The Appropriate Discount Rate in a Lost Earnings Claim

Every few years, the Journal of Forensic Economics (JFE) publishes the results of its survey of National Association of Forensic Economics (NAFE) members regarding their methods, estimates, and perspectives on lost earnings calculations.  As described in this related article, this survery demonstrates how damages experts often disagree regarding the appopriate discount rate in a lost earnings claim.

While certain states dictate the rate that must be used in certain circumstances, many rely on expert witness testimony.  For instance, under Section 3904 of the California Civil Jury Instructions (CACI), entitled “Present Cash Value”:

“If you decide that [name of plaintiff‘s harm includes future economic damages for [loss of earnings/future medical expenses/ lost profits/[insert other economic damages]], then the amount of those future damages must be reduced to their present cash value. This is necessary because money received now will, through investment, grow to a larger amount in the future.

To find present cash value, you must determine the amount of money that, if reasonably invested today, will provide [name of plaintiff] with the amount of [his/her/its] future damages.

You may consider expert testimony in determining the present cash value of future [economic] damages.”

However, many experts apply a fixed, risk-free rate even though no competent investment advisor would invest 100% of anyone’s long-term portfolio solely in risk-free investments.  Using such a rate can provide a windfall to a plaintiff.   Another article, “Calculate Economic Damages Associated with Lost Earnings Claims Accurately and Efficiently”, demonstrates the significance of the applied rate on damages.   A proper investment approach matches the time horizon for the investment with the underlying use of the moneys being invested.

 

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