Ten Mistakes Defendants Make in the Damages Part of Their Personal Injury Cases: An Economist’s Perspective

by Patrick A. Gaughan, Ph.D.

(from Litigation Economics Series)

1. Case Preparation

This usually means ignoring the damages aspects of cases. Unfortunately, this mistake is extremely common. In the world of insurance defense work, cost containment is greatly emphasized. Defense attorneys are regularly asked to accomplish more but bill less. This often results in high case loads and limited time to invest in each case. One response to such pressures is to focus mainly on liability with the idea being that if the defense prevails on liability, there is no reason to be concerned about damages. On the other hand, if the defense does not prevail on liability and has not properly prepared the damage aspects of their case, the results can be disastrous.

Too often we see cases where almost no preparation on damages has been done. In all too many cases we see that damage issues are only looked into after discovery deadline have passed and trial is imminent. It is amazing that this happens so often.More often than not, this is the result of the financial pressures we discussed. Nonetheless, the result is unacceptable. Clearly there has to be a way to properly focus on damages while not “breaking the bank”to do it.The solution may be in working smarter, not necessarily working longer.

2. Failing to Conduct Complete Document Discovery

One of the major preparation mistakes is not gathering the necessary documents needed to verify and challenge the plaintiff’s damage claims. For claims of lost wages, defendants need to assemble a complete income history. Plaintiffs may claim lost wage damages that are well in excess of what they have historically earned. Their economists may also base their lost wage claim on an anomalous year which may be very different from what they have historically earned.Unless defense counsel assembles a complete income history, the legitimacy of the plaintiff’s wage claims may be difficult to verify or challenge. If the plaintiff claims he or she does not have tax returns or W-2s the defense may have to pursue IRS records but such preparation work takes time and the process must begin early enough. Too often the defense retains an economist after the discovery deadline and only learns of these data needs too late.

3. Deposing Key Witnesses on Liability Issues Only

Consistent with the theme of focusing mainly, if not exclusively, on liability, it is all too common that the plaintiff is deposed on liability issues while little time, if any, is devoted to going through the plaintiff’s employment and compensation history. Defendants should systematically explore the plaintiff’s work history including any periods of unemployment. Ideally this should be done with the income documentation present so that any variability in earnings, such as periods of reduced earnings, could be explored. At this time defense counsel can also fully explore all efforts the plaintiff has exercised to mitigate his or her damages. Again, this should be done in a precise and systematic manner.

4. Not Getting A Damages Expert on Board Early Enough

In this era of cost containment, defense counsel may try to put off retaining a damages expert with the hope that maybe the case will settle and such an expert will not be needed.However, if this decision is postponed until late in the discovery period, it may be too late to conduct the proper damages discovery which the expert will request. For all cases where there is significant damages exposure, document discovery and deposition of witnesses who may yield useful damages testimony should be conducted with the input of your damages expert.If the damages expert is brought on board too late, then important documents may never be gathered and important questions may never get asked at depositions.

Not Challenging Faulty Economic Assumptions of Plaintiffs: Lost Earnings

5. Failing to Fully Explore Mitigation

In personal injury lawsuits, mitigation of damages can have a large impact on total damages. Every dollar a plaintiff may earn in post-injury employment is one dollar less in total damages. The opinion on what employment a plaintiff is physically able to pursue is normally outside of the expertise of an economist and falls in the domain of medical and vocational experts. If a plaintiff’s economist assumes that the plaintiff cannot pursue post-injury employment without support, the resulting projection may be speculative. Sometimes the defense will only retain a vocational expert if the plaintiff retains one.This may be a mistake as this decision should be made independent of the plaintiff’s expert witness choices. The defense should retain a vocational expert if it does not accept the plaintiff’s assumptions with respect to post-injury employment. The opinion of a defense vocational expert, with respect to not just earnings but also post-injury benefits and perhaps lost household services, can be incorporated into an economic loss analysis prepared by the economist retained by the defendant.

6. Lost Earnings Projections That Do Not Accurately Reflect the Plaintiff Earnings History

Often plaintiffs’ experts select a year of unusually high wages upon which to base a long term projection of lost earnings.The projection of future earnings generally should be based upon the plaintiff’s historical earnings (with some notable exceptions) and unless proper discovery is conducted, the defense will not know to what extent the projection is representative of the plaintiff’s work history.The same is true for fringe benefits such as medical and pension benefits.The economist retained by the defendant needs to determine the extent to which the plaintiff would have enjoyed such benefits in the future.

7 Lost Earnings That Are Projected at Too High a Growth Rate

When creating a projection of lost earnings and benefits, sometimes economists retained by plaintiffs use too high a growth rate. Defendants need to bear in mind that such rates have a compounded effect on the future projected earnings. For many years now inflation has been maintained at more moderate levels and plaintiff’s economic projections should reflect that economic reality. The economist retained by the defendant can provide the relevant inflation rates.

8. Projecting Lost Earnings for Too Long a Time Period

We often see many damages reports which project the plaintiff’s lost earnings for periods beyond the accepted standards in the field of forensic economics. We often see ending periods such as ages 65 or 70 and sometimes longer used. However, the standard ending period is the worklife expectancy.This is not an assumed retirement date, but rather a statistical construct that takes into account a variety of demographic and labor market data to reflect the average total number of years an individual would remain in the workforce and actively pursing employment. It often is below age 65.The worklife expectancy tends to be lower for females than males and also tends to be lower for lower levels of education. It is also important to note that age 65, an age so often used by plaintiff’s experts, is not even the average retirement age, as that age is approximately age 61.5.

9. Not Making Sure That Taxes, Unemployment and Discounting are Adjusted for Correctly

In many jurisdictions, including Federal courts and states such as New Jersey, taxes must be deducted from projected gross earnings and future amounts need to be brought to present value terms. In addition, all earnings projections should be adjusted downward for the possibility of unemployment.The resulting adjusted values can be significantly lower than projected gross undiscounted earnings. It is important for the defense to make sure that these adjustments have been conducted correctly. This is usually difficult to do without the assistance of a forensic economist.

Not Challenging Faulty Economic Assumptions of Plaintiffs: Cost of Care

10. Care Requirements:Making Sure All Care “Required”by Plaintiffs is Truly Necessary

In cases where the plaintiff is claiming a loss in the costs of future medical care, defendants need to scrutinize the life care plan and the associated economic valuation that should accompany it. These arenormally twoseparate reports authored by two different experts with different expertise. Life care planners have expertise setting forth care needs and their current costs. Such plans are normally handed off to an economist who creates a future projection using relevant inflation and discount rates. The defense needs to ascertain if all of the components included in the life care plan are truly necessary and, if so, whether they are necessary at the frequency set forth in that plan. In addition, the current costs of each item needs to be verified. This work is usually done by a life care planner retained by the defendant who may create a rebuttal plan which is then provided to an economist retained by the defense. That economic expert then does a valuation using relevant inflation and discount rates.One common error we see in the plaintiff’s life care valuation is the use of inflation rates that apply to highly specialized or skilled care, but which have been applied to less skilled care components such as home health aides. When we consider that some of these projections can extend for decades, the compounded effect of the use of too high a growth rate can greatly exaggerate the true care costs.