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Mar 20

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Costs Excluded From Prejudgment Interest Calculation In Personal Injury Award

Prejudgment interest is often applied to a personal injury award in an attempt to capture the lost value of the use of monies prior to the judgment date.  A recent case, Bean v. Pacific Coast Elevator Corporation (“Pacific Coast”), has addressed whether costs awarded to a plaintiff in addition to damages are also subject to prejudgment interest.  The California Court of Appeals held that the Trial Court erred in awarding prejudgment interest on costs in association with a personal injury action.

In the underlying case, Bean was injured in an automobile accident with a Pacific Coast driver.  Bean had made a $999,999 statutory offer to Pacific Coast prior to trial, which was rejected.  The jury found for Bean and awarded him approximately $1.3 million.  The Trial Court also granted prejudgment interest and costs.  On appeal, Pacific Coast argued that pursuant to Civil Code section 3291, prejudgment interest should only have been awarded on the damages that the jury awarded in its verdict and not the costs.

The Court, whose analysis of the prejudgment interest claim is found in this related article, specifically addressed Bean’s argument that if the intent of prejudgment interest is to reimburse plaintiffs for the time value of money associated with having to litigate in order to receive that to which they are entitled, the exclusion of costs from the calculation does not accomplish that economic result.  The Court responded as follows:

“Finally, we are not persuaded by Bean’s contention that “a plaintiff’s outlay of costs is necessarily a lost use of money,” and therefore, that his interpretation fosters Civil Code section 3291′s purported policy goal of “compensating personal injury plaintiffs for loss of use of money during the prejudgment period.” ….the Lakin court stated, “For more than a century it has been settled that one purpose . . . of prejudgment interest in general, is to provide just compensation to the injured party for loss of use of the award during the prejudgment period.” ….We think it clear that the purpose of Civil Code section 3291 is to compensate plaintiffs for the loss of use of the money awarded for personal injury damages, not for the loss of use of money for costs. Accordingly, we conclude that the trial court erred in awarding prejudgment interest on costs.“

By virtue of generally being defined statutorily and statically, prejudgment interest often will not accurately capture the true time value of money.  In contrast, future amounts of damages are discounted by applying a rate calculated by an expert, a discussion of which is found in this related article regarding discount rates in lost earnings claims.

About the author

Renee Howdeshell

Renee Howdeshell is a founding member of Fulcrum Inquiry, an accounting, finance and economic consulting firm that performs damage analyses for commercial litigation, forensic accountings, royalty & distribution audits, financial investigations, and business valuations. Ms. Howdeshell holds a degree in Finance and Marketing from the University of Virginia's McIntire School of Commerce and is a Certified Public Accountant (CPA) and a Certified Fraud Examiner (CFE). She has testified as an expert witness in federal court, CA state court and arbitration regarding the results of her work. She can be reached at (213) 787-4112 and her resume is available at www.fulcrum.com.

Permanent link to this article: http://betweenthenumbers.net/2015/03/costs-excluded-from-prejudgment-interest-calculation-in-personal-injury-award/

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