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Methodology · Personal Injury

Personal injury methodology

Reviewed by · Last reviewed .

Not legal advice. Outputs from Lost Wages Calculator and Contingency Fee Calculator are estimates for educational use and case-preparation reference. Not litigation testimony, not a substitute for a forensic economist or a licensed personal injury attorney.

Personal injury claim math has three layers: damages (what the case is worth — lost wages, medical, pain and suffering), costs (attorney fee + case costs + liens), and tax treatment (IRC §104). This methodology page covers the math for each.

Lost wages — past + future

Past lost wages (no discounting):
    = (months off work × monthly gross wages)
    + (prorated benefits during disability)
    + (lost bonuses, commissions, overtime)

Future lost earning capacity (present value):
    For each year y in [1 .. work-life expectancy]:
        nominal_y = base_wage × (1 + real_wage_growth)^y
                              × (% earning capacity loss)
        pv_y = nominal_y / (1 + discount_rate)^y

    Future PV = Σ pv_y from y=1 to WLE

Total lost wages = Past + Future PV

Three critical methodological inputs:

  • Work-life expectancy (WLE): BLS Work-Life Tables provide WLE by age, sex, education, and employment status. A 35-year-old college-educated employed male has WLE ≈ 28 years. WLE is shorter than “years to retirement age” because it accounts for the probability of voluntary or involuntary labor force exit. Substituting “years to age 65” is the most common methodological error — defense economists routinely use this objection to reduce plaintiff claims.
  • Real wage growth: typically 1.0–2.5% above CPI. Litigation-economist standard is 1.5%. Plaintiffs sometimes push for 2.5–3%; defense economists for 0–1%. The methodology choice can shift future-earnings PV by 15–25%.
  • Discount rate: three defensible choices — (1) IRS Applicable Federal Rate (AFR) published monthly via Revenue Rulings (current AFR mid-term ~4%); (2) U.S. Treasury yield curve at injury date matched to duration; (3) risk-free rate per forensic economist methodology. The Bedrocka Tools default is AFR mid-term, which is conservative + well-documented + broadly accepted.

A 1% change in discount rate shifts PV by 10–15% on a 20-year stream. This is the single largest variable in lost-earnings claims.

Contingency fee structures

ABA Model Rule 1.5 governs reasonableness of contingency fees but doesn't set specific percentages. Market practice in personal injury:

  • Pre-litigation settlement: 33⅓% (one-third)
  • Post-filing, pre-appeal: 40%
  • Post-appeal: 45%

State-specific caps (medical malpractice — varies by state):

  • Florida (Rule Regulating Florida Bar 4-1.5(f)(4)(B)): 30% of first $250K + 10% above; lower for med-mal
  • California (Cal. Bus. & Prof. Code §6146): 40% of first $50K, 33⅓% of next $50K, 25% of next $500K, 15% above $600K — applies to med-mal only
  • Connecticut, Massachusetts, New Jersey, New York, Tennessee, Michigan, Maine: various sliding-scale caps for med-mal

Class actions + mass torts use court-supervised fee structures (typically 25–33% with lodestar cross-check). Statutory fee-shifting cases (civil rights, employment, consumer protection) use lodestar method (hours × hourly rate × multiplier).

Settlement liens

Liens consume 20–40% of what's left after attorney fees + case costs on many personal injury settlements. The Bedrocka Tools calculator surfaces lien handling because most online tools ignore it. Common lien types:

  • Medicare conditional payments — federal lien under 42 USC §1395y(b). Must be repaid before settlement disbursement. Multi-step Medicare-Set-Aside (MSA) process for future medical care
  • Medicaid recovery — federal Medicaid law (42 USC §1396p) provides recovery rights; state-by-state variance in enforcement
  • ERISA self-funded health plans — federally preempted; can demand full reimbursement under US Airways v. McCutchen (2013) and progeny
  • Hospital liens — state statutory; varies; some states cap at 30% of settlement (e.g., Cal. Civ. Code §3045.1)
  • Workers' compensation offset — if injury is also a workplace injury, employer/carrier has subrogation rights
  • Veterans Administration — separate federal lien for VA medical care

Lien negotiation can recover 10–50% of the lien amount. Attorney-managed step — critical for plaintiff take-home.

Tax treatment under IRC §104(a)(2)

Per IRC §104(a)(2), compensation for personal physical injuries or physical sickness is excluded from gross income — tax-free at federal level. Most states follow. Excluded amounts include:

  • Lost wages (if from physical injury)
  • Pain and suffering / emotional distress (if related to physical injury)
  • Medical expense reimbursement

Taxable exceptions:

  • Punitive damages — always taxable per Schleier v. United States (1995)
  • Interest accrued on settlement (post-judgment, pre-payment)
  • Emotional distress claims without physical injury
  • Employment discrimination (Title VII, ADEA)
  • Breach of contract damages

Settlement-agreement allocation matters. A $1M settlement allocated $700K to physical injury + $300K to punitive damages produces $300K of taxable income. Generic “general damages” language may not survive IRS scrutiny. CPA / tax attorney review of allocation language before signing is recommended on settlements above $100K.

Sources

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