Selecting the Discount Rate in Personal Injury and Wrongful Death Cases

Abstract

The concept of discounting to determine the present value of future earnings has been introduced into our Court system. The technique is being used with increasing frequency to supplement the traditional approach employed by lawyers in personal injury and wrongful death cases. The traditional approach relied heavily on emotional appeal to demonstrate economic loss. Today, plaintiff's attorney often engages an economist who utilizes published data, present value formulas, statistical methods, and judgment about the future to estimate the economic loss that accompanies wrongful premature death and disability. One of the most critical decisions that the economist must make in calculating economic loss is the selection of the appropriate discount rate. This article presents an analysis of the procedure currently used in selecting the discount rate. It then suggests that the procedure is unrealistic in view of the variance in investor sophistication and the investment media available to investors. A technique that is sound on both theoretical and practical grounds is explained. Selecting a discount rate requires an understanding of the economic significance of the structure of interest rates, the needs of recipients, and both the social and economic characteristics of recipients of court awards. The existence of various rate levels may be explained by investment theory. A simple theoretical classification might be: high risks-high rates of return, intermediate risks-intermediate rates, and low risks-low rates. The category from which a discount rate would be selected in a given situation would then depend on whether the situation dictated that one's investment objectives emphasize return (high risks-high rates), security (low risks-low rates), or a combination (intermediate risks-intermediate rates ). In a personal injury or wrongful death case, the emphasis must be on security of principal and income. In these cases, the rate of return and other investment objectives are secondary in importance to the assurance that the funds will be available in future years and can act as a substitute for the lost income resulting from the injury or death. Since most economists agree that security must be stressed, the problem is simplified by limiting the choice of investments to the low-risk seg-