Actuarial Litigation Service

Myths About Using a Financial Expert Witness

Myths About Using a Financial Expert Witness

by Sheldon Wishnick, FSA

 

Although most civil litigation is driven by monetary damages, relatively few attorneys utilize a financial expert to document and value the losses involved. Part of the reason may be the myths that surround these experts and the services they provide. These myths, and the realities behind them, are the subject of this article.

 

Myth #1: The plaintiff knows his own losses best. Plaintiffs bring lawsuits because they feel they have suffered damages as a result of the wrongful acts of another. As the injured party, they might seem to be the most qualified to estimate the damages sustained. The fallacy in this reasoning can be explained from two completely different perspectives:

1.    Lack of impartiality. A plaintiff presenting his own losses can be viewed as being in a conflict of interest position. The jury may tend to discount the calculation of losses presented since he has a clear interest in developing the maximum losses possible.

2.    Training and experience. A comprehensive loss evaluation might have to include salary, life and health insurance premiums or claims, pension and savings plans. While plaintiffs have varying degrees of mathematical training, it is unlikely that even the most sophisticated would be able to evaluate these different categories of loss using the mathematical models and assumptions necessary to accumulate past losses and discount future losses.

 

Myth #2: Only actual out-of-pocket expenses should be claimed as economic losses.

Many losses arise from areas where the plaintiff may not have a cash expenditure, such as insurance benefits where no replacement policy was purchased. For example, in employment litigation there should be a yearly loss for the annual health insurance premium for a plan comparable to the employer paid plan previously enjoyed. If the insurance had not been purchased and no claims were incurred, the premium would represent the value of the peace of mind lost in going uninsured. If no insurance, but large out of pocket claims incurred, the premium, would represent the reasonable damages to be assigned to the defendant, without assessment for the negligence in the plaintiff’s not purchasing a policy.

 

Myth #3: Juries are not able to comprehend loss reports. Due to the nature of the losses and the calculations necessary for valuation, a report from an expert can be complicated. However, an expert should be able to convey the essence of the loss calculations to a jury. Juries are more likely to award the claimed amounts when they can understand how the calculations develop a reasonable representation of the losses experienced to date and anticipated in the future.

 

Myth #4: Experts are hired to inflate claims. This idea is prevalent outside the legal community. Most attorneys recognize that nothing can lose a case faster than the appearance of greed. At times, plaintiff attorneys may even ask the expert to use especially conservative assumptions to limit damages and strengthen the legitimacy of the calculations.

The expert serves his client best by developing a conservative valuation of all reasonable losses, not by maximizing the amounts claimed.

 

Myth #5: Only plaintiff attorneys use financial experts. Although it is more common for experts to be retained by the plaintiff, the advantages that an expert can bring to the defense should not be dismissed. The expert can review the report prepared by the plaintiff and point out areas of weakness or controversy. With expert input, the effectiveness of the defense attorney at deposition or trial could be significantly enhanced.

If retained as a consultant, rather than a testifying expert, the expert’s involvement need not be disclosure to the plaintiff and conversations with the defense attorney would be privileged. From a tactical standpoint, this can be of major advantage since the challenges raised by an opposing expert would not have been anticipated by the plaintiff.

 

Myth #6: Experts are only needed where significant losses are present. Attorneys should never underestimate the value of knowing what their case is worth. Having an expert review any size case will typically uncover damages that had not been properly considered or valued. In addition to demonstrating commitment, the expert’s report will also be of major importance in settlement negotiations.

 

Myth #7: Financial expert witnesses must be economists. While it is true that most experts in this field are economists, some are accountants and a few are actuaries. All these professionals are qualified to calculate past, and forecast future, losses. The actuary, however, is uniquely qualified through education and training to value pension plans, employee benefits and annuities. These skills are crucial in cases involving benefit and pension loss, such as disability or wrongful employment termination.

 

The financial expert witness should be an integral part of case development to verify that all losses have been considered and properly valued. The synergy generated by the attorney working with the financial expert will best serve the needs of the client in building the strongest possible case.