Calculating Economic Damages
In December 2013, Tippi Hedren, star of Alfred Hitchcock’s 1963 “The Birds,” received good news. After six years of litigation over an injury on the set of “Fashion House,” Hedren received a $1.5 million judgment in her favor, of which $653,708 was Hedren’s calculated lost earnings. Lost earnings must be computed in cases of personal injury, wrongful death, and employment discrimination. Forensic accountants are often brought on to accurately determine these damages.
When beginning to figure losses, a worklife expectancy must first be determined. The worklife of a person varies according to age, ethnicity, gender, and education level. Once a worklife expectancy has been determined, potential lost earnings can begin to be calculated. There are two types of earnings which can be calculated:
- Unimpaired earnings: These are estimated earnings a claimant would receive if the incident had never happened.
- Impaired earnings: These are any potential actual earnings a claimant will receive if able to work in a limited capacity.
If a claimant is deceased, or wholly unable to work, only unimpaired earnings will be calculated. This is done by looking at such measures as historical earnings, likelihood of future advancement, and comparable earnings of people in the same industry, among other criterion.
While an individual is employed there are other assets besides base wages. These fringe benefits are sometimes employer contributions to social security, retirement plans, paid time off, and insurance premiums. These too are added to the economic losses of a claimant.
Other sources of income can be affected as well. One example includes a claimant who owns and maintains rental properties which they can no longer manage. These other sources of income can be completely lost, or a claimant must pay someone else to perform these duties.
Besides earnings and benefits, one must look at specific costs directly resulting from the injury, death, or discrimination. These can come in the forms of any medical or rehabilitation treatments. Also, basic household activities can be impossible for a claimant to perform. Therefore, these replacement costs—which are the dollar amount paid to others to perform these services, or how much these suspended activities are worth—must be estimated. After the monetary amount is estimated, any potential inflation or growth must be estimated so that a claimant’s future losses correctly reflect their potential income.
Once all of these aspects are considered, we are left with the total gross economic loss of the claimant. However, because the claimant has not been working, it can be assumed that they have saved money on work-related costs, such as commuting. The final number—ascertained by subtracting these avoided costs from the gross economic loss—is the net economic loss of the claimant; this represents the full economic loss sustained by a claimant.
As can be seen, determining the economic losses due to a personal injury, wrongful death, or employment discrimination is a complex process. Therefore, it is vital for attorneys and their clients to enlist the expertise of a certified forensic accountant in order to receive the most objective and correct estimation.