Economic Valuations for Lost Earnings and Wrongful Death

Mar 4, 2000 by

By Douglas Garrett

Accidents happen. Some accidents are not preventable, but sometimes accidents are clearly caused by the direct actions of another. When asked to decide, a jury will say that the one who caused the accident must pay to make the injured party whole again. This is clearly fair and just. If you throw a rock through my window, you must pay to have it repaired. Economic valuation of losses are usually more complicated than a broken window and, in the legal world, these are the province of CPAs and economists.

The primary areas of disagreement and/or negotiation between the involved parties are assumptions about the length of time the loss did/will exist and the interest rate to apply to the future steam of revenue that would have existed, which brings the loss back to a specific dollar amount today. For example, “What is the calculation of lost profits from a restaurant that was closed for six months when a car drove thru the front window?” is one example of the type of questions that we answer. If profits were a steady $50,000 per month for the past five years, then six times $50,000 equals $300,000.

We often are called upon to value interrupted business profits, which looks to the past, and following a similar line of thought, we are also asked to value lost wages, as when someone was injured and spent several months as an invalid and unable to work. Sometimes the injury is permanent which requires a forward looking valuation. Most of the main issues are of the same type: What would the injured party have earned over the period of time that they were unable to work, and what is the appropriate interest rate (or more specifically the discount rate) that makes a lump sum deposited in the bank today equal to the same dollars that would have been in the bank for a given period of time, if they had not been injured.

As an example, say you have a 60 year old truck driver, earning $60,000 per year, who planned to retire at age 65. He is injured today in an accident caused solely by someone else and is permanently disabled. While he cannot drive anymore, he does not need special care, and he can work as a dispatcher at the same company and now makes $45,000 per year. The loss calculation is pretty clear. $60,000 per year that he would have made by driving, less $45,000 from his reduced activity desk job per year equals an earnings reduction of $15,000 per year times five years times equals $75,000, which is what he will lose over the next five years as a result of being injured. If the bank interest rate is 2% then a lump sum of $67,870 today invested in a 2% CD or bond would equal $75,000 in five years. If a jury finds that the truck driver’s injuries were directly caused by another person, then that person would be obligated to pay the truck driver $67,870 today to make him whole. Pain and suffering are an entirely different discussion that I am not addressing in this paper. Liability for pain and suffering, as well as “making a statement” about egregious conduct, are important issues both for the individual and for society. These issues have important economic aspects to them, but should not be confused or conflated with this paper’s narrower focus.

One of the sadder questions that we are sometimes asked to answer is “What is the economic value of a wrongful death?” In this case there is no alternative income or employment possibility, and there are no ongoing medical treatment costs, nor personal care costs, so on the face of it, we have a simpler calculation. But there is a twist here that need to be explored. We are no longer looking at the value lost by the person who died. We are looking at the value lost by the estate of the person who died. This is a different question from the one asked in the injured truck driver example above. To answer this question, for the benefit of the estate, we need to know not only how much was earned each year, but also how much was spent by our truck driver each year, to calculate how much his estate increased (how much he saved) at the end of each year.

If our truck driver earned $60,000 per year and spent exactly $60,000 per year, and then had a heart attack on his first day of retirement, then his estate would have grown by zero over his last five years. The present value of his expected earnings, reduced by the present value of his expected spending would equal the present value of his contribution to his estate. If we assume that our truck driver was killed by the accident today, instead of surviving it as in the example above, and he historically spent 100% of all that he earned, his estate would be due nothing from the person who killed our truck driver, for lost earnings. So the calculation is simplified to two issues, 1) what would they have saved until retirement, and 2) what is the discount rate? Again, I want to be clear that I am not addressing issues of pain, whether physical pain for the decedent, or of emotional pain for the survivors. That is a different discussion, saved for another day.

So this leaves us with a very unsatisfactory result. In our first example, our truck driver was injured, which cost the offender $67,870, and in our second example, he was killed, which due to the lifestyle choices of our truck driver, cost the offender zero. So setting aside the activity of the criminal justice system, it is economically better to kill than to maim. Again this is a very unsatisfactory result.

The death of a child is always tragic, and sometimes lawsuits are brought on behalf of their families. Generally the wrongful death valuation methodology as described above is applied, but it is very much an uphill battle. How do you prove future earnings for someone who has not yet chosen a vocation or demonstrated any singular talent or ability? Juries may be sympathetic, but they need to make awards based on facts, not emotions, or higher courts, upon appeal, will throw out their awards based upon sympathy.

The indigent, who are victims of wrongful deaths, also pose a difficult problem.   They also typically spend all they earn. Their life expectancies are difficult to calculate with any measure of certainty. In some cases their misfortune and misery is self-inflicted, but even then, even though they may not be sympathetic victims, we, as a society, still maintain that their lives have value. Those who wrongfully kill must be brought to justice, economically as well as criminally.

Therefore I would propose an alternative to the wrongful death valuation method described above.

In the past few years there have been several international commercial aircraft disasters with the loss of all souls aboard. The families of those who have died have had the same dilemma as the estate of our hypothetical truck driver described above. To further complicate the matter, the victims are from multiple nationalities, ages, religions, social customs, currencies, family structures, both sexes and widely varying economic statuses. How should the families of those lost be compensated? Is there any governing authority that reaches across international borders, across different legal jurisdictions, and across different international air carriers, that addresses this issue?

Yes there is.

It is called the Montreal Convention. This is an international multilateral treaty signed by ICAO member states in 1999. ICAO is the International Civil Aviation Organization, an agency of the UN. As of 2011, membership consisted of 190 of the 193 UN members. The United States adopted this standard in 2003. To quote Wikipedia, the ICAO “… codifies the principles and techniques of international air navigation and fosters the planning and development of international air transport to ensure safe and orderly growth.” To further quote Wikipedia, the Montreal Convention “… amended important provisions of the Warsaw Convention‘s regime concerning compensation for the victims of air disasters. The Convention attempts to re-establish uniformity and predictability of rules relating to the international carriage of passengers,baggage and cargo.”

Before the Montreal Convention, when air travel losses were governed by the Warsaw Convention, the victims were required to prove negligence on the part of the air carriers before they could recover. The Montreal Convention removed that burden of proof requirement with a “strict liability” standard. This meant that the legal responsibility was put upon the air carriers regardless of their culpability. Fault, negligence, or intention on the part of the air carrier were removed from the equation. If the damage was caused by their acts then they were responsible. The Convention also requires air carriers to carry liability insurance.

Air carriers are liable for losses up to 113,100 special drawing rights (SDR), which is a mix of currencies established by the International Monetary Fund and is adjusted every five years. One SDR is equal to .423 euro, 12.1 yen, .111 pounds, and .66 dollars. Again, from Wikipedia, “Where damages of more than 113,100 SDR are sought, the airline may avoid liability by proving that the accident which caused the injury or death was not due to their negligence or was attributable to the negligence of a third party.”  So this is a floor, not a ceiling.

So let us return to our example above. Suppose our truck driver has a teenage daughter whose grandparents live in Europe. They generously decide to buy her a plane ticket to come visit. She accepts their offer, boards the plane, and the plane is tragically lost at sea. What is the compensation due to her family? Using the Montreal Convention formula, if her family claimed the maximum under the strict liability provision, and exchange rates were as assumed/listed below then:

.423 euro = $.47 USD

12.1 yen = $.10 USD

.111 pounds = $.17 USD,

plus $.66 USD total = $1.40 as the value of a SDR in US dollars

$1.40 USD x 113,100 = $158, 340

This amount would be paid to her family (or her estate) for their economic loss, without the need to prove negligence or culpability on the part of the air carrier.

How does this apply to someone who has no provable economic future revenue stream? If an indigent person was also on that tragic flight, seated next to our truck driver’s teenaged daughter, then their estate would also be due the very same $158,340.

This is a viable alternative to the very unsatisfactory current situation where it is economically better to kill than to maim, and the economic value of the death of an indigent adult or of a child is zero.  This principle gives us a minimum standard economic loss starting value that could be applied to all similar wrongful death civil situations, where jurisdiction and strict liability are clearly proven.