Understanding Discount Rates for Future Damages in Arizona Cases

TL;DR

In Arizona, any monetary award for future economic damages, such as ongoing medical care or lost wages in a personal injury case, must be reduced to its “present value.” This reduction is achieved by applying a discount rate. The principle behind this is the time value of money: a dollar received today is worth more than a dollar received in the future because it can be invested to earn interest. Arizona law (A.R.S. § 12-591) requires this calculation but does not set a specific rate. Instead, the rate is determined on a case-by-case basis, reflecting what a reasonably prudent person could earn from a safe, long-term investment.

Key Highlights

What It Is: A discount rate is a percentage used to calculate the current worth of a future stream of payments.
Why It’s Required: The law aims to provide fair compensation that covers future losses as they occur, preventing overpayment from a lump-sum award that can be invested.
Governing Law: Arizona Revised Statutes § 12-591 mandates that all future economic damages be reduced to present value.
Determining the Rate: The rate is not fixed by law. It is a point of contention in court, typically argued by opposing economic experts based on safe investment returns.
Applicable Damages: The discount rate applies only to future economic damages, like medical bills and lost earning capacity. It does not apply to non-economic damages like pain and suffering.

Introduction

When a person sustains a serious injury, the financial consequences often extend far into the future. These are not one-time costs but a long-term series of expenses for medical treatments, rehabilitation, and in-home care, coupled with a diminished or completely lost ability to earn an income. In Arizona civil cases, calculating these future damages is a critical part of ensuring an injured person receives adequate compensation to support their needs for years or even a lifetime.

The legal framework in Arizona addresses this through a specific financial principle: present value. According to Arizona Revised Statutes § 12-591, a jury must award damages for future economic losses as a single, lump-sum payment that represents the current worth of that future stream of expenses. The statute is designed to provide a fair amount that, if invested prudently, will generate enough funds to cover the projected losses as they arise. This prevents a financial windfall for the plaintiff and ensures the defendant is responsible for the true economic cost of the injury.

This adjustment from future value to present value is not a simple subtraction. It hinges on a crucial and often fiercely debated variable known as the “discount rate.” The selection of this rate is a pivotal battleground in personal injury and wrongful death litigation. Financial experts for the plaintiff and defendant present competing analyses to influence this single percentage, which can alter the final compensation amount by hundreds of thousands or even millions of dollars. A thorough understanding of how this rate is determined and applied is essential for anyone involved in a claim involving long-term financial losses.

What Are Future Damages and Why Are They Discounted?

In any significant personal injury claim, the compensation sought is divided into different categories. While past medical bills and lost wages are straightforward calculations, future damages require projection and economic analysis. The concept of discounting these future amounts to present value is a cornerstone of tort law in Arizona.

Defining Future Economic Damages

Future economic damages are tangible, calculable financial losses that an injured person is reasonably certain to incur after a wrongful death settlement or verdict. They are distinct from non-economic damages, which compensate for intangible harms like pain and suffering.

Common types of future economic damages include:

Future Medical Expenses: This is often the largest component. It can include the projected costs of surgeries, physical therapy, prescription medications, doctor visits, diagnostic imaging, and necessary medical equipment like wheelchairs or prosthetics.
Lost Future Earnings: This refers to the income the injured person would have earned if they had not been injured. It is calculated based on their age, occupation, skills, and work-life expectancy.
Loss of Earning Capacity: This is subtly different from lost earnings. It compensates for the reduced ability to earn money in the future, even if the person can still work in some capacity. For example, a surgeon who suffers a hand injury may be able to work as a consultant but has lost the capacity to earn a surgeon’s salary.
Future Costs of Care: This includes expenses for non-medical assistance, such as in-home nursing care, home modifications for accessibility, and specialized transportation.

For instance, consider a 35-year-old electrician who suffers a spinal cord injury. Their future economic damages would include the lifetime cost of a wheelchair, regular physical therapy, potential future surgeries, prescription drugs, modifications to their home, and the income they would have earned over the next 30 years of their career.

The Concept of Present Value Explained

The core reason for discounting future damages is the time value of money. If you were offered $1,000 today or $1,000 a year from now, you would choose to receive it today. Why? Because you could deposit that $1,000 in a savings account or invest it, and in a year, it would be worth more than $1,000.

When a jury awards a plaintiff a lump sum for 30 years of future medical care, they are essentially giving them an advance payment. The plaintiff receives all the money upfront, even for a surgery scheduled 20 years from now. The law presumes the plaintiff will invest this lump sum in a reasonably safe manner. The interest earned from that investment is expected to grow the fund over time, ensuring money is available to pay for expenses as they arise.

The discount rate is the assumed rate of return on that investment. By applying it, the court reduces the total future loss to an amount that, if invested today at the discount rate, will equal the total loss over the specified period.

The Legal Rationale in Arizona

The legal justification for this process is rooted in the principle of compensatory damages: to make the injured party “whole” again, as much as money can. The goal is to restore the plaintiff to the financial position they would have been in had the injury not occurred. It is not intended to punish the defendant or provide the plaintiff with a windfall.

If a jury simply added up all future expenses without discounting them, the plaintiff would be overcompensated. They would receive the full amount of a future cost today and be able to earn interest on it for years before the expense is actually incurred. A.R.S. § 12-591 prevents this by mandating the reduction to present value. It is critical to remember that this statute applies only to economic damages. Non-economic damages, such as compensation for emotional distress or loss of enjoyment of life, are not discounted.

How Is the Discount Rate Determined in Arizona Courts?

One of the most significant aspects of Arizona’s approach to present value is what the law doesn’t say. Unlike some states that have a fixed, statutory discount rate, Arizona leaves the determination to the finder of fact, which is usually the jury. This creates a flexible but often contentious process.

The Absence of a Statutory Rate

A.R.S. § 12-591 states that future economic damages “shall be reduced to present value” but provides no further guidance on what percentage to use. This legislative silence means the discount rate is not a fixed number like 2% or 5%. Instead, it becomes a question of fact that must be proven with evidence in each individual case. The result is that the rate used in one personal injury case could be very different from the rate used in another, depending on the evidence presented.

The “Reasonably Prudent Investor” Standard

Arizona courts have established a standard for determining the appropriate investment vehicle to base the discount rate on. The rate should reflect the return that a “reasonably prudent person without special financial skills” could achieve on a safe, long-term investment. This standard is meant to protect the plaintiff. The law does not expect an injury victim to become a sophisticated stock market trader to manage their award. The compensation for their future health should not be subjected to high-risk or speculative ventures.

Because of this standard, the investments considered typically include:

U.S. Treasury bonds (T-bonds)
High-grade municipal bonds
High-grade corporate bonds
Certificates of deposit (CDs)

These are considered low-risk investments that provide a predictable, albeit modest, rate of return. The stock market is generally excluded from this analysis due to its volatility.

The Battle of the Experts

Because the discount rate is not fixed, both the plaintiff and the defendant will hire their own experts to argue for a rate that benefits their side. This “battle of the experts” is a central feature of any trial involving significant future damages.

The Plaintiff’s Position: The plaintiff’s attorney will retain a forensic economist or financial analyst to testify in favor of a low discount rate. A lower rate results in a smaller reduction, which means a larger present value award. Their expert might argue that given economic uncertainty and the need for absolute security, the plaintiff can only be expected to earn a very low return, perhaps 1% or 2% after accounting for inflation.
The Defendant’s Position: The defense attorney and the insurance company will hire their own economist to argue for a high discount rate. A higher rate leads to a greater reduction and a smaller payout. Their expert might present a portfolio of mixed, high-quality bonds that could safely yield a higher return, perhaps 3% or 4%.

These experts will submit detailed reports and provide testimony at trial, explaining their methodologies and assumptions. The jury is then tasked with weighing the credibility of each expert and deciding on a final discount rate to apply to the damages.

The Mechanics of the Calculation: A Step-by-Step Example

While the theories behind the discount rate are complex, the mathematical application is more straightforward. Understanding the mechanics shows just how impactful a small change in the rate can be on a final award.

Gathering the Necessary Information

To calculate the present value of future damages, three key pieces of information are needed:

The Future Loss Amount: This is the stream of projected annual costs. For example, an expert might determine that a plaintiff will have $60,000 in medical and care costs per year.
The Time Period: This is the number of years over which the losses will occur, typically based on the plaintiff’s life expectancy or work-life expectancy.
The Discount Rate: This is the percentage decided upon by the jury after hearing from the experts.

A Simplified Calculation Example

The formula for present value is: Present Value = Future Value / (1 + r)^n Where ‘r’ is the discount rate and ‘n’ is the number of years in the future.

Imagine a plaintiff needs $20,000 for a specific medical procedure that will happen exactly three years from today. The jury has decided on a discount rate of 3% (or 0.03).

The calculation would be: Present Value = $20,000 / (1 + 0.03)^3 Present Value = $20,000 / (1.092727) Present Value = $18,302.83

So, the jury would award $18,302.83 today for that specific future cost. The assumption is that this amount, invested at 3% for three years, will grow to the required $20,000.

In a real case, this calculation is done for every single year of the plaintiff’s expected future losses, and the results are added together.

Multi-Year Example (at a 2% discount rate):

Year	Future Loss	Present Value Calculation	Present Value Award
1	$50,000	$50,000 / (1.02)^1	$49,019.61
2	$50,000	$50,000 / (1.02)^2	$48,058.44
3	$50,000	$50,000 / (1.02)^3	$47,116.12
…	…	…	…
20	$50,000	$50,000 / (1.02)^20	$33,648.57

The total future loss over 20 years is $1,000,000 ($50,000 x 20). However, the total present value award would be the sum of the discounted amounts for each year, which would be significantly less than $1,000,000.

The Impact of a Small Change in the Rate

This is where the battle of the experts becomes so important. Consider a total future economic loss of $3 million spread over 30 years.

At a 1.5% discount rate, the present value might be approximately $2.4 million.
At a 3.5% discount rate, the present value might be approximately $1.85 million.

A two-percentage-point difference in the discount rate results in a $550,000 difference in the final award. This demonstrates why insurance companies fight so hard for a higher rate and why plaintiff’s attorneys invest in top-tier economists to argue for a lower one.

Key Factors That Influence the Discount Rate

The experts who testify in court do not simply pick a number. They base their recommended discount rate on a variety of economic factors and assumptions, all of which can be challenged by the opposing side.

Current and Historical Economic Conditions

An economist’s analysis will always start with the current financial climate. Key indicators include:

Interest Rates: The rates set by the Federal Reserve have a ripple effect across the economy, influencing the returns on bonds and other safe investments.
Yields on U.S. Treasury Securities: Since these are considered among the safest investments in the world, their historical and current yields are a primary benchmark for determining a risk-free rate of return.
Economic Forecasts: Experts will look at projections for economic growth and stability. A period of expected low growth might justify a lower discount rate, while a robust economy could support a higher one.

The Plaintiff’s Life Expectancy

The duration over which the damages will be paid is a massive factor. The discounting process has a much more dramatic effect on long-term awards than short-term ones.

For a 65-year-old plaintiff with a 15-year life expectancy, the difference between a 2% and 3% discount rate is significant. For a 25-year-old plaintiff with a 55-year life expectancy, that same one-point difference can change the award by millions of dollars. This is because the losses projected for 40 or 50 years in the future are very heavily discounted. Actuarial life tables and testimony from medical experts are used to establish this timeframe.

The Role of Inflation

Inflation is a critical and complex part of the discount rate discussion. Inflation erodes the purchasing power of money over time. A dollar today buys more than a dollar will buy next year. An award for future damages must account for this.

There are two main ways to handle inflation:

The Net Discount Rate Method: This is the most common approach. The expert calculates a “net” or “real” discount rate by taking the nominal interest rate (the return on a safe investment) and subtracting the expected rate of inflation. For example, if U.S. Treasury bonds are yielding 3.5% and the projected long-term inflation rate is 2%, the net discount rate would be 1.5%.
Separate Inflation Adjustment: Another method is to first increase all future damages by an expected inflation rate and then discount that inflated stream of costs back to present value using a higher, nominal discount rate.

The plaintiff’s expert will often argue that medical inflation—the rate at which healthcare costs increase—is historically much higher than general consumer price inflation. They may argue for a very low or even negative net discount rate for future medical expenses, asserting that the cost of care will rise faster than any safe investment can grow. The defense expert will counter with data suggesting a more moderate inflation rate.

The Strategic Importance in Arizona Personal Injury Litigation

The discount rate is not just an academic exercise; it is a key strategic element in both settlement negotiations and trial. How each side approaches this issue can define the financial outcome of a case.

How Plaintiff Attorneys Approach the Discount Rate

For a plaintiff’s arizona wrongful death attorney representing a client with catastrophic injuries, the primary goal is to secure a fund that will last for their client’s entire life. Their strategy is to minimize the discount rate to maximize the present value award. They achieve this by:

Hiring a Credible Economist: They will select a forensic economist with strong credentials and trial experience who can persuasively argue for a conservative, low-risk investment strategy.
Focusing on Safety: The expert will emphasize that the plaintiff is not a financial professional and that the award must be protected from market fluctuations. The argument is that the fund’s primary purpose is preservation, not aggressive growth.
Highlighting Medical Inflation: They will present evidence that the costs of medical technology, pharmaceuticals, and specialized care are rising at a rate that outpaces general inflation, justifying a very low net discount rate.

How Defense Attorneys and Insurance Companies Counter

The defense side, representing the defendant or their insurance carrier, has the opposite objective: to minimize the payout by arguing for the highest defensible discount rate. Their strategy includes:

Hiring Their Own Expert: Their economist will present an alternative investment portfolio, still within the “safe” standard, but one that generates a higher yield. This might involve a mix of different types of bonds with varying maturities.
Challenging Assumptions: The defense will attack the plaintiff’s expert’s assumptions about inflation, arguing they are speculative or overly pessimistic. They may also challenge the projected costs of future care.
Presenting Alternative Economic Data: They will use historical economic data that supports a higher long-term rate of return on conservative investments.

The Impact on Settlement Negotiations

The vast majority of personal injury cases settle out of court. The uncertainty surrounding the discount rate is a powerful driver of these settlements. Both sides know that a jury’s decision on the rate is unpredictable. A jury might side with the plaintiff’s expert, the defense expert, or pick a number somewhere in the middle.

This risk encourages compromise. The final settlement amount in a case with large future damages is often a negotiated figure that falls somewhere between the plaintiff’s present value calculation and the defendant’s. The strength of each side’s expert report and the perceived credibility of their economist play a huge role in these negotiations.

Common Misconceptions About Present Value and Discount Rates

The concept of reducing an award for future damages can be confusing and often leads to misunderstandings. Clarifying these points is important for anyone going through the personal injury claim process.

Misconception 1: “It’s a way for insurance companies to pay less.”

While the practical effect is a lower lump-sum payment, the legal theory is not about helping defendants. It is about achieving economic fairness. The goal is to provide the plaintiff with a sum of money that, when combined with the investment returns it generates, will perfectly match their future needs. It is designed to prevent overcompensation, which would violate the legal principle of making the plaintiff “whole.”

Misconception 2: “The calculation is simple arithmetic.”

The mathematical formula itself is not overly complex for a financial professional. However, the inputs to that formula are anything but simple. Determining the future stream of losses requires input from medical experts, vocational rehabilitation specialists, and life care planners. Determining the appropriate discount rate requires a deep understanding of macroeconomics, financial markets, and inflation trends. The complexity lies in the expert assumptions, not the final calculation.

Misconception 3: “Any investment return can be used for the rate.”

This is incorrect. Arizona law uses the “reasonably prudent investor” standard, which specifically excludes risky or speculative investments. An expert for the defense cannot argue for a discount rate based on historical stock market returns (e.g., 8-10%). The courts recognize that an injury victim’s fund for future survival cannot be gambled in the market. The focus must remain on safe, stable, and predictable investment vehicles like government and high-grade corporate bonds.

Misconception 4: “It applies to all damages.”

This is a critical distinction. The requirement to discount to present value applies only to future economic damages—the tangible, quantifiable financial losses. It does not apply to non-economic damages, such as pain, suffering, emotional distress, and loss of enjoyment of life. These damages are awarded as a single sum for past, present, and future suffering and are not subject to a discount rate calculation.

Conclusion

The application of a discount rate to future damages is a fundamental and legally required component of personal injury and wrongful death cases in Arizona. Governed by A.R.S. § 12-591, this process ensures that a lump-sum award accurately reflects the present value of a lifetime of future needs, adhering to the principle of fair compensation. However, the absence of a state-mandated rate transforms this calculation into a complex and contentious issue, heavily reliant on the competing testimony of economic experts.

The final rate chosen by a jury can dramatically alter a final award, with a single percentage point translating into hundreds of thousands of dollars over the long term. This underscores the importance of the “battle of the experts,” where arguments over safe investment yields, inflation projections, and economic forecasts take center stage. For an injured person, understanding this concept is vital to appreciating how a total projected loss of millions can result in a smaller, though economically equivalent, lump-sum payment. It highlights the intricate financial and legal work required to secure a stable future.

If you or a family member is facing a future of significant medical expenses and lost income due to a serious injury, the financial calculations are as critical as the medical care itself. Ensuring your future is properly valued requires a legal team that not only understands the law but also commands the economic principles that will shape your recovery. To protect your rights and secure the compensation you need, it is essential to seek guidance from an experienced Arizona personal injury attorney. Contact our firm today for a no-cost consultation to analyze the specific financial details of your case. Contact us for free evaluation today.