Forensic Economics: Role in Tort

Over the last three decades the profession of forensic economics has experienced rapid growth, and an expansion into all areas of civil torts and public law. A forensic economist is an economist who applies the general theories and methodologies of economics to the measurement of damages and/or proof of liability in litigation. In the past, the field of forensic economics has been viewed as a mere extension of other fields of economics such as labor economics and price theory. During the past two decades though, it has become a unique discipline, and in 1985 the National Association of Forensic Economics (NAFE) was founded. It now has over six hundred members in all fifty states, and six common law countries.

Prior to the twentieth century, damage calculations in civil torts were largely restricted to commercial torts. In English common law, precedents existed for the award of pecuniary damages when commercial interests were infringed upon, or when personal property was destroyed. However, there was no precedent in awards for personal injury or death in either the course of employment or from the use of dangerous products. It was through the evolution of British and German common law that the first actual known tort case; one in which a person was sued for negligence and causing personal injury, taking place in England in 1937. In 1912, E.H. Downey wrote concerning issues in 1911 work accidents caused 35,000 deaths and about two million injuries. With the industrial revolution came the passing of the workman’s compensation act as well as the FDA, which finally was able to protect both consumers and workers. This finally allowed tort law to also be used in personal injury cases, and enabled protection to those who previously had been left to just accept it and move on.

The forensic economist has many considerations in the determination of the economic loses. In recent years the NAFE has come to an agreement on several areas of methodology, such as the projection of fringe benefits, hedonic damages and personal consumption. Despite the fact there are still many areas on which they disagree, more research and writings are helping to create a universal system that will define the determinations of the loses. As of now, the forensic economist must juggle several different issues when determining loses in both injury and death cases. The most crucial and frequently attacked areas of methodology are household services and Work life expectancy. Other areas taken into account are Base earnings, Discount Rates, Taxes, and residual earnings.

When an economist begins work on a case, vast amounts of information must be gathered before he can begin the writing of his report. He must inquire about the person’s race, age, date of birth, date of incident, and the date of the trial. With this basic information, it becomes possible for the economist to start putting together a family profile that is crucial in determining the loss. In addition to these facts, the economist must also be given information regarding the education of the client; income and work life expectancy are shown to be linked to education. As the report probes more deeply, the economist requires a medical history that might in any way decrease the person’s life expectancy prior to the incident. After such assessments, the economist must gather all the information regarding income, including income history, and occupational history. Finally, the client’s personal history must be explored, such as the existence of a family and what role is played in the family if at all. It is at this point at the economist can begin to determine the economic losses.

The area most forensic economists choose to first explore is that of Base earnings. Over long periods of time, it is undisputed that wages increase. Another undisputed fact is that wages grow at different rates depending on the job preformed. Furthermore, there have been declines in the wages of selected jobs as well as artificial flat spots in wage’s increases resulting from freezes during high levels of inflation. When using historical data, the Forensic economist allows the most recent history to weigh more heavily than the distant past. The argument is made that in determining the earnings of the client in question, that by assuming a natural growth that is assigned by tables and national averages, it may in fact not be accurate for both good and bad reasons. Many times the cause of a person’s increase is due to promotions or increased productivity, all of which cannot be exactly predicted. On the other hand, there are times when no raise at all would happen either because of productivity or because of the natural increase in living expenses. This points to the reason that in many cases the growth rate is never challenged, as the average would, in most cases, come to equal the average of both the best and worst percentages of growth. While the growth rates differ by occupation, it is also found that they differ by education and location as well. The prediction of base earnings presents a challenge overall. A greater challenge comes in a younger person who was essentially nothing, but potential can be studied with more facility with an older person who may have an established earnings history and an easily predictable future.

For many years hedonic damages were shunned, and they were regarded simply as a lesser form of this burgeoning form of economic art. Hedonic damages concern the idea of economically replacing the value placed on a person’s life. That is to say, if a person was willing to risk their life for a certain amount of money or time, then it can be determined how much they valued their lives. Dana Hewens uses the example concerning observations of people as they crossed a busy street. One option would be to risk your life and cross the street at your present location. The other option would be to walk ten minutes down the road and go over a footbridge present no danger. The people who chose to walk to the bridge were viewed as those who valued their lives more than those who chose to race across the street. Valuing life is seen as greater when walking lessened the risk. The idea of hedonic damages has come up recently in light of the tragedies of nine eleven, as the people in the towers took no risk in their job, and thus were seen as valuing their lives more.

Personal consumption is a peculiar area of an economic settlement, as its determination can greatly swing a decision in either direction. There are several different ways of determining personal consumption. For those who are older, many times there are actual spending records that can help to determine the amount spent on an individual. In other cases, it would be better to simply use percentages that came from tables produced by the government. Those that are able to be determined based on marital status, and number of children who would shift the actual percentage that that person would have consumed had they not died. There is a second way of determining, one that is mainly used by plaintiff forensic economists in cases when the client is older and no longer has children at home. This idea allows one to compare the average of a single personal household to that of a two-person household, stating that difference is the amount of personal consumption. This works well if one is trying to get a higher award, as you can always argue that there are certain things that would have to be consumed, whether by one person or two.

Household services are an area that has evolved in recent years, as the roles of men and women in the home have seen shifts. The point is, the survivors are going to have to pay in order to replace the services that were essentially performed for free by the deceased or permanently injured party. Usually, a flat fee for service professionals is chosen, and the survivors are asked approximately how much work per a week a person did around the house. A good forensic economist will take that number and decrease it by about 25%, assuming that one would personally consume some of the services they would perform.

Work life expectancy, as simple as it may seem, has been hotly contested in recent years. Those in the field, those who have worked on many cases, have put the accuracy of such assumptions to question. The problem arises surrounding the tables published by the national government, tables that in many cases take race and age into account when projecting a person’s life and work life expectancy. The issue arises from the idea that, one who works a hard labor job is predicted to not continue in that job as long as one who holds a white collar job. The same can be said for those who own their own businesses and are forced to work longer due to a lack of pension or other forms of retirement plans. This issue will only be resolved when enough research can be completed to collect better readings of work life expectancy by profession instead of just age.

The Discount rate is used to determine the amount of money a person suing for damages will receive at that time, in return for the losses that would have occurred over the years to come. This simple equation takes the interest rate in something such as thirty year bond from the unite states government, and then subtracts the rate of inflation at that time. Although this is very hard to argue, as the rates are published by the government and do not leave anything up to interpretation years later when the effects of such an equation could be felt. During the early nineties there were many attempts at controlling the growing inflation rate. This actually caused the rate to go up, so awards from the early nineties are actually worth more now than at the time. The discount rate remains an interesting topic; in many cases it takes close to two years for a case to actually go to trial or begin to reach any kind of settlement, and the discount rate can change drastically over that period of time. The question really concerns the place and point where the discount rate taken. In many states it starts when the trial starts, which can both hurt and hinder both sides involved.

As any American knows, taxes take a large portion of personal income. When it comes to determining economic awards though, in the state of Massachusetts, personal income tax is not taken into account. Rhode Island, on the other hand, requires that they be included. The problem here is that in numerous studies done, the subtraction of taxes and social security actually raises the worth of a person’s estate. There is no national law stating that it should be included or not, so as you travel from state to state, is important to know the difference as a forensic economist.

The line between injury and wrongful death has no greater illustration than in heath care. Following one’s death, very little money is to be had regarding care. In Injury, it is important that an economist bring in a heath care professional. One who can give a good idea of how much care a person would need over the rest of their projected life, along with an extrapolation concerning their ability to ever be able to work in any capacity again. In many instances, this is why a personal injury case can actually be worth more, as the care of a live person can equal millions for a lawyer.

In the study of forensic economics, I have discovered that the role played in personal injury cases has allowed numerous people, those who might not have received any compensation, be able to receive what they have economically lost due to the death of a loved one. In fact, though they have over seen a rise in awards and settlements owing to the fact that it is now easier for a lawyer to point to concrete proof of lost earnings, challenges arise because an expert witness is able to lay it all out for the jury. Punitive damages and Pain and suffering awards have fallen off, while high profile awards still make them seem prolific. There has been recent discussions concerning stricter laws and caps put on the awards. The hope of the forensic economists lies in the new legislative limits concerning the awards for things such as punitive damages. All told, this does not limit their ability to help make a person economically whole once again. As it is, the duty of the forensic economist to make sure that the client is economically whole, and is able to continue on as before. This is why the victim’s relief fund has come under so much scrutiny, as it wishes to pay the people off, but not properly making them economically whole.

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