Lost compensation is a method of capturing economic damages in personal injury, medical malpractice, wrongful termination, failure to promote and other similar torts. Independent damages experts (often economists or CPAs) are often employed to calculate lost compensation because of their unique background/skill set in addressing such economic losses. However, the desire to minimize costs means that these experts are often employed after settlement/mediation efforts have failed. This presents a difficult situation for counsel, who are negotiating and/or agreeing to a settlement without the benefit of the expert’s opinion regarding damages. As a result, plaintiffs may leave money on the table, defendants may overpay, or efforts may be wasted further pursuing an unrealistic expectation when a settlement offer was reasonable.
Conceptually, lost compensation is what Plaintiff should have earned had the alleged incident not occurred (aka “but-for” compensation) less actual compensation (aka “mitigation”). Although the concept may be relatively simple to describe, the data underlying the calculations varies significantly, as does the final result. The data underlying the calculations is a combination of (i) data specific to an individual Plaintiff and (ii) application of appropriate and credible statistics, all of which must be distilled into a proper methodology for damage computation.
Ideally, one would have the full benefit of the testifying expert’s opinions prior to settlement negotiations. However, access to an interactive settlement/mediation tool can provide counsel with the information necessary to provide meaningful advice to the client about appropriate damage amounts. Use of such a tool and the resulting conclusions can also assist with settlement/mediation discussions in general by demonstrating that amounts requested/offered are based on reasonable application of defined inputs, properly applied.
The semi-automated model created by Fulcrum Inquiry calculates lost compensation (lost earnings and lost benefits) based on Plaintiff specific inputs including demographics and historical earnings, combined with government statistics, economic studies, and market conditions. Economic factors considered in the calculation include those generally accepted in lost earnings matters, such as:
- Future earnings and earnings growth
- Value of employment benefits
- Expected work life
- Present value discounts for future earnings
The model can also be customized to include fact patterns that are unique to a particular case. For more complex assignments involving stock options or other more difficult to value compensation elements, supplemental analysis is available.
The interactive feature allows you to immediately see how various inputs affect the economic damage conclusion and can generate alternate scenarios. This facilitates preparation and assessment of settlement/mediation offers and acceptable ranges for negotiation. Some of the more common points of disagreement amongst opposing sides of a lost earnings case include the appropriate discount rate, future earnings, and future employment fringe benefits. All of these variables/inputs (among others) can be altered in the model and presented in various combinations.
To provide an example, the following two damage calculations and accompanying graphics demonstrate the varying conclusions of the model changing just one important input, the discount rate (see article regarding discount rates), while keeping all other inputs (e.g., Plaintiff’s demographic and earnings data, trial date, future employment benefits, etc.) static. Altering just the discount rate can have a material effect on the damages amount; in this case, approximately a $600,000 difference:
Summary of Economic Damages Using a 10% Discount Rate
Summary of Economic Damages using a 3% Discount Rate