Home Management How to Accurately
Assess Damages in Litigation
How to Accurately Assess Damages in Litigation
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How to Accurately
Assess Damages in Litigation

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The topic of determining damages is one of the most important parts of litigation. How is the harmed person going to be made whole again? Damages. Once somebody has been unfairly injured and looked for a solicitor in bury for advice, their concern will then usually turn to damages. The three basic legal principles needed to understand how to determine damages are proximate cause, reasonable certainty and foreseeability. In addition to these principles, there are several tools the court will use to properly estimate or calculate damages or lost profits and lost earnings. Courts will use one of three methods to calculate lost profit damages: the “Before and After” method, “But-For” method, and the “Yardstick” method and will look to several relevant factors to determine lost earning damages.

The Importance of Forensic Accounting

The word ‘forensic’ most literally means suitable for use in a court of law in investigating a crime. Forensic accounting is basically any investigation of a financial nature having a legal consequence. The area of forensic accounting specializes in engagements resulting from actual or anticipated disputes and litigation. The forensic accountant’s role in litigation support can vary from case to case. They can act as an expert witness, if necessary, a trial consultant, assist in the preparation of interrogatories, prepare questions for deposition or to evaluate/critique the opposing expert’s analysis.

Forensic accounting is relevant across the board: claims made under commercial property and liability insurance policies, civil and criminal disputes, financial and economic issues, assets involved in the formation, finance, operation and dissolution of business entities, investigation of fraud, and matters pertaining to the public sector including economic losses, internal compliance, regulatory and oversight.

Just as facts and issues differ by case, damages will vary based on the type of case and the resulting harm or loss. For example, general business damages include lost profits arising from breach of contract, a dissenting shareholder and partnership disputes while personal injury damages include work limitations resulting in a loss of earnings capacity, business value and basic household services. If you have found yourself a victim of personal injury, you might want to check out someone like this Brooksville slip and fall attorney for more information on how to help with your claim. And wrongful termination or wrongful death damages include claims resulting in loss of expected earnings and/or business value.

Understanding Lost Profits

The basic legal principles needed to understand lost profits are (1) proximate cause, (2) reasonable certainty and (3) foreseeability:

Proximate Cause: In order to be recoverable, damages must be proximately caused by the wrongful conduct of the defendant. There is no tangible difference in the requirement of proximate cause for cases involving contracts and torts.

Reasonable Certainty: In addition to proximate cause, damages must also be proven with “reasonable certainty.” Generally, proof of actual or even estimated costs is all that is required with certainty. After damages have been proven, the amount of those damages can be proven with less certainty (or estimated).

Foreseeability: Lastly, to be recoverable, damages from a breach of contract must have been foreseeable as the natural and probable result of a breach at the time the contract was made. This means the lost profits need not be proven with mathematical precision, but they must also not be purely speculative. Historical data, such as past business volume, is an acceptable basis for ascertaining lost future profits.

In determining how to calculate lost profits damages, financial statements are always the preferred source of information. Sources of such financial information include Plaintiff/Defendant’s accountant, the IRS, Plaintiff/Defendant’s suppliers and/or customers, industry data and bank statements. Earnings and fringe benefits can be determined through the U.S. Department of Labor, Bureau of Labor Statistics, The Census Bureau, Employment Cost Index, Union Data and U.S. and Local Chambers of Commerce Data.

It is important to keep in mind, lost earnings capacity or lost profits damages applies to all types of claims while loss of business value can apply to both personal injury and wrongful death claims. Getting the right remedy for your injuries is a top priority when it comes to personal injury claims, you will want to hire a professional that knows exactly what they’re doing such as Diamond and Diamond, legal professionals such as these will ensure that you are supported and the correct legal guidance is offered. When suffering injuries in a car accident or other personal injury-related incident, lawyers understand that it can be a distressing and complicated time, both emotionally and financially, therefore they want to offer you all the help you can get. Using their legal knowledge to make a successful claim.

To maintain a claim for lost profits, a plaintiff must prove three things: (1) The defendant breached a legal duty to the plaintiff; (2) The defendant’s actions or inactions, actually damaged the Plaintiff; and (3) These damages are “proximately related” to the event. Generally, there are three basic methods of proof used to calculate lost profits with multiple approaches within each method: (1) The “Before and After” method; (2) The “But-For” method; and (3) The “Yardstick” method.

The “Before and After” Method: To use the “Before and After” method to calculate lost profits you take the level of normal operations “before” the incident less the actual results “after” the incident.

The “But-For” Method: The “But-For” method for determining lost profits is based on a projection of post-incident operations based on what should have happened during the time of loss which shows how the loss is affecting the business and what should have occurred against what actually happened. The lost profits damages are determined based on the fact that “But-For” the incident, the loss would not have been incurred. Relevant sources of this information includes historical operations, post-incident operations, trend or regression analysis, pre-incident forecasts and budgets. Courts will also allow industry or market outlooks, credit or loan information, information from franchises or other locations and information from competitors of the business regarding specifics to the market affecting the business outside of the incident.

The “Yardstick” Method: The “Yardstick” method uses the experience(s) of another business to estimate that of the affected business. Such information can be obtained from same business – different locations, similar businesses, industry or market data and economic indexes or indicators.

Another issue to be discussed is whether there was a loss or decline of sales that will be deferred into a later time period. For example, if a dentist is forced to cancel all of his appointments for a specific time it is likely those appointments will be rescheduled for a future date and the lost profits will be made back. Generally, to lose profits you must lose sales or have an increase in normal operating expenses.

Understanding Earning Losses

While lost profits relates to the earnings ability of a business, lost earnings damages are only based on the earnings ability of the individual. Lost earnings capacity is the difference between the expected lifetime earnings “but for” the incident and the current expected lifetime earnings subject to any work restrictions resulting from the incident. The calculation is earnings “but for” the incident minus the actual current earnings equals wage loss plus any benefits. However, when the incident relates to a permanent work impairment, you need to consider life expectancy and work-life expectancy. Life expectancy (as determined by census data) is the number of years the claimant would have lived “but for” the loss event. Work-life expectancy is the number of years the claimant would have worked “but for” the loss event. The expected lifetime earnings need to be evaluated for “but for” earnings and current earnings. To determine “but for” and current earnings, use case specific data if available: W2’s, payroll records, tax returns and industry specific data. Empirical data may be substituted if the source is generally accepted as independent and reliable.

Past losses will be the claimant’s losses as a certain point in time, usually as of the date of trial. Future losses are the losses sustained from the trial date through the loss period and the loss period may extend through the claimant’s expected work-life or life expectancy. Lost fringe benefits may include employer contributions for Social Security, worker’s compensation, unemployment insurance, employer contributions to stock option, profit sharing and retirement plans, employer contributions for health, life and disability insurance premiums and paid time not worked for vacations, holidays and sick leave that is in addition to regular compensation.

There are many factors to consider for expected future costs: the nature of the injury and expected duration, the effect of the injury to the claimant’s life expectancy, past medical and rehabilitation costs, testimony or reports by medical or rehabilitation experts, and a growth rate specifically for medical expenses. Household services are those non-paid services that the claimant would have provided to the household “but for” the incident but can no longer do those services, including: home maintenance and repairs, managing finances, child care, housekeeping, cooking and shopping and other routine activities required to maintain a household.

How To Earn CLE Credit on this Topic

For an in-depth review on this topic, Attorney Credits offers a course titled Damages in Litigation.

The course is available for CLE credit in the following states: Alabama (AL) | Alaska (AK) | Arizona (AZ) | California (CA) | Colorado (CO) | Connecticut (CT) | District of Columbia (DC) | Florida (FL) | Georgia (GA) | Idaho (ID) | Illinois (IL) | Indiana (IN) | Louisiana (LA) | Maryland (MD) | Massachusetts (MA) | Michigan (MI) | Minnesota (MN) | Mississippi (MS) | Missouri (MO) | Montana (MT) | New Hampshire (NH) | New Jersey (NJ) | New York (NY) | North Dakota (ND) | Ohio (OH) | Oklahoma (OK) | Oregon (OR) | Pennsylvania (PA) | South Dakota (SD) | Tennessee (TN) | Texas (TX) | Vermont (VT) | Washington (WA) | West Virginia (WV)

James Nguyen
James Nguyen

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