Economic Losses
Most personal injury and wrongful death claims include future economic losses as a core element of damages. Broken down, these typically include claims for replacement of future wages, fringe benefits, and household services. On large catastrophic losses, such losses are supported by reports and testimony from economic experts. On smaller cases, such losses may be supported by past income tax returns reflecting the kind of income the injured party can no longer earn. In either case, there are many factors to consider when determining the true future economic loss sustained by a plaintiff. It is never as simple as taking the annual wage and multiplying by the number of years to age 65.
Wages
Determining a person’s current and past wages is usually a simple matter of documentation. This becomes more problematic when the plaintiff is self-employed or derives a large portion of their income from cash transactions and gratuities. Federal income tax returns usually serve as the final arbiter.
Wage Growth Rates
The annual growth factors attributed to an individual’s wages are normally presented in an expert economist’s report. Lacking such a report, there is ample data to draw on to make assumptions regarding future wage growth, however this type of a projection is still opinion.
Work life Expectancy
One key to determining lifetime expected earnings involves quantifying the number of years a person can reasonably be expected to work or their “work life expectancy”. Male and female worklife expectancies vary along with the resulting projections of earning capacity, despite a narrowing trend in this gap. Worklife estimates are an essential key when determining expected earnings loss in cases of permanent, partial disability.
The U.S. Department of Labor, Bureau of Labor Statistics, compiled as of September 1986 provides comprehensive data for use in projecting the work life expectancy of both men and women. These 1986 tables are widely acknowledged as the best source of data to use in determining a plaintiff’s worklife expectancy.
Net versus Gross Wages
Most expert economists project replacement of future gross wages. When contemplating offering compensation in the form of tax-free future payments, you have to instead determine what the claimant’s future net wages would have been. While future income and payroll taxes are unknown, one generally simply deducts current appropriate State and Federal Income Taxes and F.I.C.A. deductions from the annual gross income to determine appropriate net annual income loss.
Household Services
Household services cover the additional costs a plaintiff would incur in hiring someone to help with normal daily activities including child care, maintenance of the house and yard, grocery shopping and so on. In cases involving future economic loss, it is alleged that the plaintiff’s disability would preclude them from performing these duties. Unlike replacement of future lost wages, which cease at the end of the worklife expectancy, future household services are replaced for the full life expectancy of the plaintiff. As these represent additional costs, one adds the cost of household services to the economic loss analysis.
Fringe Benefits
Fringe benefits are best determined through documentation such as contract clauses or evidence of contributions to health insurance and retirement accounts. However, there are many cases where there is clearly a loss of fringe benefits and no clear documentation is provided. Data exists to provide “standard and customary” fringe benefits as a percentage of the annual gross wage.
As fringe benefits do not impact taxable income, they are added in after determining net annual income.
Now that we have properly accounted for the economic loss sustained by the plaintiff, how do we replace this loss? The case for future economic loss is made by documenting how the loss will be incurred over time. It then stands to reason that the loss should be recovered over time as well. Our analysis using the expert economist’s wage growth rates will document the plaintiff’s after-tax economic loss to their worklife expectancy and also over their normal lifetime. This approach provides the plaintiff with the precise income and benefits they lost over the exact time the loss occurred. The future payments are based on the expert opinion of their own economist. The cost to fund this stream of payments is then determined by designing a corresponding periodic payment schedule and then pricing out that payment schedule with the appropriate markets.
This approach to ascertaining economic loss provides benefits to all parties. The plaintiff is assured they are being fairly compensated for their loss and the defendant is assured they are funding an appropriate amount. The structured settlement annuity will provide the plaintiff with tax-free payments to replace their lost future net wages and household services over their respective work life and normal life expectancy. The defense and plaintiff are both assured that all settlement annuity payments are guaranteed to be made to the plaintiff exactly as set forth in the settlement agreement.
Do you have a case with a future economic loss? Would you like to find a way to resolve that claim by using the most up-to-date settlement tools and techniques? Call Frank C. Kilcoyne, CSSC at 800-544-5533. I am here to help.
