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Personal Lines Claims

Getting to the Bottom Line—Determination of Damages

Elise Farnham | August 1, 2011

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Gavel on a stack of money

Donald Hirsch defines damages as "the monetary compensation which may be recovered by any person who has suffered loss, detriment, or injury, whether to person or property, through the unlawful act or omission or negligence of another." That sounds rational and straightforward, however, actual determination of damages can be anything but "rational and straightforward" as described by Mr. Hirsch. This article will explore what the claim professional must consider when determining compensatory damages.

First, let's consider what is meant by "compensation" in third-party liability claims. Generally, the term "compensation" in third-party claims refers to repayment to the injured person for the losses suffered in order to return that person to the same or equivalent position they were in prior to the loss occurring. For the most part, compensation is considered in terms of money paid to the injured person.

The issue of damages, if not stipulated prior to trial, is a matter of fact for the jury. The court may instruct the jury on the issues or questions to be answered, the matters it must take into account when determining the amount of the award, if any, but the final amount awarded is up to the jury. However, the courts have some leeway when considering the decision of the jury. If the amount of the award is against the weight of the evidence, or if it is so low or so excessive that it "shocks the conscience of the court," the court may take action at its own behest or at the request of the parties. It may set the verdict aside, dismiss the claim, or grant a new trial.

Types of Damages

Personal liability policies generally agree to pay for bodily injury or property damage that the insured becomes legally obligated to pay. These are considered compensatory damages, often referred to as simply "damages." There are, however, two categories of damages—compensatory and punitive. Compensatory damages consist of special damages and general damages. Punitive damages are usually not covered by insurance, but may be depending on the jurisdiction.

Let's focus on compensatory damages first. Special damages are those damages that are quantifiable. For ease of explanation, you might think of them as anything documented by a piece of paper, for instance, a lost wage statement, medical bills, damage appraisal for damaged property, and so on. When claims professionals ask, "What are the 'specials?'", they are asking for compensatory damages that have been quantified through tangible documentation.

General damages are those compensatory damages that are not quantifiable. For instance, this may include pain and suffering, inconvenience, disability or inability to earn a living, consortium, or loss of services, and so forth. General damages may include consequential damages if they are not quantifiable.

Punitive damages are awarded and meant to punish the defendant for egregious behavior. Punitive damages are awarded in addition to compensatory damages and are usually not covered by insurance as a public policy. However, interpretation of policy language can vary by jurisdiction, so the issue of insurance coverage for punitive damage will vary based on the court's interpretation of the policy language. (For more on punitive damages, see "Green" Building Claim Implications (October 2009).)

Determining Special Damages

Even though special damages involve tangible loss costs, it is still necessary for the claims professional to review them carefully for relevancy, accuracy, and appropriateness based on the facts of the case. The claims professional will want to ensure that all special damages have been accumulated and reviewed prior to evaluating the expected cost of the claim.

Medical expenses must be verified through review of physician notes and reports. The claims professional will need to obtain a medical authorization form from the injured party in order to request medical reports, treatment records, and bills for services rendered. Medical costs will need to be weighed against usual and customary costs for medical care based on the diagnosis and treatment required.

Lost wage information must be obtained from the injured party's employer. Again, a wage authorization form is required and must be signed by the injured party. Self-employed third-party claimants present some difficulty in verifying wages. Income tax records are sometimes used, but also a profit/loss statement or banking records may be helpful. If income tax records are used, a certified copy of the income tax return from the Internal Revenue Service should be obtained.

Damage to property is verified through damage estimates, particularly if the damage is to a vehicle or building. Damage to other property, such as jewelry or furs, may require analysis of a specialist in those products. For instance, fine art specialists would be of assistance in the event of loss to sculptures, artwork, or artistic photos.

In compiling the special damages, the claims professional will want to be certain that all allegations of damages have been investigated and that all damages have been identified. Failure to take care in determining the full extent of the damage may result in a nasty surprise when undertaking settlement negotiations later in the case. (See The Art of Strategic Negotiation (January 2010).)

Determining General Damages

General damages are more intangible and more difficult to quantify. There is no receipt or valuation book available to assist the claim professional in evaluating general damages. There are certain issues that should be considered when evaluating general damages.

  • Pain and suffering: Consider the extent and the duration of the pain and suffering. How long did the injured person feel pain? Is the pain permanent? How extensive was the pain—excruciating? Irritating? An annoyance? Did, or does, the pain interfere in daily life activities? What kind of medication was necessary to manage the pain, and for how long? The pain and suffering must be analyzed by considering the extent of the pain and the duration.
  • Inconvenience: This is another issue that must be considered from the standpoint of extent and duration. How long was the person inconvenienced? Were they able to make alternate plans during the time that repairs were under way? How much trouble was it for them to make alternate plans and implement those plans? How quickly was the injured person able to return to normal? Or, will they never be able to return to normal? For instance, a person with a debilitating injury may never be able to return to their normal life. They may be in a wheelchair. If that is the case, there will be ongoing inconvenience, and there may be additional special damages to retrofit their home to accommodate a wheelchair.
  • Loss of services: What services did the injured person perform that must be replaced? Are there additional costs related to caring for children, for completing yard work, and so on. In dealing with this aspect of general damages, the claim professional may uncover some specific damages such as additional costs for child care that should be included with the special damages. The specific costs would be special damages; the time and effort to arrange an alternative would be considered general damages. Spousal services must be considered here, including loss of consortium.
  • Disfigurement claims: This amount depends on the extent of the scarring and where it is located. Scarring on the face or a visible body part will generally have a larger settlement value than scarring on parts of the body usually hidden by clothing. The physical appearance of the person will make a difference—a beautiful woman or handsome man will generate a larger claim settlement value than someone not so good looking. The medical consequences of scarring must also be taken into consideration; for instance, keloid scarring is painful and may require future surgical intervention—another example of how consideration for a general damage may uncover additional special damages. Valuation of disfigurement must also consider the impact on the injured person's life and work. A claim made by a model with a facial scar has a greater damage value than a similar scar on the face of a construction worker. Also, some scarring may hinder physical mobility, and this negative impact on life must be taken into consideration.
  • Continuing and future damages: These can be special or general damages, but this implies that they will continue for either a definite or an indefinite period. Consideration for future damages also requires evaluation of any permanent injury and how it will impact the injured person's future ability to lead a life similar to the one they knew before the accident. Future wage loss or future loss of wage earning capacity must be considered, including whether the injured person has transferrable skills and whether there are any other employment opportunities in their geographic home territory and in the industry in which they have experience or for which they studied. The prospect of future medical expenses must be considered—including the extent of treatment, the cost of treatment, and the impact of future inflation rates on medical expenses. When considering the future damages relative to an ongoing business interruption claim, the claims professional will also consider loss due to loss of customer base. For instance, it took so long for the business property to be repaired and the business to return to operations that the customer base moved to a competitor. The claims professional will want to consider how long it will take the business to get up to pre-loss levels for revenue and expense and how that compares to what would have been anticipated if no loss had occurred.

General damages are often the hardest to validate and may leave the broadest area of negotiation when attempting to conclude a loss. Often, assumptions must be made about future expenses, future activities of the injured person, and value for services that were rendered for "free" or without money exchanging hands.


Determination of compensatory damages can be challenging for the claims professional.

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