Valuations and Damage Models

• Author: Jim Wren
• Pages: 167-204

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6. Valuations

Chapter 6

Valuations and Damage

Models

I. Overview of Models and Methods

§6:01 Difference Between Models and Methods

§6:02 Importance of Models and Valuation Methods

§6:03 Distinguishing Between Positive Values and Negative Costs

§6:04 The Value of Building Your Own Damage Model First

§6:05 Sample Models and Valuations

II. Personal Injury or Wrongful Death Damages

§6:10 Overview of Damages Components

§6:11 Steps for Computing Lost Earnings and Earning Capacity

§6:12 Step 1: Future Earnings Projected From an Earnings Base

§6:13 Step 2: Work Life Expectancy

§6:14 Step 3: Actual (Mitigating) Earnings

§6:15 Step 4: Present Value of Future Net Earnings Loss

§6:16 Step 5: Personal Consumption Expenditures

III. Business Damages

§6:20 Overview of the Valuation Methods

§6:21 Book Value (a Cost Approach)

§6:22 Multiple of Book and Multiple of Earnings (Hybrid Approaches)

§6:23 Capitalization Rate of Net Cash Flow (an Income Model)

§6:24 Discounted Cash Flow Analysis of Projected Future Earnings (an

Income Model)

§6:25 Comparable Properties (a Market Value Model)

§6:26 Common Discounts and Premiums

IV. Lost Profits

§6:30 General Points

§6:31 The Discount Rate

§6:32 How Many Years to Project Lost Profits

§6:33 Analyzing Lost Profits at the Outset of the Case

Proving Damages to the Jury

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6. Valuations

V. Valuing Real Property

§6:40 Appraisers Use Three Methods

§6:41 Income Approach

§6:42 Market Approach

§6:43 Cost Approach

VI. Assembling the Business Loss Damage Model

§6:50 General Points

§6:51 Type of Loss

§6:52 Method of Evaluation

VII. Additional Economic Loss Issues

§6:60 Tax Effects

§6:61 Loss of Insurability

§6:62 Loss of Credit

[Note: The author acknowledges with appreciation the assistance of economics professor

Charles North, Ph.D., Hankamer School of Business, Baylor University, for his kindness in

reviewing this chapter.]

6. Valuations

Valuations and Damages Models §6:02

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6. Valuations

I. Overview of Models and Methods

§6:01 Difference Between Models and Methods

A “damage model” refers to the full compilation of different elements of damages that

add up to the total damages in the case, or at least the total economic damages in the case.

A “valuation method” is the methodology used to value a specific component of the

damage model. For example, in a personal injury case, loss of future earnings is merely

one component of the overall damage model for the case, but that component is valued by

following some type of specific valuation method for computing future lost earnings.

§6:02 Importance of Models and Valuation Methods

Jurors find it frustrating to see a wrong but be left without trustworthy guidance on how

to value the damages. They want to do the right thing but too often they’re not being given

the help they need. Unfortunately, if a lawyer focuses primarily on just the proof of liability

during the early stages of discovery and case development, the explanation of damages at

trial is probably going to be inadequate.

During the early pretrial development phase, every damages case needs to start with an

outline of the likely jury charge, including a listing of the elements of damages for which

recovery is being sought. Then a preliminary damage model needs to be constructed from that

listing of the elements of damages. Without these vital first two steps, the development of the

damages case will be relegated to an afterthought and, later in trial, the jury will sense it.

Some lawyers largely ignore damage models and valuation methods because they do

not understand them. Trial lawyers do not need to be technical experts in complex damage

modeling, but a basic understanding of concepts goes a long way.

Damage models are useful for clarifying damages, particularly economic damages,

and they are not that hard to understand. They are logical constructions, and they become

foundational building blocks in putting together the damages case and communicating with

damage valuation experts (and ultimately the jury).

It is important to understand damage models and common valuation methods for several

reasons:

• First, in today’s Daubert-dominated courtroom, if you do not understand the basics of

valuation methods and how damage models are constructed, you don’t know enough

to probe your own expert’s methodology and ultimately defend it from attack.

• Second, if you do not understand the topic, neither will the jurors. Maybe the jurors

will blindly trust your expert with no understanding of the basic concepts, but your

lack of practical explanations and questions leaves them without a lifeline from you.

• Third, if you do not understand the basics of how common damage models and

valuation methods are constructed, you are likely to miss the discovery you need

until it is too late. In the meantime, your opponent is using discovery to plant

landmines in your damages case without you even recognizing what is happening.

• Fourth, it is very expensive to invest in a case and hire experts only to realize

too late in the process that the true damage model is far below the number you

were anticipating, because you did not know how to make a rough estimation for

yourself before taking the case and hiring experts.