Costs Excluded From Prejudgment Interest Calculation In Personal Injury Award

|||Costs Excluded From Prejudgment Interest Calculation In Personal Injury Award

Costs Excluded From Prejudgment Interest Calculation In Personal Injury Award

March 2015

Prejudgment interest is often applied to a personal injury award in an attempt to capture the lost value of the use of monies prior to the judgment date.  A recent case, Bean v. Pacific Coast Elevator Corporation (“Pacific Coast”), has addressed whether costs awarded to a plaintiff in addition to damages are also subject to prejudgment interest.  The California Court of Appeals held that the Trial Court erred in awarding prejudgment interest on costs in association with a personal injury action.

In the underlying case, Bean was injured in an automobile accident with a Pacific Coast driver.  Bean had made a $999,999 statutory offer to Pacific Coast prior to trial, which was rejected.  The jury found for Bean and awarded him approximately $1.3 million.  The Trial Court also granted prejudgment interest and costs.  On appeal, Pacific Coast argued that pursuant to Civil Code section 3291, prejudgment interest should only have been awarded on the damages that the jury awarded in its verdict and not the costs.

The Appeals Court addressed this question of statutory interpretation by applying the de novo standard of review, beginning with an examination of the text of a statute:

“to ascertain the intent of the enacting legislative body so that we may adopt the construction that best effectuates the purpose of the law….We first examine the words themselves because the statutory language is generally the most reliable indicator of legislative intent….The words of the statute should be given their ordinary and usual meaning and should be construed in their statutory context….we presume the Legislature meant what it said, and the plain meaning of the statute governs.”

Civil Code section 3291 provides in relevant part:

 “In any action brought to recover damages for personal injury sustained by any person resulting from or occasioned by the tort of any other person, corporation, association, or partnership, whether by negligence or by willful intent of the other person, corporation, association, or partnership, and whether the injury was fatal or otherwise, it is lawful for the plaintiff in the complaint to claim interest on the damages alleged as provided in this section.”

“If the plaintiff makes an offer pursuant to Section 998 of the Code of Civil Procedure which the defendant does not accept prior to trial or within 30 days, whichever occurs first, and the plaintiff obtains a more favorable judgment, the judgment shall bear interest at the legal rate of 10 percent per annum calculated from the date of the plaintiff’s first offer pursuant to Section 998 of the Code of Civil Procedure which is exceeded by the judgment, and interest shall accrue until the satisfaction of judgment.”

The Court also looked to relevant case law in Lakin v. Watkins Associated Industries (1993) (“Lakin”), where the Supreme Court considered whether a party may recover prejudgment interest pursuant to Civil Code section 3291 on that portion of a jury’s award attributable to damages other than for personal injury and concluded it could not.  In reaching this conclusion, the Court acknowledged that the second paragraph of Civil Code section 3291 “is not a model of clarity” and could be read to suggest that prejudgment interest is to be awarded even on those components of a judgment that are not for personal injury damages.  However, when read as a whole, the Court concluded that the statute is best interpreted as permitting prejudgment interest to be calculated solely on personal injury damages since it describes interest on the damages alleged, which it believed to be an intentional narrowing.  This was further underscored by Brown v. Desert Christian Center (2011), where costs were described as not part of the judgment, but “normally viewed as an incident of a judgment.”

The Court specifically addressed Bean’s argument that if the intent of prejudgment interest is to reimburse plaintiffs for the time value of money associated with having to litigate in order to receive that to which they are entitled, the exclusion of costs from the calculation does not accomplish that economic result.  The Court responded as follows:

“Finally, we are not persuaded by Bean’s contention that “a plaintiff’s outlay of costs is necessarily a lost use of money,” and therefore, that his interpretation fosters Civil Code section 3291’s purported policy goal of “compensating personal injury plaintiffs for loss of use of money during the prejudgment period.” ….the Lakin court stated, “For more than a century it has been settled that one purpose . . . of prejudgment interest in general, is to provide just compensation to the injured party for loss of use of the award during the prejudgment period.” ….We think it clear that the purpose of Civil Code section 3291 is to compensate plaintiffs for the loss of use of the money awarded for personal injury damages, not for the loss of use of money for costs. Accordingly, we conclude that the trial court erred in awarding prejudgment interest on costs.“

By virtue of generally being defined statutorily and statically, prejudgment interest often will not accurately capture the true time value of money.  In contrast, future amounts of damages are discounted by applying a rate calculated by an expert, a discussion of which is found in this related article regarding discount rates in lost earnings claims.

Fulcrum Inquiry performs economic analysis of injury and employment damages.

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