The Concept of “Present Value” of Future Losses
If you’ve filed a personal injury claim after suffering catastrophic injuries, you may be eligible for compensation from the negligent party that caused your injuries. Calculating that compensation can be difficult if your future cost of care or future lost wages need to be taken into consideration. This is where the concept of present value comes into play.
In order to understand the concept of present value of future losses, you first need to understand how compensation works for personal injury claims. The legal term for compensation is damages. In a typical personal injury case, damages are separated into economic and noneconomic categories.
Economic damages refer to the monetary expenses related to your injury. These can be calculated exactly and there is no limit to the types of claims that can be made or the amount a person can be awarded. The most common types of economic damages include loss of earning, loss of future earnings, medical expenses, cost of future medical care, costs associated with canceled plans, and household expenses.
Noneconomic damages are harder to calculate because they’re based on the harm a person sustained. The most common types of noneconomic damages include pain and suffering, mental anguish, loss of enjoyment, and loss of consortium. A judge or jury will decide how much to award a plaintiff for noneconomic damages.
In some cases, especially when gross negligence is a factor, punitive damages may be awarded. A personal injury victim can be awarded punitive damages when the negligent behavior of the defendant is deemed reprehensible. These damages serve to punish the guilty party and deter them from committing similar acts in the future.
Defining Present Value and Factoring in Future Losses
Present value is the cost today that will fund an amount that will need to be paid in the future. The costs that will come about at a later time are referred to as future losses. In regard to personal injury, these are typically future lost wages and the cost of medical care in the future.
When it’s known that a personal injury victim will have expenses related to their accident in the future, an issue can arise when trying to value those damages. If, for example, it’s known that a person will not be able to return to work, those earning will need to be calculated and factored into the total compensation. To do this, they take into consideration the length of time the person could reasonably be expected to continue working. Typically, loss of earning is projected through normal retirement age.
The issue with determining future losses is that they have to be reduced to present value. This is because a dollar earned in the present will be worth more in the future. The reductions, however, are often offset by evidence that suggests the increases in earnings the person would be expected to receive through raises and promotions.
To determine the total of a future loss like lost earnings, the rate used to make the calculation is called the discount rate. This works in the opposite way that compounding does, as the further in time the salary is received, the less the payment is worth today. After determining the amount of all the future earnings, and discounting the total, the amount will likely be adjusted for the inflation that will take place over the period of time involved.
To calculate the present value of future losses, forensic economists and structured settlement brokers are typically used. Economists can testify about issues like inflation rates, investment returns, and other factors that impact present value. They can provide an opinion of how much money will be required today to fund a single payment or multiple payments in the future. Structured settlement brokers can gather data about the plaintiff’s age, gender, and life expectancy. That information is used in conjunction with programs by life insurance companies to get projections on future interest rates. While personal injury settlements are tax-free, any investment income earned in the future is not.
It’s can be confusing when trying to calculate the compensation you may need for the future after suffering because of the negligent actions of another. When you work with the lawyers at Belsky, Weinberg & Horowitz, LLC, we will call on forensic economists and other financial specialists to determine how much money you may need for future losses. This way, you won’t have to worry about determining a sum and can focus on recovery. To learn more about present value and the possibility of filing a personal injury claim, schedule a free consultation with us today.