Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Why personal consumption matters in determining damages

“It’s pretty simple, right? For personal consumption I just take the decedent’s annual wages, multiply it times the number of years he would have still been working, and that should be the damages, right?”

We have all been on either side of phone calls just like this one, and I am confident in saying that the answer is nearly always “Well, not exactly.”

So, what did my client not consider in this scenario? Well, as it turns out, quite a bit, and it just goes to show the value that a forensic economist can add to a case.

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First things first, I need to be completely fair and say that the caller in this scenario was partly correct. We do use the annual earnings or earnings capacity, and we do calculate the number of working years that would have been left but-for the incident, but there is a lot more to it than that. I will save calculating lost earning capacity for another blog post (stay tuned, Dear Reader), but did want to address a key portion of this calculation that is often overlooked, personal consumption.

So what’s the big deal, exactly?

First off, let’s talk out what exactly personal consumption is. Simply put, it is the adjustment to the damages in a wrongful death case for lost earnings that the decedent would have personally consumed. As an example, if a decedent earned $50,000 in salary after taxes, a portion of this would be allocated to his or her own personal care and purchase of personal items.

Believe it or not, this level of domestic spending is tracked by the government but is largely self-reported so there is some criticism about how accurate the data may be. One thing is for certain – regardless of income level, everyone needs clothing and soap.

So why is this so important?

In certain states, the courts have decided that if a surviving spouse were to get the full take-home earnings capacity of the decedent, it would create a windfall of sorts because the entirety of that take-home pay wouldn’t otherwise be available if the decedent survived. Similar arguments are currently being made for an income-tax offset, which will also be saved for another blog post.

So how do you calculate a good personal consumption percentage?

A very good question. Ultimately, we rely on industry data and best practices to formulate a personal consumption percentage that best represents the amount of the household income that would be specifically allocated to a deceased family member. We consider things such as household income, the number of people living in the home and their ages, and anything that might be considered extraordinary – such as the cost of care for a disabled family member or a very expensive hobby, for example. Each of these details plays its own part in helping us to arrive at the correct personal consumption estimate.

If you have any questions on this subject, please contact us. For more information on the litigation and valuation services we provide, check out our Services page.

Alison Wise, CFE