including physician fees, surgeon fees, anesthesia, hospital costs, physical therapy, pre and post-op office visits, medications, etc. When this report is then handed off to the economist, we will calculate the present value of future services item by item. It is important to note that medical care inflation has historically (as well as currently) been greater than general inflation measured by the Consumer Price Index (CPI) and can be a rather large portion of total damages.
As you can see, when you compare the final figures calculated with and without an expert economist, the numbers vary significantly. This is important to know regardless of which party you represent. If you represent the Plaintiff, you may think your case is worth less than $500,000 when in reality it is worth more than three times that amount. You may unknowingly settle for a much lower amount. On the other hand, if you represent the Defendant, it is helpful to know your potential damages liability. For example, if you enter a mediation with a report knowing this case is worth well over $1.3 million and the Plaintiff is only asking for $450,000, it may be in the best interest of your client to settle the case and not risk going to trial and having the Plaintiff hire an economist.