Several common elements generally apply to all economic damage
analyses; two such elements are discussed here.
JOE EPPS, CPA/CFF/ABV, CFE, CVA, PRESIDENT
EPPS FORENSIC CONSULTING PLLC
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How to Determine Economic
Damages in a Litigation Case
The exact method applied to determine economic damag- es in a litigation case will vary
based on factors such as the type
of case, type of business, or employment situation and the documentation and information available.
However, two elements applied
to all cases include determining
the relationship between the cause
of litigation and the damages being claimed; and a calculation of
projected income that would have
been earned if it were not for the
One element of economic damages in cases of all types is that there
must be a relationship between
the cause of the litigation and the
damages being measured; i.e. the
This is commonly done in one
of two ways, often with consideration of both factors. The first
method is to establish a direct link.
For example, in a contract dispute
there is usually a contract which
specified what was to be done by
each party and the damages flow
from one or both parties not living
up to their contractual obligations.
In these cases, the relationship
between damages and proximate
cause can be very straightforward.
The second method of considering the causal link is an indirect
method. In some cases, such as a
lost income claim under an insurance policy, the expert may not be
able to establish a direct relationship between all changes in the
business income and the causal
event. What the expert may do in
such cases is to look for other
identifiable factors which could
have caused the change in income.
Failing to find any other cause of
the change, it may be reasonable
to conclude that the event in question is the proximate cause of the
change in income.
A second common factor in deter-
mining economic damages is that
it is necessary to make a projec-
tion of the income that would have
been earned but for the causal
event under consideration. The
required projections include reve-
nue (sales), cost of sales, and all
operating expenses. In making
these projections, the expert ends
up projecting the net income the
business would have earned but
for the causal event.
The reality is that there is no
one way to make a projection. The
expert must consider both the
past history of the business and
the probable future history (i.e.
after the date of the causal event)
as though the event had not occurred. The projection often takes
into consideration not only data
specific to the subject individual
and business, it may also consider
general economic factors and economic factors specific to both the
relevant industry and the local
economy. This requires a certain
amount of professional judgment.
Application of this judgment is
usually where the differences of
opinion arise between experts.
One of the skills an expert is well
served to develop is that of being
able to look at their analysis from
the opposing perspective. Some
experts are better at this than others.
The retaining attorney can therefore assist their expert by looking
at the projections of the expert
with a skeptical mind and challenging the basis for each element
of the projections.