Print this page

Confessions of a Financial Expert

by Sheldon Wishnick, FSA

It has been said that a consultant is someone you hire to look at your watch and tell you the time. Therefore, a consultant specializing in documenting economic losses in litigation should look at a plaintiff's pre- and post- incident income and benefits to determine her losses. In fact, this may not be too far from the truth!

There are many challenges facing an actuary working as a financial expert in a field dominated by economists and CPAs, not the least of which is that many people are unfamiliar with the work of an actuary. This article sheds light on the work of financial experts and offers examples illustrating the actuarial perspective in loss development.

What is an actuary?

In very general terms, an actuary can be described as someone who calculates the current value of financial events that either occurred in the past or are expected to occur in the future. The Society of Actuaries is the national organization that actuaries join in order to receive professional recognition. Achieving Fellowship in the Society of Actuaries (FSA) requires passing a comprehensive series of exams covering topics ranging from probability and statistics and risk theory to demography, financial modeling, employee benefit design and social insurance.

Most actuaries work in insurance companies where they calculate insurance and annuity premiums and reserves. Actuaries are also employed in state government  insurance departments and in the federal government Social Security Administration. Consulting actuaries design employee benefit plans or value pension plans for employers. A very few actuaries work in litigation, where they document economic loss. Since 1996, my primary work has been economic loss development in matters under litigation.

How is economic loss determined?

The calculation methods used to determine economic loss follow a fairly standard procedure. The description that follows is a simplified, general view of the process.

Regardless of the type of case, an incident occurs that impacts an individual's earning capacity. This incident can be wrongful employment termination, personal injury or wrongful death. Conceptually, there is much similarity in determining economic loss among different types of cases. The general method used to determine economic loss is to first examine the potential income and employee benefits available to the individual prior to the incident. These amounts are projected over the anticipated working lifetime, using rates of growth similar to those that have actually been experienced or those derived from statistical sources.

These potential amounts must be reduced by a mitigation offset, the income and benefits available to the individual in her current employment capacity. Mitigating amounts are projected from replacement employment in a manner similar to that used in developing potential. In a personal injury case, the development of mitigation is often assisted by a vocational expert to help determine post-injury capacity. Although there is no mitigation in a death case, most state jurisdictions require a reduction by the living expenses the individual would have incurred in producing the income.

The difference between the potential and mitigation streams of income and benefits is then adjusted for interest and other relevant factors. The sum of all the calendar year differences over the period studied produces the estimate of economic loss.

Special situations

Not all cases are as straightforward as the example above. In fact, the special situations in my own practice are becoming more numerous than the standard cases. In the sample cases to follow, I will briefly describe the special types of analyses that were required to determine economic loss. Although these are all real cases, I have changed the facts and circumstances in nonmaterial ways to preserve anonymity.

Case #1        Personal Injury with self employed plaintiff

Background: The plaintiff was the owner-operator of an acrobatics studio. He was involved in a motor vehicle accident sustaining injuries that caused a permanent 10% loss of use to the left elbow. This restriction left him unable to demonstrate techniques or spot his students as they went through their routines.

The business was able to function by recruiting friends and family members to volunteer their time. Also, advanced students were offered extra lessons in exchange for assisting in other classes. The defendant's insurance company requested tax records to document the extent of economic loss.

Analysis: The extraordinary assistance arrangements that were made were not reflected in the tax records. In an ideal world, new employees would have been hired to do the work. Therefore, I did a survey of each of the responsibilities being filled by volunteers and the number of weekly hours they worked. I estimated the hourly wages, benefits and employment taxes that would have been paid had these volunteers been employees. The discounted value of these gross costs then became the basis of the economic loss report.

Case #2        Employment termination without re-employment

Background: The plaintiff was wrongfully terminated and was not yet re-employed at the time the report was to be completed despite a comprehensive job search  and several interviews.

Analysis: The basis for mitigation was the unresolved issue in preparing the report. The plaintiff may have been unable to find work due to disparaging information put out by the prior employer or because the job search had not been diligent. Absent these conditions, I usually ask for an estimate of the level of income and benefits that have been available in the jobs where the plaintiff had interviewed. I then ask the plaintiff for her best estimate as to when she might secure a job in her field. Using this information, I can complete a report that includes a reasonable reflection of mitigation anticipated in the future.

Case #3        Employment termination with substandard mortality

Background: This was one of the more egregious cases of wrongful employment termination in which I have ever been involved. At the annual company paid physical, an employee was diagnosed with cancer. Although she had no obligation to do so, the plaintiff reported this information to her employer. Despite a history of glowing performance appraisals, she was immediately terminated because her boss did not want the company's experience-rated insurance premiums to increase.

The plaintiff had been in sales and was able to find new employment in a short period of time because of her strong track record. Health insurance was not an issue since she was able to obtain dependent coverage through her husband's employer. Other than a minor amount of lost wages, the major element of loss was the previously held large group life insurance policy.

Analysis: Because of her medical condition, the plaintiff was unable to get life insurance coverage from her new employer. In similar cases, I have often sent the individual out for substandard premium quotes from insurance companies specializing in covering individuals with significant medical conditions. In this instance, however, the severity of the condition made insurance unavailable at any price.

Instead, I spoke directly with the treating physician to get a better understanding of the extra mortality arising from the disease. With this data, I was able to create an impaired mortality table and calculate the actuarial value of the life insurance. The single premium for this hypothetical coverage became the loss basis.

Case #4        Documentation of legal contingency fees due

Background: This case was unique in that I did not become involved until after the case had been settled. The attorney was bringing suit against his client for nonpayment of legal fees and I was retained to document the disputed amount.

In the arbitration settlement, the attorney had secured the individual's promotion with the associated higher level of income and benefits and had obtained a lump sum payment for a back pay differential. The client was only willing to pay contingency fees on the lump sum amount. Bills for contingent legal fees on future income and benefit enhancements were ignored because the client claimed that continued employment until retirement was speculative.

Analysis: The first step was to estimate the difference between future earnings and benefits with and without the promotion. Applying the contingency fee percentage to the present value of this difference was a straightforward calculation.
I then did two alternative calculations to address the objections of the client. Since the involuntary loss of employment could only occur on death or termination, I did a scenario for each:


Assuming the client's death, his life insurance would become payable to his wife. Since the face amount was defined as three times his annual salary, the enhanced salary would produce a higher death benefit. Similarly, the pension plan was based upon his final average salary. Therefore, the survivor benefit available to the wife was increased even with death before his retirement.


Because this was the client's primary concern, I assumed that he would be immediately terminated for purposes of this example. The client had been a long-term employee who would be eligible for severance pay based upon his total service and current income, which, of course, was now considerably enhanced.  In addition, the pension enhancement would be of greater impact than under the death scenario because benefits would now be payable during the lifetimes of both client and spouse.

With answers and numerical backup to each of the client's objections, the attorney had a much stronger case to present at trial and a much greater likelihood of winning an equitable award.

Case #5        Social Security benefits

Background: I occasionally get calls to work for the defense when the attorney needs to interpret an economic loss report submitted by the plaintiff's expert. The relevant part of this wrongful termination case was the inclusion of Social Security benefits as an element of loss. The plaintiff's expert calculated this loss as an accumulation with interest of the employer FICA taxes with interest, treating the benefit as a defined contribution pension plan.

Analysis: Social Security is most assuredly not a defined contribution pension plan. It is a social insurance program that requires equal employee and employer contributions with benefits that are heavily weighted toward a lower paid individual.
In my analysis of the benefit situation for the plaintiff, I first noted that he was in his late 50s earning approximately $65,000 yearly. I then calculated the Social Security benefit he would have earned had he worked to the normal retirement age of 65. I re-calculated the benefit available at retirement based upon work completed to the termination date. The difference between these amounts was the Social Security monthly benefit loss. Since the plaintiff was not a low wage earner and because the benefit is developed from earnings over an entire career, the benefit loss was minor. I converted the monthly Social Security benefit loss to a lump sum and then subtracted the present value of the additional employee taxes that would have had to be paid to secure these higher benefits. The net result was negative, indicating that the additional employee taxes paid would have exceeded the additional benefits earned. Therefore, the employment termination actually caused a net gain in Social Security benefits.
The defense attorney was most impressed with these results and put them to good advantage in impeaching the plaintiff's expert at trial.

Case #6        Pension allocation in divorce

Background: The husband's attorney retained me to review a pension analysis of the husband's pension benefit that had been completed by the wife's financial expert. The pension was currently being paid and the expert, an economist, used a fairly common estimate of treating the pension as an annuity payable over the life expectancy of the husband.

Analysis: The estimate that had been used is a rough approximation at best and was completely inapplicable in this case. The annuity was being paid in the form of a joint and 50% survivor, meaning that on the death of the husband, the wife would receive 50% of the amount that had been received while both were alive. Unlike a beneficiary in life insurance, the survivor cannot be changed once the annuity payout has begun. Therefore, the survivor portion of the annuity would remain with the ex-wife after the divorce. I then used actuarial mathematics to calculate the present value of the annuity, reduced by the survivor benefit retained by the wife, as the basis for the allocation. My results were quite different, and much more defendable, than the estimate produced by the wife's expert.


The determination of economic damages can be a very complicated process that often requires a certain degree of creativity. The losses developed should be reasonable and computed conservatively and professionally to strengthen the claim and make it less vulnerable to a challenge. The analysis must produce results that can be explained, understood and defended under hostile questioning. In the end, however, despite all the analysis, it is the judge and jury who must make their own determination of loss. The attorney should strive to have the best expert possible put forth a comprehensive loss analysis to assist the judge and jury in this determination.

Sheldon Wishnick is a fellow of the Society of Actuaries and a member of the American Academy of Actuaries who provides services to the legal community through his firm Actuarial Litigation Service in Newington, Connecticut. For additional articles of this type, please visit web site: