Calculating economic damages in wrongful death cases

1. Collect the documents you need to calculate damages

To determine what an individual was capable of earning had they not died, you should start by reviewing their historical earnings and benefits documents.

Earnings are most often detailed in W-2s, 1099s, pay statements, and tax returns. The more earnings history you are able to review, the greater understanding you will have of the individual's earnings picture. Ideally that would include at least three to five years of documents before the incident through the present. Use this information along with descriptions of their earnings to get a full understanding of their earnings, including salary, bonuses, commissions, etc.

To ensure you collect all relevant documents available from your client, review our list of earnings types.

For employer-provided benefits, review the employee handbooks, offer letters, and other benefit contribution descriptions that detail the benefits they received. These may include contributions to health insurance premiums, 401k and pension plans, Social Security and Medicare, etc. Often pay statements and W-2s detail the individual and employer's contributions to health insurance, 401k, and other benefits.

There are dozen of types of employer-provided benefits. Review our list of benefit types to ensure you ask for all relevant documents.

Each analysis, like each client, is different. If a client was a government worker, you may find that there were no contributions to Social Security if the agency offers a pension plan in lieu of Social Security.

In some cases you won't have access to historical documentation of earnings or benefits. For example, waiters who do not declare their cash tips or minor children who have not entered the labor market.

2. Determine the earnings and benefits had they not died

The non-incident earnings and benefits are what the individual was capable of earning had they not died. In many cases, their historical earnings may be the best guide to what they would have continued to earn for the remainder of their career. Depending on the historical earnings patterns, their earnings capacity may be calculated as an inflation-adjusted average, a straight average, or their last full-year of earnings.

In some instances, the historical earnings may not represent the individual's earnings capacity. For example, if the decendent was a minor child, hadn't finished their education, or had just recently joined the labor force, their recent low or non-existent earnings do not necessarily represent the earnings they could have received throughout their life. In examples like these, it is common to utilize the average earnings of similar individuals, such as by their occupation, industry, or education level.

3. The length of the damages

In wrongful death cases, damages continue through the point in which the plaintiff - generally the spouse and/or children of the decedent - is projected to no longer experience losses due to the death.

For earnings and benefits damages, this period is commonly through the decedent's work life expectancy or assumed age of retirement. Work life expectancies are the amount of time someone is expected to be employed in the workforce throughout their life.

In some instances the damage period may be shorter, for instance when the spouse is significantly older than the decedent and has a shorter life expectancy than the length of the decedent's work life expectancy.

In some cases, using a specific age of retirement is more appropriate. For example, older workers closer to a retirement age may have a plan for retirement in place that they would likely have followed. This is common for government employees planning retirement at a specific age for their pension plan.

For household services damages, while the decedent may have been able to perform household services through their entire projected life expectancy, the spouse's age should be taken into account just like with earnings and benefits. Further, any children of the decedent may not have been living with their deceased parent and may not be owed any household services, or they may have been planning to leave the house at a certain age.

4. Project a growth rate for future earnings and benefits

Once the non-incident earnings and benefits have been determined, the next step is to project them through the expected length of damages. In general, the longer someone works, the more they earn. Projecting future losses of earnings and benefits should account for these increases with the use of a growth rate.

In some cases, the individual's own historical earnings may indicate a growth rate. However, some caution is warranted as there may only be a small sample of years of earnings from which to determine a historical growth rate.

The most common method for determining future earnings and benefits is the application of a growth rate based on historical increases for all workers or within an occupation, industry, or education level. Bureau of Labor Statistics data is a commonly utilized source.

There may be circumstances where future growth is predetermined. If the individual was a government or union employee at the time of their death, there may be pay schedules that specifically detail the earnings they would have received over time. Pay schedules are commonly based on the individual's 'step', 'grade' and/or 'longevity' with the employer, and are generally set for a few years into the future. These pay schedules should be applied first into a projection of earnings had the individual not died. For years beyond the pay schedules, the projected future growth may then be based on average growth rates or by determining the historical growth rate of the pay schedules.

5. Adjust for income taxes, if relevant

Depending on the jurisdiction, income taxes may need to be incorporated into an analysis of economic damages. The application of income taxes to an analysis may be relevant to one or more factors in an economic damage analysis, depending on the jurisdiction rules. Jurisdiction rules should be reviewed before applying any income taxes to the analysis.

The primary and most obvious application of income taxes is from the earnings the individual would have received had they not died. By adjusting the projected earnings for the income taxes owed on those earnings, the resulting effect is a reduction to economic damages.

Income taxes may also need to be applied to the discount rate being used to adjust the economic damages to present value. Discount rates in analyses of economic damages account for the interest that will be earned from the potential award after it is received and invested. If income taxes should be applied to the interest earned, the result would be a reduction in interest received on the damage award, and therefore an increase to economic damages.

It is sometimes appropriate to apply income taxes to the award itself. This may be the case when the award is taxable. If income taxes are required to be paid on the award, the individual would be left with less money to invest towards their losses. The economic damages may need to be adjusted upwardly to account for income taxes on the potential award.

6. Adjust for personal consumption, if relevant

In some jurisdictions, families may sue for the full loss of earnings and benefits the decedent would have earned. In others, they may only sue for the loss of support they would have received from the decedent. When analyzing the loss of support, an amount for personal consumption or personal maintenance may need to be subtracted from the earnings.

Personal consumption is the amount of money the decedent would have spent on items and services that would have been personally consumed. These include items and services such as clothing, grooming products and services, medical expenses, personal entertainment, transportation, some amount of food, alcohol and tobacco, etc.

Personal maintenance is similar to consumption, but only includes those items necessary to receive their earnings.

Generally, individuals do not track their spending closely enough to determine a personal consumption or personal maintenance factor. Fortunately, the Bureau of Labor Statistics collects data on household expenditures in the Consumer Expenditure Survey. The data is broken down into categories of number of people in the household and earnings level. These data may be used to determine the average personal expenditures.

Jurisdiction rules should be reviewed before applying any personal consumption or personal maintenance factors to the analysis.

7. Determine the past and future losses

Economic damages may be relevant for two time periods: from date of the incident to the present, and from the present into the future. These are referred to as past losses and future losses.

8. Discount future losses to present value

Most settlements and awards are paid as a single lump sum. However, the economic damages may be calculated for future earnings and benefits that they would have received through their full working life. Any future damages should be adjusted to present value, otherwise they would be over-compensated.

The present valuation of future damages accounts for the time-value of money. In short, money received today is more valuable than money received in the future, as money received today may be invested and earn interest over time.

To convert the future damages to present day value, a discount rate is applied. The discount rate accounts for the interest the individual could expect to receive from investing their lump sum in a risk-free investment. The use of a risk-free investment is necessary as it is assumed the investment will be secure and ensuring the annual funds needed to cover the projected future economic losses in each year they are expected to occur.

U.S. Treasury Securities are the most commonly used interest rates when adjusting economic losses to present value, as they are backed by the U.S. government.