Economic Damages—Getting Personal

Diversify your practice and expand your skillset

Valuation analysts can develop the necessary skillset to perform economic damages calculations and construct detailed reports. This is the case despite the differences in how economic damages calculations are prepared vis-à-vis commercial damages calculations.

It seems that forensic financial analysts are uniquely qualified to offer their services in matters pertaining to economic damages resulting from personal injury, wrongful death and wrongful termination. However, more often than not, analysts appear to feel more comfortable with the commercial side of damage calculations and engagements or business valuations involving litigation. Perhaps it is time for forensic financial analysts to inventory their skillset, expand their opportunity to serve clients and put their training to full use.

Models

Analysts love valuation templates and models. Personal economic damage calculations are no exception. I created my first models and workbooks in SuperCalc on an Osborne computer based on the writing and work of economist, Stuart Speiser. Today, we have access to subscription software, more versatile spreadsheet programs and a greater abundance of reference sources to assist in the building of economic loss models.

The basic economic damage model is a discounted cash flow projection that captures the following elements as applicable:

1. Loss of earning capacity from a job or occupation, reduced by any mitigating earnings
2. Loss of all fringe benefits attached to the job or occupational earnings
3. Loss of a value stream reflecting household services performed, reduced by any mitigating capacity to perform those services
4. Medical and rehabilitation expenses incurred plus any future expense estimates provided by a life care planner
5. The economic value (present value) of the loss elements as of a specific date

Data

Not unlike the traditional business valuation process, economic damage engagements require forensic financial analysts to research and collect earnings and market data. However, the interesting difference is the greater availability and application of empirical and statistical data. The damage calculation requires the analyst to refer to mortality tables, worklife expectancy tables, occupational employment studies and statistics, personal consumption studies and tables, household services studies, and interest rate and inflation rate data.

The challenge for the analyst is to understand the application of the data and selecting the between two or more studies relating to a loss element (worklife expectancy—Skoog and Cieka tables or Kruger tables). Another challenge for the analyst is integration of any reports and conclusions reached by a vocational rehabilitation expert or life-care planner. The greater abundance and use of empirical and statistical data does not make a personal economic damage simple. It is merely different and requires an investment in time and study.

Reporting

There probably exists a difference in opinion as to what the depth and length of a forensic financial analyst’s report should be. In my opinion and experience, it is a matter that is largely determined by retaining counsel at the outset of the engagement. Two distinctive report types emerge and neither should pose a problem for a forensic financial analyst.

A calculation report reflects an engagement whereby the analyst calculates an estimate of economic loss based largely on the financial and personal data of the subject of the analysis and application of applicable statistical data within an economic model. A calculation report provides a basic estimate of loss, assumptions, methodology and reference sources.

A detailed report contains all of the elements of a calculation report, but reflects additional considerations such as personal interviews with employers, family, friends, any vocational rehabilitation expert or life planner or physicians of record. The additional data and considerations accomplish two things: first, it allows the analyst to personalize the analysis and breathe life into the numbers and damage estimate. Second, it allows the analyst to make any subjective and necessary adjustments to the calculation not reflected in the statistical data and tables. Whether the analyst includes any additional considerations in the written report is personal preference.

Communication

In many instances, a trained forensic valuation analyst represents the preferred choice for economic damage valuation engagements, and it is not necessarily because they are any more intelligent or detail-minded than professional economists. The reason is that successful analysts keep a complex calculation simple and communicate the results (both written and oral) in a manner that the parties of interest can understand. Parties of interest include jurors and the trier of fact. Additionally, many trained forensic financial analysts excel in preparing trial exhibits and providing expert testimony.

Summary

While tort reform decreased the overall growth and market for personal economic damage engagements, it still represents an interesting and viable practice area for the forensic financial analyst. During the recent recession, the unemployment rate increased and the number of wrongful terminations rose sharply, as employers attempted to shed their workforce. It continues to represent an active practice call for many forensic analysts. What will be the next market change?

If you are considering expanding your service offering in economic damages and litigation support, and enjoy researching and applying empirical and statistical data, then perhaps it’s time for you to invest in learning, training, and marketing yourself in the area of personal economic damages.

Jeffrey Harwell, CVA, MAFF, is Principal of Harwell & Corporation, based in Fort Worth, TX. Mr. Harwell values closely held companies interests, economic damages, litigation support, merger and acquisition planning. Jeff can be reached at jharwell@hypercon.net.