Why Financial Experts Should Explain Themselves

A recent personal injury case illustrates why it critical for your financial experts to provide the reasoning behind their damages calculations when they testify. In Andler v. Clear Channel Broadcasting, Inc., a federal district court excluded a financial expert testimony regarding the plaintiff loss of future earning capacity, finding the expert methodology unduly speculative.

But the Sixth U.S. Circuit Court of Appeals reversed and ordered a new trial on damages. Why? Because it found that the lower court had confused the concepts of lost earning capacityand lost earnings.

Expert relied on national averages

Before her injuries, the plaintiff worked part time at a child care center, primarily so she could be near her young children. Her injuries forced her to change jobs, and in the following years she worked full time as a manicurist and pedicurist.

Based on Bureau of Labor Statistics data, the plaintiff expert estimated what she could have earned as a full-time child care worker but for her injuries. He also estimated her postinjury annual earning capacity as a full-time manicurist and pedicurist. Interestingly, the two figures were roughly the same. The expert based his estimate of lost earning capacity ” approximately $230,000 ” on the increased likelihood that the plaintiff would miss work and exit the workforce early as a result of her injuries.

The district court excluded this damages testimony as unreliable and flawed. The court said that relying on national average salaries rather than the plaintiff actual earnings (which were significantly lower) amounted to unreasonable speculation.

Appeals court had its say

The Sixth Circuit disagreed. The plaintiff was seeking damages for loss of earning capacity, not lost earnings. The former, the court explained, is the difference between the amount of wages the plaintiff will be capable of earning over her working life after the injury and the amount she was capable of earning over her working life before her injury.

The plaintiff historical earnings are a factor to be considered in determining future earning power, but they're not conclusive. Plaintiffs who are underemployed at the time of an accident, for example, may be entitled to damages for loss of earning capacity based on their true capabilities and potential. Plaintiffs can recover damages for loss of earning capacity even if their wages increaseafter an accident, provided they can show that (but for their injuries) they would have earned even more.

Damages calculations that depart from actual preinjury earnings can't be unduly speculative, however. In this case, the expert testimony involved a degree of speculation ”for example, he assumed that the plaintiff would shift from part-time to full-time work as her children grew older. But this speculation, the court said, wasn't unrealistic.

Be prepared

In Andler, the damages expert testimony ultimately was allowed, but not before the plaintiff went through a lengthy appeal process. Although there are no guarantees, you can minimize these headaches by ensuring that your financial experts explain the rationale behind their damages calculations at the trial level.