Venue Matters: A Comparison of Hypothetical Damage Awards In Six States. Mitch Marino and Matthew Marlin. I. Introduction

Venue Matters: A Comparison of Hypothetical Damage Awards In Six States Mitch Marino and Matthew Marlin I. Introduction A tort is an injury caused either willingly or through someone s negligence and includes things such as automobile or workplace accidents, medical malpractice, and wrongful terminations. The result of a tort is a physical or financial injury, or even death. To compensate those so injured, the states have enacted statutes, reinforced and/or modified by judicial rulings that establish guidelines for determining the amount of loss or and the compensation to which the victim is entitled. Recovery of such damages usually involves a lawsuit. 1 Although the guidelines for calculating damages are generally similar across the states, there are some instances where they differ in the manner in which losses must be calculated. The purpose of the current analysis is to describe the different rules for a wrongful death damage calculation in different states and show how they can result in significantly different financial awards. Because of a unique feature, the focus of the research is on Pennsylvania and a comparison to the surrounding states of West Virginia, Ohio, New Jersey, New York, and Maryland. The damages resulting from a tort can be both economic and non-economic, but this analysis focuses solely on the economic losses for which compensation is being sought. Although there is an accepted body of literature that describes the procedures and processes for determining economic loss, placing a value on pain and suffering or the loss of life s pleasures are generally accepted to be beyond the scope of economic analysis. 2 The general categories of loss included in economic damages valuations include lost income, lost benefits, and the value of lost nonmarket household services that had been produced and provided for family members. In wrongful death cases an allowance for the personal consumption expenses of the deceased also must be taken into account. The paper is organized as follows. Section II presents a hypothetical case and Section III examines the broad categories of loss that are common to all six states, the ways in which they differ, and then estimates the recoverable compensation in each state. Section IV is reserved for a summary and conclusions. 1 Gilchrest, David, Patrick Fitzgerald, and Kevin Marshall. What s Happening to Prejudgment Interest as a Result of Tort Reform? Paper presented at the Eastern Economic Association annual meeting, Philadelphia, February 25, 2006. 2 For example, Journal of Forensic Economics and Journal of Legal Economics are two peer reviewed publications dedicated to the advancement of knowledge in this area. Also, an important primer on past and current research is Martin, Gerald P. Determining Economic Damages, 17 th Revision (Costa Mesa, CA: James Publishing, 2005). 1

II. Hypothetical On January 1 st, 2006 John Doe, a forty year old male was killed due to another s negligence. He leaves behind a wife, Jane, born January 1 st, 1966 and two children, George and Georgina, twins born January 1 st, 1996. To simplify the current comparisons, it is assumed that the date of trial coincides with the date of death so as to avoid the issue of past versus future losses. John Doe had completed four years of college earning a bachelor s degree. He went on to work for Acme Financial Services starting January 1, 1986; he had no previous employers. He received a 3.0% raise each year from 1996 through his final full year of employment (2005), earning $40,000 in that year. Jane worked outside the home and her salary was identical to John s; however she did not have any fringe benefits. Mr. Doe produced and provided an average amount of non-market household services for his family. He had no exceptionally costly hobbies and his personal expenditures were equal to the national average for his income cohort. From an economic perspective, there should be no reason to expect that the Doe family s economic loss would be more or less in Pennsylvania than in Maryland or any other state. However, from a legal perspective there are significant differences that do make the legally recoverable value of a life different in different venues. III. Estimating the Economic Loss Income Although many complications can arise in cases of self-employment, seasonal work, etc, the calculation of lost income is generally a compilation of lost income in the past and a forecast of that income into the future. Given an estimated annual income stream, what remains is to determine the worklife expectancy (WLE) how many years into the future the deceased would have worked. There is no statutory or other reason to believe that worklife expectancy would vary from state to state and it is assumed that Mr. Doe would have worked for another 23 years had he not been killed. 3 What does vary from state to state, however, is the calculation of the present value of Mr. Doe s future earnings. Most studies that estimate economic values over time take into account the fact that the value of money changes over time, (i.e., the value of a dollar received in the future is less than the value of a dollar in one's hand today). As a consequence, most estimates of economic losses that extend into the future must estimate future increases that might result from inflation and/or productivity increases (the wage growth rate), and then these estimates are discounted to present values through the use of the estimated rate of interest (the 3 This is the number of years of (statistical) worklife expectancy estimated by Skoog and Ciecka. 2

discount rate). The result is a lump sum, which if invested in the best and safest instrument, will yield a future stream of income just equal to the estimated lost income. 4 However, in Kaczkowski v. Bolubaz, the Pennsylvania Supreme Court ruled that in injury and death cases (other than those related to medical malpractice) tried under Pennsylvania law, one must assume that any future income increases due to inflation are equal to the discount (interest) rate used to calculate the present value of a future income stream. 5,6 Consequently future income losses in Pennsylvania are not discounted to their present value. Although wages may not be increased due to inflation when estimating damages in Pennsylvania, they can be increased based upon proper foundation showing that future raises in excess of the inflation rate will occur. The current example assumes that no such foundation exists. Accordingly, as shown in Table 2, the lost income resulting from Mr. Doe s death in Pennsylvania would equal $40,000 per year for 23 years, or $920,000. The laws in Maryland, Ohio, and West Virginia do not specify a particular wage growth or discount rate to be used in damage calculations. In these states it is assumed that the calculations will use the 1994 to 2005 historical wage growth rate of 4.0% and a discount rate equal to the 5.34% yield on a 20-year U.S. Treasury bond as of May 1, 2006. 7 As shown in Table 2, inflating Mr. Doe s $40,000 income at 4.0% per year and then discounting by an annual rate of 5.34% results in a present value equal to $761,377, or rounded off, $761,000. 8 New Jersey differs from the other states in this analysis in three important ways. 9 First, it requires a deduction for income taxes. In 2005, the standard deduction for a married couple was $10,000 and the personal exemption was $3,200 per person. Assuming that they did not itemize, the total reduction from taxable income for the Doe family of four would be $22,800. Deducting this from the family income of $80,000 results in a taxable income of $57,200, a tax bill of $7,850 and an after-tax income of ($80,000 - $7,850) = $72,150. Applying half these taxes to Mr. Doe s income results in an after-tax annual income loss of $36,075. 4 The most important case in setting the framework for determining economic damages were established in Jones & Laughlin Steel Corp. v. Pfeifer, 103 S. Ct 2541, or 462 U.S. 523 (1983). 5 Kaczkowski v. Bolubasz, 421 A.2d 1027 (Pa. 1980). The Medical Care Availability and Reduction of Error (Mcare) Act of 2002 removed this total offset rule for cases involving medical malpractice. 6 Rodgers, James, and Robert Thornton. "Assessing Economic Damages in Personal Injury and Wrongful Death Litigation: The State of Pennsylvania." Journal of Forensic Economics 15 (2002): 335. 7 Wage Growth rate from the 2005 OASDI Trustees Report and interest rates from the Federal Reserve Bank of St. Louis. 8 The calculation of tort damages in New York is actually done in terms of inflated future values. After the trial is over, the judge and opposing counsels agree on the discount rate to be used. In order to compare apples to apples it is assumed that the discount rate is already applied. 9 Tinari, Frank. (1998) 3

The second and third differences between New Jersey and the other states is that income growth must be calculated at 4.5% and the future earnings must be discounted at 6.0%. Increasing Mr. Doe s after-tax future income of $36,075 per year by 4.5% and then discounting at 6.0% per year results in a present value of lost income equal to $672,174. Rounded to $672,000, this estimate of the lost value of future income in New Jersey is entered into Table 2. Tort reform legislation in New York in 1986 has led to one of the more complex procedures for calculating damages in wrongful death cases. 10 (The complexity is reflected in the spirited exchange about the proper interpretation of the law between Spizman, Schmitt and Floss on one side and Riccardi and Ireland on the other). 11 Total nominal losses, including an inflation factor, are calculated without discounting to present value and $250,000 is then deducted from the total future wage loss and immediately awarded as a lump sum to the plaintiff. Attorneys fees are deducted from the balance and the remainder is then divided by the number of years of lost wages to arrive at an annual loss figure. The annual amount is then increased, by statute, by another 4.0% per year. Finally, an annuity that will generate this income stream is purchased by the defense and awarded to the plaintiff. 12 Assuming that Mr. Doe s income would have increased at 4.0% per year (based on historical wage growth), the total nominal loss would be $1,464,716. Subtracting $250,000 leaves $1,214,716, or $52,814 per year for 23 years. Increasing this annual amount by the statutorily required 4.0% per year over these 23 years results in a total of over $1.9 million. However, the actual value to the plaintiff would be the present value of the income stream. New York statutes stipulate that treasury bond yields must be used for discounting, so once again the current analysis will use the 5.34% Treasury bond rate. The discounted value of the income stream equals $1,005,278, and when added to the $250,000 lump sum the total award is $1,255,278. Rounded to $1,255,000, this amount is included in Table 2. Benefits Fringe benefits are an increasingly important part of compensation in the American workplace, especially health insurance and retirement plans. However, other than the different growth and discounting values indicated above, there are no statutory or other reasons for the calculations of lost benefits to differ among the states. Nonetheless, because the discounting rules do vary, it is instructive to see how the estimated value of these benefits varies from state to state. According to the Bureau of Labor Statistics, the cost to employers of health insurance, retirement plans, and employer contributions to the Social Security 10 Civil Practice Law & Rules Article 50(b) (CPLR 501-5049). 11 Spizman and Schmitt (2000), Spizman, Schmitt and Floss (2002 and 2003), Riccardi (2001), Ireland (2003). 12 This account ignores the statutory requirement that one third of the award is deducted for legal fees. Because they are not stipulated in the other states, and because it does not directly affect the total value of the award, it is assumed for simplicity and purposes of comparison that legal fees are also 33% in the other states. 4

Retirement Trust Fund for professional employees was approximately $13,300 per year at the end of 2005. 13 Although the costs and value of these benefits probably will grow at different rates than income (especially health insurance), for simplicity it is assumed that the value of the benefits will grow at and be discounted by the same rates used for income in each of the states. In Pennsylvania the result is a total value of lost benefits equal to 23 years times $13,300 per year, or about $306,000. In Maryland, Ohio and West Virginia, the $13,300 per year is inflated by the same 4.0% as wages and discounted by the same rate of 5.34%. The discounted present value equals about $253,000. Using New Jersey s mandated 4.5% growth rate and 6.0% discount rate results in present value of about $248,000. The same process as described for wage loss calculations in New York is used for benefit loss calculation, with the exception that the $250,000 lump sum is not deducted again. The result is a lost value of benefits equal to about $404,000. Personal Consumption At the same time that Mr. Doe s death resulted in an economic loss to his survivors, it must be recognized that a certain percentage of the family's income would have been allocated to his personal maintenance and/or consumption. For example, expenses would have been incurred for his transportation, food, clothes, toiletries, entertainment, medical expenses, etc. It is a generally accepted practice to estimate the total economic loss resulting from the loss of a life, and then to subtract estimated personal expenditures from this total. Personal consumption data for 2004 compiled by the Bureau of Labor Statistics is shown in Table 1. 14 The twins were ten years old at the time of Mr. Doe s death and it is assumed that they will leave the house in 2014 when they reach age 18. For all years prior to that, the personal consumption deduction will be based on a four person household; in subsequent years it will be based on a two person household. Once again Pennsylvania differs from the other states in a manner which leads to a larger damages award. While the other states use the concept of personal consumption, Pennsylvania uses the concept of personal maintenance. A generally accepted difference between the two concepts is that the former represents only those expenses necessary for the maintenance of earnings while the latter includes leisure and recreational expenses. 15 13 As of December 2005. Bureau of Labor Statistics, Employer Costs for Employee Compensation Table 1. Civilian workers, by major occupational and industry group. http://www.bls.gov/news.release/ecec.t01.htm 14 Bureau of Labor Statistics Consumer Bulletin Surveys, (www.bls.gov/cex/home.htm) 15 Rodgers and Thornton (2002), The case law upon which this distinction arises can be found in McClinton v White, PA. Super. 427 A.2d 218, 219 (1979), and Incollingo v Ewing, 444 Pa. 26, 299, 282 A.2d 206, 229 (1971). 5

Table 1 Male Personal Consumption Levels by Income Level by Males Gross Income Bracket $70,000 and over $50,000-$69,999 $40,000-$49,999 $30,000-$39,999 $20,000-$29,999 Persons in Household Male Consumption As % of Income 4 12.80% 2 18.10% 4 16.20% 2 25.90% 4 17.90% 2 29.40% 4 22.80% 2 34.80% 4 23.40% 2 43.50% No data exist for maintenance expenditures per se, but it is obvious that such expenditures would be less than consumption expenditures. For simplicity, it is assumed that the former would be two percentage points less than the latter. With the exception of Maryland and West Virginia, state laws allow the maintenance/consumption deduction to be made against the income of the deceased only, and not the entire family income. Using a reduction of 15.9% through 2014 and a reduction of 27.4% in later years, the total value of personal maintenance expenditures deducted from the economic damages estimate in Pennsylvania is approximately $211,000. In Ohio and New Jersey the percentage reductions indicated in Table 1 would be applied to Mr. Doe s discounted income. Using the corresponding rules for discounting to present value, the deduction would be approximately $138,000 in Ohio and $164,000 in New Jersey. Using the annual values generated for calculating wage loss in New York, the estimated personal consumption expenditures would be $259,000. Maryland is the only state in the sample that requires personal consumption expenditures to be applied to household income rather than the deceased s income. Applying the values in Table 1 to the household income of $80,000 and discounting to present value as described above, the deduction for personal consumption expenditures in Maryland would be about $241,000. West Virginia is rare among the states in that it does not deduct personal expenditures from lost compensation is a wrongful death case. 16 In 1994 the 16 Barrett, George. "Assessing Economic Damages in Personal injury and Wrongful Death Litigation: The State of West Virginia." Journal of forensic economics 16 (2003): 315. 6

Supreme Court of Appeals stated that estimated personal living expenses need not be considered in calculating damages for the expected loss of income. The result is that personal consumption will not be deducted from the lost compensation of John Doe in West Virginia. Household Services Although not provided through a market, the non-market work performed to maintain a household provides real economic value. Tasks such as fixing a leaky faucet, shoveling snow, disciplining and chauffeuring the children, etc., provide an income in-kind to the household. The loss of such services to a death has long been recognized as a legitimate economic loss in all the states reviewed here. Estimating its value, however, requires an estimate of the amount of time that the deceased spent doing work around the house, the monetary (hourly) value of that work, and the number of years that the work would have been done. The time spent in the production and provision of household services varies with age, marital status, number of children, and work status. Expectancy Data, an economic demography firm, has compiled data on the time spent in providing household services ( household production and caring and helping ) from the Bureau of Labor Statistics American Time Use Survey. They have organized the data according to hours spent by various demographic characteristics and various tasks and it is published in The Dollar Value of a Day (DVD). 17 According to their estimates, married men with children under 13 spend 1,154 hours per year producing and providing household services. The hours fall to 953 when the youngest child is between 13 and 17, to 816 hours when the children are out of the house, and then increase to 1,346 hours per year during retirement years. Most forensic analyses use a market replacement value to estimate the value of lost household services, and this value is based on the cost of hiring someone to provide the services that have been lost. 18 The authors of the DVD use Bureau of Labor Statistics data gathered in the November 2003 Occupational Employment Statistics survey to obtain wage rates for the occupations most closely aligned with the categories included in Household Production and Caring and Helping. The reported hourly wages are inclusive of legally required benefits such as Social Security, unemployment insurance, and workers compensation. Adjusted for inflation, the national average values thus obtained are $13,170 per year when the 17 Expectancy Data, The Dollar Value of a Day: 2003 Dollar Valuation. Shawnee Mission, Kansas, 2005 The tasks included in Household Production include Inside Housework; Food Cooking & Cleanup; Pets, Homes & Vehicles; Household Management; Shopping; Obtaining Services; and Travel for Household Activity. The tasks included in Caring and Helping include Household Children; Household Adults; Non-Household Members; Travel for Household Members; and Travel for Non-Household Members. 18 The cost of replacement will of course vary from region to region. However, since Mr. Doe s wage is considered to be the same in all states, regional wage disparities have already been assumed away in earnings and they will be assumed away here as well. 7

youngest child is under 13; $11,202 when the youngest is between 13 and 17; $9,537 when the children are gone; and $15,790 during retirement years. The final variable in determining the value of lost household services is the number of years that such services could reasonably have been expected to be provided. In addition to providing estimates for the time spent in providing household services and the value of the services, Expectancy Data provides estimates of a healthy life expectancy, the number of years that an individual could be expected to be able to continue to provide such services. According to their estimates, a 40 year old white male has a healthy life expectancy of about 33 years. Using the above information and assuming retirement at age 67, the estimated value of lost household services in Pennsylvania would equal about $395,000. Using a growth rate of 4.0% and a discount rate of 5.34%, the present value of the services in Ohio, and West Virginia would equal about $339,000. Maryland requires the use of unisex life tables, and this would add one year to the total number of years of healthy life expectancy, bring the total to around $347,000. Following the above procedure for calculating losses in New York, the value of the lost household services would equal approximately $640,000. The proper method of calculating lost household services in New Jersey is subject to some controversy. Tinari (1998) argues that unlike other states, the New Jersey courts allow the value of lost guidance and counseling for a spouse and children to be valued at the same hourly rate as that charged by professional sociologists and psychologists. Using the hours estimated by the DVD, assuming that such professionals charge $100 per hour, and discounting by the rules used in the state, the total value of lost household service in New Jersey would equal about $490,000. Table 2 Estimated Lump Sum Economic Loss of John Doe s Survivors PA MD OH NJ NY WV Wage growth 0.00% 4.00% 4.00% 4.50% 4.00% 3.00% Discount Rate 0.00% 5.34% 5.34% 6.00% 5.34% 5.34% Lost Income $920,000 $761,000 $761,000 $672,000 $1,255,000 $761,000 Benefits $306,000 $253,000 $253,000 $248,000 $404,000 $253,000 Consumption* ($211,000) ($241,000) ($138,000) ($164,000) ($259,000) $0 Household $395,000 $347,000 $339,000 $490,000 $640,000 $339,000 Total $1,410,000 $1,120,000 $1,215,000 $1,246,000 $2,040,000 $1,353,000 * Maintenance in Pennsylvania IV. Summary and Conclusions When is the economic value of a life? While economists might be in general agreement as to the correct way to calculate such a value, state courts and statutes are much less likely to agree. As shown in Table 2, for the same hypothetical wrongful death the correct value ranges from about $1.120 million in Maryland to about $2.040 in New York. 8

The value in Maryland is at the bottom of the damage estimates of the six states in the current comparison primarily because it requires the personal consumption deduction to be calculated as a percentage of household income rather than the income of the decedent. If only one of the Maryland spouses worked outside the home, the estimate of recoverable damages would be the same as in Ohio, about $1.215 million. Although the purpose of the current analysis is simply to compare damage awards under different sets of rules, the authors would offer the opinion that the rules in these two states are most consistent with economic theory. The estimate in New Jersey, $1.246 million is similar to that for Ohio and Maryland. The estimate for lost wages is lower due to its being the only state that requires damages to be computed on an after tax basis, but this is offset by its being the only state that (potentially) allows lost household service to include the market price of professional counseling services. While this might or might not have merit, one major criticism of the New Jersey procedure is the mandated values for the wage growth rate and the discount rate. On the other hand, the net discount rate that results from these values [1.06 1.045 = 1.44%] is as reasonable and defensible as most estimates made by forensic economists when they have a free reign to argue what they believe to be the appropriate growth and discount rates. Except for the failure to account for the fact that the decedent would most assuredly spent some of the family s income on him- or herself (thus leaving less than the total earnings for the benefit of survivors) the rules in force in West Virginia are essentially consistent with economic theory. Failure to account for such personal consumption expenditures results in the West Virginia damages award being larger than the award would be if the case were tried in Maryland, Ohio, or New Jersey. The relatively high value in Pennsylvania ($1.410 million) is attributable to its use of a total offset rule that essentially sets the real interest rate equal to zero, an assumption that is certainly at odds with generally accepted economic, finance, and accounting theories. The extremely high value that would occur in the New York courts ($2.040 million) is the result to a number of upward biases that were originally enumerated by Spizman and Schmitt. In the first place, arbitrarily mandating that $250,000 of future losses must be paid in a lump sum with no regard for the time value of money obviously increases the size of the damages award. Second, the statutes in essence allow the real value on the award to be increased by an inflation factor two times: once by the economist calculating the nominal values of lost wages, benefits and household services, and then a second time by the mandated 4.0% increase in the average annual loss. While forensic economists spend their time fighting over the proper discount rate and debate the merits of worklife expectancy tables versus life-participationemployment (LPE) models, attorneys should be spending their time fighting over the proper venue. Apparently it pays to sue in some states more than in others. As a follow up, further research into whether attorneys who have a venue option are 9

aware of the differences in potential awards and if, when possible, they fight to get the most beneficial venue. References Barrett, George and Michael Brookshire, "Assessing Economic Damages in Personal injury and Wrongful Death Litigation: The State of West Virginia," Journal of forensic economics Fall 2003, 16(3), pp. 315-327 Boyd, David, "Assessing Economic Damages in Personal injury and Wrongful Death Litigation: The State of Ohio," Journal of Forensic Economics, Spring/Summer 2004, 17(2), pp 241-253. Ireland, Thomas. A Comment on One More Time: New York s Structured Settlement Statutues, Rent Seeking and the Pro-Plantiff Bias, Journal of Forensic Economics, Fall 2003, 16(3), pp 283-298. Riccardi Anthony H., A Response to Rent Seeking in New York State s Structured Judgment Settlement Statutes, Journal of Forensic Economics, Fall 2001, 14(3), pp. 273-292. Rodgers, James, and Robert Thornton. "Assessing Economic Damages in Personal Injury and Wrongful Death Litigation: The State of Pennsylvania." Journal of Forensic Economics Fall 2002, 15 (3) 2002: 335-355. Spizman, Lawrence and Elizabeth Dunne Schmitt, The Unintended Consequences of Tort Reform: Rent Seeking in New York State's Structured Settlements Statutes," Journal of Forensic Economics, Winter 2000, 13(1), 29-48. Spizman, Lawrence M., Elizabeth Dunne Schmitt, and Fredrick Floss, One More Time: New York s Structured Settlement Statutes, Rent-Seeking, and the Pro- Plaintiff Bias, Journal of Forensic Economics, Fall 2002, 15(3), 303-311. Spizman, Lawrence M., Elizabeth Dunne Schmitt, and Fredrick Floss, Final Comment: Unintended Consequences of New York Structured Settlement Laws, Journal of Forensic Economics 16(3), 2003, pp. 309-314 Tinari, Frank, "Household Services: Toward a More Comprehensive Measure," Journal of Forensic Economics 11 (3), 1998, pp. 253-265 10