Virtually every state has adopted some version of Federal Rules of Evidence Rule 702, which says: "If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise."
 
Generally speaking, the only difference among the states is whether a state has adopted the Daubert v. Merrell Dow Pharmaceuticals Inc./Kumho Tire Company v. Carmichael test, the U.S. v. Frye standard, or more commonly the Daubert v. Frye decision.
 
Regardless of the appellate framework, claims relying on expert opinions must meet certain standards of admissibility. Nowhere is this more evident than in claims for economic damages.
 
All too often, the logical fallacy of post hoc, ergo propter hoc is used by claimants, their experts, and their attorneys to present economic damage claims. The Latin term translates as "after this, therefore because of this." It can be stated otherwise as "since that event followed this one, that event must have been caused by this one."
 
As you know, a fallacy is an incorrect argument in logic that causes a lack of soundness or validity in the result. This could be the result of an intentional attempt to manipulate data or to persuade by deception. Or it could be unintentional due to carelessness or ignorance.
 
Post hoc, ergo propter hoc is a particularly tempting error because temporal sequence of events is in nearly every case critical to understanding causation. The fallacy lies in determining a conclusion based solely on the order of events, rather than taking into account other factors that might rule out the connection. The presentation of and attack on damages claims is accurately characterized by U.S. Circuit Judge Richard Posner in Patton v. Mid-Continent Systems, Inc. as "too often treating it as a question appropriately answered (on the plaintiff's side) through the piling on of speculative possibilities imaginatively shaped by a compliant expert witness and (on the defendant's side) by nitpicking and sheer denial."
 
Two common examples of cases where this fallacy is found are:
 
1. Following a fire that seriously damaged a business, a first-party claim is filed seeking a significant amount for future income loss.  The loss is attributed to the fire despite evidence of the role of external forces, such as the entrance of competitors into the marketplace, outdated operating assets, and changes in consumer tastes and buying habits.
 
2. A component failure leads to the destruction of a critical piece of equipment resulting in a third-party claim seeking all future loss of earnings for that equipment. The claim is made despite evidence that the job was drawing to a close, no future projects had been booked, and the equipment was near the end of its useful life.
 
The relevance and reliability requirements of Evidence Rule 702 keep expert testimony on track and can also be valuable tools at each stage of the claims handling process. In addition to providing guardrails for expert testimony, adherence to these requirements enables claims personnel and counsel to:
• Properly evaluate and respond to the initial claim.
• Investigate the claim during the adjustment process.
• Perform discovery in the event of litigation.
• Challenge the findings of economic damages experts either in a pre-trial Daubert challenge or in cross-examination at trial.
 
For first-party claims, the examination begins with the initial claims documents. Virtually all first-party insurance coverages contain standard clauses requiring the insured provide the carrier with a wide range of information and documents.
 
If the loss is substantial, the employment of a forensic accountant or economist at this stage is recommended. This individual can:
• Evaluate what documentation has been provided.
• Provide direction regarding additional documents and information to seek.
• Prepare the examiner for the examination under oath.
 
In a first-party claim, documents the insured is required to provide are generally limited to the specific property damages. While the term "records that relate to the loss" may be sufficient to support a broad request, the justification for this document request should be set out in the letter to the insured or insured's counsel. A forensic accountant or economist can assist in drafting this supporting argument to make it bulletproof against a later challenge of bad faith claims handling. Additionally, the forensic accountant or economist can help identify additional documents that may need to be obtained from sources other than the insured.
 
These can include:
• Complete banking records – Both business and personal.
• IRS Documents – Reported income histories and other information.
• Bureau of Labor Statistics – Earnings data can be obtained for business segments and employment scenarios.
• Employment Security Department – Reported payroll histories.
• Licensing and registration records
• Settlement proceeds/other litigation
• Intervening cause data
• Business segment data – Industry journals, websites, databases, or other information on which industry participants rely for planning purposes.
• Other information – Customer data, leases, contracts, former employees, bankruptcy filings, tax audits, records kept at former accountants and/or tax preparers, acquisition/business broker listings, and competitor data.
 
In a third-party lawsuit, the documentation as to the value of the loss will arrive either as an element of the Civil Rule 26(a) voluntary initial disclosures or in response to discovery requests. In those federal districts and states that have adopted some version of Civil Rule 26(a), the claimant is required to voluntarily provide the following, subject to certain limitations, without waiting for discovery requests:
 

 
To the extent that such a requirement exists, the attorney working with or without the assistance of a forensic accountant or economist should examine the documents produced to make certain they support all claims for future economic loss and are not simply a “document dump” of historical financial records that provide a financial history but do not support future projections of overhead and potential revenue. If appropriate, a motion to compel compliance at this stage may, if successful, help avoid:
 
• The delay while written requests for production and interrogatories are responded to.
• Expending some of the allotment of interrogatories provided by the civil rules.
• Costly and relatively ineffective depositions that are hampered by a lack of the critical documents.
 
Next, it will be time to prepare for the claimant's deposition as to damages and the report by the defense economic damages expert and to take a deposition of the claimant's economic expert.
 
In examining the claimant and his expert, it is critical to avoid the assumption that any trend change, dip in sales, ebb in income, or other observable loss of income or profits, if occurring after the date of loss, must be the result of such event without regard to other dynamics in the marketplace.