Evaluating Claims of Economic Loss

"Honesty is the best policy…when there is money in it.” Mark Twain is credited with this nugget of insight. Surprisingly, he was neither a plaintiff/claimant nor an expert witness. However, many cases both in the casualty context and in the commercial liability context involve claims of economic loss. Below are some considerations for investigating, evaluating and defending these claims.

Goals of Investigation — Whether or not an expert is used, a good early investigation into an economic loss claim can provide an accurate valuation, identify key documentation, help with accurate reserving, identify fraud, develop legal and factual defenses in litigation, develop targeted discovery, and prepare counsel to attack the claimant’s economic loss expert if one is used. Identify these goals in collaboration with counsel before undertaking the investigation.

Past vs. Future — Past economic loss claims are much easier to prove for the claimant. They are also much easier to evaluate. For wage and personal income losses, documentation is usually available in terms of tax returns, pay stubs, W-2 forms, work attendance documents, etc. For commercial losses, documentation of revenue and expenses before the loss and after the loss are usually also fairly determinative. However, future economic losses are more difficult. Projections of future income based on past performance require estimates and some degree of speculation. In addition, industry trends, accuracy of past projections and pro forma statements can be very helpful in defending future-loss claims in the commercial context. Expert testimony is often necessary to prove or defend these claims, particularly when the value of the claim justifies the cost of the expert.

Economic Loss Rule — Variations of this rule exist in different states, but they generally prohibit recovery for losses in tort cases that are purely economic. In most cases, there must be some accompanying property damage or physical injury. Proper remedies for purely economic loss do exist in contract law and in breach of warranty claims. This has particular application in product liability cases. Be aware of the various nuances of the rule and exceptions that may exist in a particular jurisdiction. Some states have departed from this majority rule entirely.

Expert Evaluation — An accounting or forensic economic expert can be valuable in assessing and defending more complicated business loss claims. In addition to simple lost profits, damages could include reduced market value of the business, lost clients, lost investment opportunities and other categories. This may require knowledge of the marketplace as well as projection of expenses and revenues years into the future. The ability to perform this analysis in the context of the claim is often a product of specific accounting and economic tools and training. This is particularly the case in business interruption claims. However, casualty claims involving simple lost wages can also benefit from expert analysis if the size of the claim justifies the expense. There is always a cost/benefit analysis to be made, particularly when forensic experts can run $350-$500 per hour and up.

Intangible Economic Losses — Claims involving hourly wages are easy to compute. The time off from work because of an injury multiplied by the rate of pay produces the past loss. However, plaintiff’s lawyers will frequently use as the basis for a claim more intangible factors, such as lost vacation time, lost fringe benefits (Social Security, disability and health insurance, pension contributions, etc.). The value of the benefits is debatable. For example, is the claimant required to use vacation by the end of the year? Did he have concrete plans to use the time? Has he let vacation time lapse in the past? Lost opportunities for career advancement or promotion may be the basis for future lost wages. Testimony from those responsible for making the advancement or promotion is important.

Duty to Mitigate — Almost without exception, claimants have a duty to mitigate damages in every damage category. In lost income claims, the claimant will usually have a duty to seek out other employment or income that they are capable of performing. The lost wage claim then becomes the difference between the prior income and the reduced income. The claimant will also have a duty to return to full work capacity as soon as is reasonably possible.

Economic Forecast and Conditions — Depending on the occupation, the future lost wages can be dependent on economic forecasting. In certain industries facing an economic slump with large layoffs and an oversupply of labor, this defense should be explored to reduce the strength of a lost income claim. The claimant’s past history should be examined. Frequent changes in employment are commonplace in some industries. However, a long, stable employment history is less susceptible to changes in industry-wide economic conditions.

Other Sources of Income — Additional sources of income should be subjects of discovery. For example, older claimants may be nearing the age at which they can draw Social Security. Retirement plans may provide income at a certain age, or annuities may begin periodic payments in the future. These should be considered in conjunction with the claimant’s retirement plans, as well as the average retirement age in their field. In addition, disability payments may reduce the lost income; although, some disability carriers may make subrogation claims.

Generally, lost income claims can be more complicated than they first appear. In addition, they have the potential to drive up non-economic damages. Even when they are smaller claims in comparison to medical expenses or property damage, they affect a jury since the ability to earn an income is an area in which most jurors can empathize with a plaintiff.

Jim Pattillo is a partner with Norman Wood Kendrick & Turner, an Alabama-based law firm. He has been a CLM Member since 2010 and can be reached at jpattillo@nwkt.com, nwkt.com.