Valuations and Damages Models

• Author: Jim Wren
• Pages: 173-214

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6. Valuations

Chapter 6

Valuations and Damages

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 Damages Model First

§6:05 Sample Models and Valuations

II. Personal Injury or Wrongful Death Cases

§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 Cases

§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

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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 Damages 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

VIII. Providing Valuations for Non-Economic Damages

§6:70 The Importance of a Rationale for Suggested Numbers

§6:71 Jurisdictions Allowing Per Diem Arguments

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

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

in reviewing this chapter.]

6. Valuations

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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 “damages 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

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

one component of the overall damages 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 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 damages 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 damages models and valuation methods because they do

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

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

Damages 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

damages 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 damages 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 damages 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 land-

mines 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 damages model is far below the number you were

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

self before taking the case and hiring experts.

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