This article first appeared in the autumn 2007 issue of the Expert Witness.
Recent changes to the Insurance Act in Alberta (amendment R.S.A. 2000, c. 1-3 defined in section 626.1) may affect the treatment of survivor pension benefits in fatal accident calculations. Prior to the legislative change, survivor pension benefits were treated as a collateral benefit – in the sense that they represented insurance proceeds paid for by the deceased’s CPP contributions – and these benefits were not included when estimating the family’s dependency loss. Any deduction for the survivor’s benefit would have been equivalent to reducing a loss of income-dependency award because the survivor had received some life-insurance proceeds.
Under the new legislation, however, the forms of payment to be deducted from the award include:
(d) benefits under a prescribed income continuation or replacement plan or scheme…
Thus, under the new legislation, it may be argued that for fatal accidents occurring on or after January 26, 2004, any survivor benefits should now be deducted from the loss of dependency award as these represent “income continuation or replacement”. However, note that the Act does not specifically address CPP survivor’s benefits, though it does state that CPP disability pensions are to be deducted from an injured plaintiff’s losses. It may be argued that the same reasoning applies in the case of a fatal accident, and the survivor’s pensions will be found to be deductible.
Note that this may also imply that any private pension benefits that are received by a surviving spouse may also need to be included in the dependency loss calculations. For example, if the deceased was a teacher or nurse, presumably the surviving spouse would receive any private pension contributions in the form of a lump-sum payment or monthly survivor pension benefits.
In light of the legislation change, we propose that since survivor benefits are now to be deducted from the dependency losses, they must also be factored into the without-accident income path. That is, in any given year there would have been a possibility that the deceased would have died and the survivors would have received benefits, (had the accident under litigation not occurred). In the past, we would not have considered these benefits to be “income” as they would have been treated as collateral benefits.
Allowing for these changes to the legislation requires that we take a two-step approach to estimating the deceased family’s loss of dependency on income.
In the first step, we undertake the following calculations to estimate the family’s loss of dependency.
- We estimate the employment and retirement incomes that the deceased would have earned over his life, had the accident not occurred (his “without-accident” income path), and the probability that the family will experience a loss of dependency on that income.
- We then estimate the survivor benefits that dependents would have received had the deceased died, and the probability that these benefits would have been received.
- We multiply each year’s loss by the probability of each event occurring in the years following the accident, and add the resulting figures to estimate a stream of losses.
- Finally, we calculate the present discounted value of the stream of losses.
In the second step, we calculate the present discounted value of the survivor benefits the family is now receiving. The dependency loss is then the difference between the figures calculated in the two steps – the expected value of the loss of dependency and the present value of the survivor benefits.
For the loss of dependency calculations, contingencies that reflect the probabilities that the couple might have eventually separated or that the surviving spouse may remarry, are also usually included. These contingencies have the effect of reducing the dependency loss. If the couple had separated, then presumably the surviving spouse would not have benefited from the deceased’s income, and if the surviving spouse remarries, then presumably he/she will no longer be dependent on the deceased’s income. However, when estimating the probability that the surviving spouse would have received survivor benefits regardless of the accident, we do not include remarriage contingencies. Had the deceased died regardless of the accident, the surviving spouse would have received survivor benefits as long as the couple had not separated by that time. Whether or not the spouse subsequently remarried would not have altered his/her eligibility for survivor benefits. Therefore, remarriage has no effect on the without-accident survivor benefits and does not need to be included in the calculations.
The argument that survivor benefits should be deducted from the loss of dependency award is based on the assumption that they represent “income continuation or replacement,” as specified in the new legislation. There is, however, an argument that survivor pensions should be treated as “proceeds from insurance,” not as “income continuation” benefits. If they fall in the former category, they may be considered to be a collateral benefit, which would not be deducted.
For example, suppose the surviving spouse is receiving a pension from a private plan. It may be argued that this pension is a collateral benefit – in the sense that it represents insurance proceeds paid for by the deceased’s acceptance of a reduced direct pension. Presumably the deceased had a choice between accepting a pension with a survivor’s benefit and a higher pension with no survivor’s benefit. Both pensions would be actuarially equivalent. The deceased’s choice of the “survivor’s benefit” option is effectively the same as if she had chosen the option of a higher pension with no survivor’s benefit, and used the additional income (while she was alive) to buy life insurance. Had she done so, it is our understanding that the life insurance proceeds would be considered to be a collateral benefit, and not deducted from any dependency losses. That is, any deduction for the survivor’s benefit would be essentially the same as reducing a loss of income-dependency award because the survivor has received some life-insurance proceeds. The courts do not allow the latter, as we understand the law.
Conservative estimate of survivor benefits without-accident
In our calculations, we assume that the survivor benefits actually received by the family are a reasonable reflection of the benefits they would have received had the deceased not died in the action under litigation. This is likely a conservative estimate that will understate the losses since the longer the deceased would have contributed to a pension plan, the higher the benefits would have been.