The Valuation of Household Services – Conceptual Issues

Posted on December 1, 1996March 23, 2017 By economica

by Therese Brown

This article first appeared in the winter 1996 issue of the Expert Witness.

Since individuals make valid contributions through their efforts at both paid and unpaid work, the courts have concluded that they should be compensated when they are unable to pursue either type of employment. In the field of personal injury litigation this has implied that calculation of a plaintiff’s damages should include the loss (or impairment) of the individual’s ability to perform household services. Controversy remains, however, concerning the method which should be used to establish the economic value of that loss.

Three frequently discussed household services valuation methods will be explored here: the opportunity cost method, and both the generalist and specialist variants of the market replacement method. Each of these wage-based methods will be defined and the advantages and disadvantages associated with each of them will be outlined. It will be argued that there are sound reasons for the courts to have frequently adopted the generalist variant of the market replacement approach in personal injury cases.

The Opportunity Cost Method

Valuation of household services utilizing the opportunity cost method is based on the assumption that when an individual chooses to undertake unpaid work, such as household activities, the possibility of spending that time at paid work is precluded. Thus, the salary associated with that employment is foregone. Wages sacrificed to allow the individual to spend time at unpaid work are thus said to be representative of the economic value that the individual places on the unpaid activity. For example, if the individual has chosen to give up 20 hours a week of employment paying $10 per hour, in order to engage in 20 hours of housework, the opportunity cost approach concludes that the value of that housework must have been at least $10 per hour. Ten dollars becomes the valuation of an hour of housework.

There are various problems associated with adopting the opportunity cost method to valuate household services, not the least of which is the determination of the wage that has been sacrificed to allow the individual to participate in unpaid work. Janet Yale has delineated some of these concerns in her article, “The Valuation of Household Services in Wrongful Death Actions” (University of Toronto Law Journal, 1984, 303). She notes that it is reasonably simple to estimate the foregone market wage in the case of an individual who has had recent labour market experience, who has clearly defined skills, or who belongs to a particular profession. Outside of this framework, the estimation of an appropriate market wage may become extremely difficult.

More problematic is the assumption, underlying the opportunity cost method, that the amount which must be spent to restore the plaintiff to his/her pre-accident position is the value which the plaintiff had placed on the household services which have been lost. Although the individual may have given up $20 per hour to engage in housework, that individual can, in principle, be compensated for his/her loss by employing a third person to perform the forgone tasks. If a maid service can be hired to wash the kitchen floor for $15, it does not matter whether the plaintiff had previously foregone $6 or $60 to wash that floor – it will be equally clean in either case. (The exception to this argument occurs when the plaintiff had formerly obtained pleasure from household chores – but the compensation of this loss is properly that of non-pecuniary damages.)

The Replacement Cost Methods

The approach taken in both replacement cost methods is to value household services according to what it would cost to hire an individual who offers those services on the market. The difference between the two market substitute methods is that the generalist method assumes that these services could be replicated by an individual who does general domestic work. The specialist method, on the other hand, assumes that to replace household services it would be necessary to hire individuals with expertise in specific areas that comprise the various components of household duties.

Jamie Cassels expresses two concerns about the use of the replacement cost method in an article entitled “Damages for Lost Earning Capacity: Women and Children Last!” (The Canadian Bar Review, 1992, 488). First, he notes that homemaking is more all-encompassing than is implied when described simply as housekeeping, and as such the services of a housekeeper cannot adequately replace the contributions made by someone who is running a household. He also argues that domestic wages are depressed due to the large volume of “volunteer and vulnerable” labour provided by women in this sector. This would imply that these services have a higher value than the relevant market wages would indicate.

Selection Among Methods

The concerns identified above are representative of the various criticisms leveled at wage-based methods. For the most part these concerns are valid and in principle imply that these methods are inferior to the ultimate tool in the assessment of household services which has been identified as one that valuates the outputs of unpaid work (Households’ Unpaid Work: Measurement and Valuation, Statistics Canada Publication 13-603E, No. 3, 28). Elimination of this method, on the basis of its impracticality, leaves the choice between wage-based methods and more subjective methods of valuation. Since the latter would unquestionably lead to inconsistent results, we come back to wage-based methods. Although not flawless, these prevail as the best techniques available, in any practical sense, to facilitate the calculation of loss of household services.

Once the field is narrowed to these methods, it is necessary to identify the criteria that the method of choice must satisfy. Janet Fast and Brenda Munro have outlined several criteria which serve this purpose in their article “Toward Eliminating Gender Bias” (Alberta Law Review, 1994, 12-13). In particular they note three issues which warrant consideration when choosing an appropriate method: first, its computational complexity; second, the extent to which it achieves distributional equity; and third, how well it satisfies the objective of restoring the plaintiff (as much as is possible) to his/her pre-accident position. On this basis, Fast and Munro recommend the use of replacement cost methods in the valuation of household services in personal injury claims, as they best meet these criteria.

Of the two replacement cost methods, it may well be that the specialist variant is unmanageable in a practical sense, in addition to being less than objective. This approach necessitates a lapse into subjectivity when a particular specialist in one of various occupational fields has to be matched to certain household tasks (Households’ Unpaid Work: Measurement and Valuation, Statistics Canada Publication 13-603E, No.3, 25). Another hurdle remains after the occupational field is identified, as various factors affect the wage payable to specialists, depending on whether they are self-employed or employees, full or part-time employees, supervisors or labourers in entry-level positions, etc. Prior to calculation of the average wage an assumption must be made as to the “type” of employee under consideration. It is apparent that the determination of the wage for a specialist is not a clearcut matter.

If the specialist variant is ruled out, for practical reasons, this leaves the generalist variant of the market replacement method as the technique of choice in the valuation of the loss of household services. One concern that remains in reference to this method is that individuals who work in the domestic sector may perform household tasks more efficiently than would individuals in their own homes. Allowance is made for this increased efficiency in Economica’s calculation of the loss of household services. To reflect this efficiency differential, the estimation of hours of household services which have been lost is reduced by 25 percent, giving an approximation of the number of replacement hours required (see “Adjusting Claims for Hours Devoted to Household Chores”, in the Summer 1996 Expert Witness).

In our view, the generalist variant of the replacement method, once adjusted in this way, is the tool which lends itself best to the calculation of the loss of household services in personal injury cases. It is only when the generalist approach is clearly inappropriate, such as when the plaintiff provided services to the household which could only be replaced by a skilled tradesperson, that we would recommend use of the specialist method.

The caveat still holds, however, that an estimate derived using the replacement cost method is only as reliable as the factors used in its calculation, specifically the determination of the number of hours requiring replacement and the hourly cost of the replacement services. Both of these topics will be discussed in future issues of The Expert Witness, as will a review of court judgments dealing with the loss of household services.

From 1996 through February 1998, Therese Brown was a consultant at Economica.

Application of Contingencies in the Pre-trial Period

Posted on December 1, 1996March 23, 2017 By economica

by Scott Beesley

This article first appeared in the winter 1996 issue of the Expert Witness.

There is an interesting discussion regarding pre-trial “work life expectancy” continuing among members of the National Association of Forensic Economics (NAFE). We mention here two issues: survival probabilities (i.e. life expectancy) and employment contingencies.

First, there is debate over whether or not survival probabilities should be applied to pre-accident income in the pre-trial period, when the plaintiff has in fact lived to the date of trial. It can be argued that the accident “changed the world” completely, and that the post-accident fact of survival does not guarantee the plaintiff would have lived, had the accident not occurred. While I believe this argument is correct, some writers have gleefully pointed out that the application of survival probability to reduce expected pre-accident income invites plaintiff’s counsel to say to a defense economist “So, you are suggesting that the injury to my client has helped to keep him alive, are you?” In fact, this debate is virtually meaningless in almost all cases, because survival probabilities are so close to one, even near retirement age, that approximating them as equal to one in the pre-trial period is accurate. This is Economica’s conventional approach.

The contingencies applied to reflect the pre-accident risk of unemployment and disability are much more significant in the calculation of pre-trial loss. Again, we usually view those “from the date of the accident” in the sense that, if the plaintiff has worked steadily since the accident, we still assume they might have become disabled or unemployed, had the accident not occurred. This is clearly correct when the plaintiff no longer works in the same field, or does not work at all. The only awkward circumstance is when the plaintiff works in the same job or field (presumably with lower hours and earnings). The argument then is that the fact of no (further) disability or unemployment between the date of the accident and the date of trial provides additional information which implies that those contingencies should not be applied to pre-accident income. I disagree with this argument as it applies to disability, believing that any injury significant enough to reduce a plaintiff’s income also changes their lifestyle, and in particular would tend to make them more risk-averse at home and at work. The argument has merit as it applies to unemployment, however, since the time path of unemployment for a given company or industry is known better 3 or 6 years later, and market-wide risk of unemployment is the same pre-or post-accident. If an industry had grown rapidly between the date of accident and date of trial, and unemployment in the plaintiff’s area had fallen from 12 to 6 percent, the use of a 12 percent contingency would seem incorrect.

Scott Beesley is a consultant with Economica and has a Master of Arts degree (in economics) from the University of British Columbia.

The Income Tax Gross-Up on a Cost of Care Award

Posted on December 1, 1996March 23, 2017 By economica

by Derek Aldridge and John Tobin, C.A.

This article first appeared in the winter 1996 issue of the Expert Witness.

Consider a simple example where a plaintiff requires an award to pay for $11,000 in cost of care expenses one year from today. Assuming an annual (nominal, or observed) interest rate of 10 percent, this suggests that an award of $10,000 will be sufficient to cover the future cost of care expenses ($10,000 + 10% x $10,000 = $11,000). But suppose that the plaintiff’s interest income is taxed at a rate of 25 percent. Now $250 of the $1,000 in interest income is lost to tax, effectively reducing the interest rate from 10 percent to an after-tax rate of 7.5 percent (i.e., the plaintiff receives $750 after-tax interest on an investment of $10,000). One year from now the plaintiff will have only $10,750 to cover the $11,000 in expenses, a shortfall of $250.

To compensate for the tax impact, the plaintiff will require an additional award of $232.56 for a total of $10,232.56. Now the plaintiff will earn $1,023.26 in interest income (= $10,232.56 x 10%), of which 25 percent, or $255.82, will be lost to tax, for net after-tax interest income of $767.44. When the net interest income is added to the award, or capital, of $10,232.56, the plaintiff will have the required $11,000 to meet cost of care expenses one year in the future. The additional award of $232.56 is known as the cost of care tax gross-up.

Usually, the gross-up is reported as a percentage of the non-grossed-up award. In the example discussed above the tax gross-up would normally have been reported as 2.3256 percent of the “non-grossed-up” amount $10,000. Readers of The Expert Witness will know from experience that this percentage gross-up varies widely from case to case. The purpose of this article is to identify some of the factors which may affect the percentage gross-up.

Factors affecting the income tax rate (and the tax gross-up)

The gross-up is determined by calculating the plaintiff’s tax liability prior to considering the award for cost of care. This is compared to the liability including income generated from the award for cost of care. The gross-up is the additional capital required to fund the resulting tax liability.

The percentage gross-up is dependent on the plaintiff’s marginal tax rate and the plaintiff’s eligibility for various income tax credits. In the example above, if the individual’s investment income had been taxed at a marginal rate of 50 percent, instead of 25 percent, the effective after-tax interest rate would have fallen from 7.5 to 5 percent. A consequence of the increased marginal tax rate is that now the individual would have to invest $10,476.19 to provide $11,000 one year from today. That is, the percentage gross-up increased from 2.3256 to 4.7619.

A number of factors combine to affect the overall tax rate and the amount of tax paid on income invested to compensate for future costs of care. First, some of the future costs of care may be eligible for a medical tax credit (e.g., the cost of a wheelchair would typically be eligible for a tax credit). A tax credit reduces the plaintiff’s tax liability, at a certain percentage. The more expenses that the plaintiff has which are eligible for a medical tax credit, the lower his tax liability and the tax gross-up. To further complicate the tax calculation, it could be the case that once every five years the plaintiff will incur $50,000 in expenses, of which $40,000 are tax- creditable, while in the other years he faces costs of $20,000, of which only $5,000 are tax-creditable. Also, in certain circumstances the plaintiff’s injury may result in his qualifying for the disability tax credit. This will further reduce his tax burden (and the associated gross-up). In some cases, a severely disabled plaintiff may be entitled to a smaller gross-up, in percentage terms, than a moderately disabled person, as a result of his higher medical expenses and his eligibility for the disability tax credit (though the former’s total cost of care and gross-up will almost certainly be higher).

The plaintiff will usually have other sources of income which will affect the gross-up. Interest income on a loss of income award or a non-pecuniary award, as well as post-accident employment earnings or pension income will all attract tax, and will affect the marginal tax rate on the interest income earned from the cost of care award. (The percentage of tax applied to each dollar of additional income is the marginal tax rate.) The courts have ruled that the investment income from the cost of care award is to be added to all other sources of income and taxed at the rate associated with the highest tax bracket in which the individual’s income places him. To estimate the gross-up, details about the future cost of care requirements (and the associated tax credits) are required as well as information about all of the plaintiff’s expected income, including future employment income and any additional interest income that he will earn (especially from loss of income awards). The higher the plaintiff’s expected income, the greater the percentage gross-up resulting from income being taxed at a higher marginal tax rate.

A third issue to consider is the time path of award consumption. Just as the amount of any non-pecuniary and loss of income award will affect the tax gross-up, the time path of the consumption of these awards will affect the calculation. If the plaintiff spends his entire loss of income and non-pecuniary award immediately upon receipt, then the award will not generate any interest and will not attract any tax. Therefore, the plaintiff will be in a lower marginal tax bracket and he will pay a lower average tax rate over his lifetime on the award for cost of care. This would result in a lower tax gross-up. For the loss of income award, it may be argued that the plaintiff will consume enough of this award each year to compensate him for the income which he has lost due to his injury. For the non-pecuniary award, it may be assumed that the plaintiff will consume the award gradually over his lifetime, or alternatively that he consumes it quite quickly. Except for very large non-pecuniary awards, where the plaintiff does not have any other significant income, the variation of the consumption assumption on the award does not have a significant effect on the gross-up calculation.

We occasionally encounter cases where a plaintiff with a shortened life expectancy is expected to receive a “lost years” award (see “Shortened Life Expectancy: The ‘Lost Years’ Calculation” in the Spring 1996 Expert Witness) – this adds a further complication to the gross-up calculation. In such a “lost years” case, a plaintiff will receive a portion of the money that he would have earned in years in which he is now not expected to be alive. In these circumstances, if we assume that the plaintiff will consume enough of this award each year to compensate him for that year’s loss of income due to his injury, then he will not consume all of the loss of income award before his death. As an alternative in these situations, for the purposes of making the gross-up calculations, we assume that the plaintiff will consume the loss of income award at such a rate that by his expected death he will have consumed the entire award.

Given equal total awards, older plaintiffs will typically require lower gross-ups than their younger counterparts. This is because older plaintiffs will begin to draw on the capital amount earlier, so the interest income will decline more rapidly. A young plaintiff will usually consume only a portion of the interest income (which can be substantial) for several years before he begins to draw on the capital. Thus, we would expect that for several years a younger plaintiff will earn large amounts of (taxable) interest income, in excess of medical expenses which may be eligible for a tax credit. It should be noted, however, that if the plaintiff is a child then he may not be required to pay tax on any of the interest income earned on the cost of care award until the tax year of his 21st birthday. This would substantially reduce the tax gross-up. If a minor has a shortened life expectancy then it is conceivable that the gross-up would be nominal.

In the example described at the beginning of this article, it was assumed that the cost of care would be incurred one year hence. It can easily be shown that the tax gross-up will be larger, the further into the future is the cost of care to be incurred. For example, assume that $16,105.10 is to be replaced 5 years from now and that, again, the interest rate is 10 percent. In the absence of taxes on the investment income, this amount can be replaced with an investment today of $10,000. If the interest income is taxed at a marginal rate of 25 percent (resulting in an effective after-tax interest rate of 7.5 percent), the required award will increase to $11,218.15 – for a tax gross-up of 12.1815 percent (compared to 2.3256 percent in the earlier example). As the number of years over which the award is to be invested increases, the interest which will be earned on the award also increases. Hence, while the non-grossed-up award (here, $10,000) remains the same, the impact of income taxes increases, as does the percentage gross-up. In short, the longer is the period over which the costs of care are to be awarded, the higher is the percentage gross-up (everything else being equal).

Summary

To summarize, we have listed some of the factors which influence the value of the gross-up. Other things being equal, we can normally assume the following:

Cost of care award. A larger cost of care award will generate more interest and more tax. Thus it will lead to a higher gross-up.
Loss of income award. A larger loss of income award will translate to a larger cost of care tax gross-up.
Post accident employment income. Greater post accident employment earnings will lead to a larger gross-up.
Tax-creditable expenses. The greater the portion of tax-creditable expenses, the less tax will be paid. Thus the tax gross-up will be lower.
Time path of consumption. If a large portion of the cost of care award will be consumed early in the plaintiff’s life, then this will lead to a lower gross-up.
Age. Young plaintiffs will generally require larger gross-ups than will old plaintiffs, both because they will have more interest income and, therefore, be in higher tax brackets, and because their awards will continue much further into the future.

Derek Aldridge is a consultant with Economica and has a Master of Arts degree (in economics) from the University of Victoria.

John Tobin, CA, is a partner with Kenway Mack Slusarchuk Stewart LLP Chartered Accountants.

Calculation of the Dependency Rate in Fatal Accident Actions

Posted on December 1, 1996March 23, 2017 By economica

by Christopher Bruce

This article first appeared in the winter 1996 issue of the Expert Witness.

In a fatal accident action, the surviving spouse is entitled to claim for any loss of pecuniary advantage which would have been derived from the deceased. There is considerable uncertainty, however, concerning the manner in which this loss of dependency is to be calculated. The purpose of this paper is to discuss three alternative approaches to the calculation of the dependency and to argue that selection among them depends upon the nature of the couple’s marriage. The three approaches are defined in the first part of the paper. In the second, three types of marriage are defined and each type is matched with an associated method of calculating the dependency.

Theoretical Approaches to Calculation of Dependency

Assume that the husband of a childless couple has been killed. The husband was earning $30,000 per year (after taxes) and the wife $20,000 per year. Assume also that the wife’s dependency on family income has been found to be 70 percent – composed of 30 percent of family income spent on items which benefitted the wife alone and 40 percent spent on items which benefitted the husband and wife equally. Three different approaches to the calculation of the wife’s loss can be identified.

a) The sole dependency method

In this approach, the wife receives 70 percent of her husband’s projected income.

b) The “traditional” cross-dependency method

In this approach, the wife receives 70 percent of the family’s income net of her earnings:

(0.70 x $50,000) – $20,000 = $15,000 (2)

The source of the difference between these approaches can readily be seen if the cross-dependency equation is rewritten in a form which makes it equivalent to that used in the sole dependency method. In doing this, it is first necessary to recognise that the family income figure, here $50,000, is composed of the sum of the wife’s and husband’s incomes, that is, $30,000 + $20,000. Thus, the equation for the wife’s dependency in the cross-dependency approach, (equation (2)), may be rewritten:

0.70 x ($30,000 + $20,000) – $20,000 = $15,000 (3)

Furthermore, with rearrangement, equation (3) can be represented as:

(0.70 x $30,000) + (0.70 x $20,000 – $20,000) = $15,000 (4)

or as:

(0.70 x $30,000) – (0.30 x $20,000) = $15,000 (5)

That is, the difference between the sole dependency approach and the cross-dependency approach is that in the latter, the element (0.30 x $20,000), which is the portion of the wife’s income which had previously been devoted to the husband, is deducted from her loss of dependency.

c) A “revised” cross-dependency method

In this approach, the wife receives the husband’s total income net of the total amount devoted to his personal expenditures. Thus, as it has been assumed that the husband’s personal expenditures accounted for 30 percent of family income (and family income is $50,000), the wife would receive:

$30,000 – (0.30 x $50,000) = $15,000 (6)

Recognising, again, that the $50,000 family income figure in this equation is the sum of the husband’s and wife’s incomes, equation (6) can be rewritten:

$30,000 – (0.30 x ($30,000 + $20,000)) = $15,000 (7)

or:

$30,000 – (0.30 x $30,000) – (0.30 x $20,000) = $15,000 (8)

which, with simplification, becomes:

(0.70 x $30,000) – (0.30 x $20,000) = $15,000 (9)

Equation (9), however, can be seen to be identical to equation (5), the method for calculating a “traditional” cross-dependency. Hence, although the rationale for using equation (9) is different from that for equation (5), the two approaches yield the same result. It is for this reason that I used the term “revised” cross-dependency to describe the approach which was used to derive equation (9)

Three Types of Marriages

In this section, I discuss three types, or “styles,” of marriage and identify the appropriate dependency approach associated with each.

a) The idealised marriage. In what might be called an “idealised view of marriage”, the couple marries for love and shares all family income (approximately) equally. That 30 percent of family income is spent on items which benefit the husband alone implies that 30 percent of each of the husband’s and wife’s income is devoted to those expenditures. (And, conversely, 30 percent of each spouse’s income is devoted to items which benefit the wife alone.) The wife is assumed to spend 30 percent of her income on her husband because she loves him and, hence, derives pleasure from expenditures which benefit him.

In such a marriage, the pecuniary impact of the husband’s death is as follows: First, the wife has lost the 70 percent of the husband’s income (0.70 x $30,000 = $21,000) which he had spent on joint, family expenditures and on her personal consumption. Second, the wife now “saves” the 30 percent of her income, here $6,000 (= 0.30 x $20,000), which she had previously been spending on her husband’s personal consumption. However, it is not correct to say that she is “better off” by that $6,000. In the “idealised” marriage, her “gift” of $6,000 to her husband was voluntarily made because that use of her money gave her greater pleasure than any other use available to her. Thus, when the death of her husband “freed” her to spend the $6,000 on herself, she was not made better off. The “freeing” of the $6,000 forces her to purchase something – goods and services for herself – which she values less than the items she was purchasing before – goods and services for her husband.

A less emotion-laden example might help to explain this point. Assume that individual A has been leasing a car for $500 per month. The tortious intervention of individual B has destroyed the car and $1,500 of contents belonging to A. Although two months had remained on the lease, A has been excused from further payment (perhaps on the ground that the contract was frustrated). B admits that he owes $1,500 to A, to compensate him for the loss of his personal belongings, but argues that this should be offset in part by the $1,000 A has “saved” because he no longer has to make two months of lease payments. B’s argument is wrong. Although A now has $1,000 which he did not have before; he has been deprived of the use of a car, a use on which he had placed a value of at least $1,000. Instead of being made better off by the “gain” of that $1,000, he will actually be made worse off by the difference between the value of the car and the value of the “next best” set of goods and services which he can now purchase. Similarly, the wife who was previously devoting some of her income to her husband is not better off when she is prevented, by the tortious action of some third party, from spending that money. Rather, like the individual deprived of his car, she is worse off. Hence, in the idealised form of marriage, it is the sole dependency approach which is justified.

b) The marriage of convenience. The couple may not have married for reasons of love, but for reasons of financial gain. From a purely financial perspective, the marriage described above cost the wife $6,000 – the amount which she spent on items which benefitted her husband alone. In return, however, she received the benefit of the expenditures her husband made on her – 70 percent of his income, or $21,000. That is, she may be thought of as having “paid” $6,000 in order to receive $21,000. In such a marriage of convenience, the wife loses only the difference between these two figures – $15,000 – when her husband dies. (Note: the husband has also gained from this marriage, as he has “paid” 30 percent of his income, or $9,000, in order to obtain the benefit of 70 percent of his wife’s income, $14,000.)

In such a marriage, it is the “traditional” cross-dependency approach which is justified – subject to the following caveat: The 30 percent of the wife’s income which benefitted the husband alone must have been less than the 70 percent of the husband’s income which benefitted the wife, (and vice versa), otherwise the marriage would not have provided a financial gain to the wife. For example, if the wife’s income had been $50,000 and the husband’s $20,000, the wife would have spent (0.30 x $50,000 =) $15,000 on the husband in return for only (0.70 x $20,000 =) $14,000. Such an outcome would have been possible in an “idealised” marriage, but not in one which had been entered for financial gain.

c) A marital partnership. Although the couple may have married for love, they may have agreed to maintain separate bank accounts, with each spouse paying for those items which benefitted him/her alone. In this case, it is only that portion of the deceased’s income which was spent on joint household expenditures which the surviving spouse will have lost. In the example developed above, the husband was assumed to have earned $30,000 and the wife $20,000. Thirty percent of total family income, or (0.30 x $50,000 =) $15,000, was for the husband’s benefit alone. In the “marital partnership” model, the husband is assumed to have paid for all of the latter expenditures. What remained of his $30,000 income, after deduction of this figure, was the husband’s expenditure on items which benefitted the couple jointly. That amount is also $15,000 (= $30,000 – $15,000). It is the “revised” cross-dependency approach which would compensate the wife for the loss of this amount.

It will be noted that the loss of dependency calculated on this basis, $15,000, is identical to that calculated according to the “traditional” cross-dependency approach. This is not a coincidence. Mathematically, the two can be shown to be identical to one another. Hence, the use of the cross-dependency approach can be justified on the basis of either the “marriage of convenience” or the “marital partnership” model. It should be cautioned that both suffer from the reductio ad absurdum that individuals earning relatively high incomes will be found to be “better off” when their spouses are killed.

Conclusion

It is now seen that there is not a unique approach which can be applied to all marriages. Rather, one must consider the nature of the relationship which had been shared between the deceased and the plaintiff. Two types of evidence can be led: subjective and objective.

a) Subjective evidence. Subjective evidence concerns the nature of the personal relationship which had existed between the husband and wife. If evidence is led to indicate that the marriage in question had been based on love and mutual respect, a prima facie case would appear to have been made for use of the sole dependency approach. Only if it could be shown that the marriage was one of “convenience” would it be appropriate to employ the traditional cross-dependency approach.

b) Objective evidence. Objective evidence concerns the extent to which the couple had intermingled their incomes and paid for personal and household items jointly. Even when the court is reluctant to rule on the basis of the presence or absence of a “loving” relationship, use of the sole dependency approach can be justified on the pragmatic ground that many couples combine their incomes in a single pool, within which it is impossible to distinguish one individual’s contribution from the other’s. Hence, if 30 percent of the (family) income in this pool is spent on the husband, for example, it would not make sense to argue that 30 percent came entirely from his income. Rather, the more reasonable conclusion would have to be that 30 percent derived from his contributions to family income and 30 percent from his wife’s contributions – that is, that the sole dependency approach should be employed.

On the other hand, if the couple had carefully kept their accounts separate from one another, a strong presumption would appear to have been made for use of the “revised” cross-dependency approach – unless the individuals had markedly different incomes. (If the wife’s income was $10,000 per year and her husband’s $50,000, for example, it would be extremely unusual to find that the husband had spent 60 percent of “his” $50,000 income on items specific to himself; while only 60 percent of the wife’s $10,000 income had been spent on items specific to her.)

Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).

Selecting the Discount Rate

Posted on September 1, 1996March 24, 2017 By economica

by Christopher Bruce

This article first appeared in the autumn 1996 issue of the Expert Witness.

The discount rate is the interest rate at which it is assumed plaintiffs will invest their awards in order to replace their future streams of losses. As was explained in the first issue of this newsletter, it is the “real” rate of interest – or observed rate of interest net of the expected rate of inflation – which most financial experts prefer to use for this purpose.

In six provinces, the discount rate has been set by regulation. In the remaining four, including Alberta, however, the expert must provide evidence concerning the forecasted value of the real interest/discount rate. The purpose of this article will be to review a number of techniques for obtaining such a forecast and to provide an estimate of the real rate of interest based on the most reliable of these techniques.

The article will be divided into three sections. In the first, I list the rates in the six provinces which mandate a discount rate. In the second section, I summarise three methods which have been used to forecast real interest (discount) rates and identify the strengths and weaknesses of each of those methods. Finally, I select one method and use it to select a discount rate for use in Alberta.

Mandated Discount Rates

Mandated discounted rates in Canada
Province	Discount Rate
British Columbia	3.5% (cost of care)
British Columbia	2.5% (loss of income)
Saskatchewan	3.0%
Manitoba	3.0%
Ontario	2.5%
New Brunswick	2.5%
Nova Scotia	2.5%
Prince Edward Island	2.5%

The discount rates shown in the previous table have been mandated in Canada.

Three Methods for Determining Discount Rates

1. The historical approach: The approach which, implicitly, has been favoured by those provinces which have mandated their discount rates is to assume that the average rate which has been observed in the past will continue into the future. Typically, those who use this approach rely on the real interest rates which have been reported over the entire post-World War II period. What analysis of these rates indicates is that real rates were fairly stable over the period 1950-1970, at approximately 3 percent. During the oil crisis, of the early 1970s, real interest rates fell, sometimes becoming negative. Towards the end of that decade, however, they began to rise again and it appeared that they would return to their historical level. But the rise continued beyond 3 percent and since 1983 real interest rates have consistently remained above that level. Indeed, real interest rates have remained above 4 percent for so long that it is now difficult to justify the use of a rate lower than that. At the very least, any expert who attempted to rely on the historical 3 percent average to forecast future rates of interest would have to explain why the 1980s and 1990s were such an anomaly.

2. Forecasting agencies: There is a small number of consulting firms in Canada which provide forecasts of such economic variables as GNP, the unemployment rate, and inflation. They will also forecast other variables, including the real rate of interest. Extreme caution must be used when employing these firms’ long-term forecasts, however. First, the mathematical models which they employ were built specifically to make short- term forecasts. Second, long-term forecasts cannot be made without imposing assumptions about many factors which are outside the mathematical models developed by these agencies, such as foreign interest rates, exchange rates, and government monetary and fiscal policy. Finally, private forecasters have little incentive to produce accurate long-term forecasts. A consulting firm’s reputation will not hinge in any way on the accuracy of its current forecasts concerning, say, the level of unemployment in 2020. The forecasts which customers use to evaluate the agencies’ accuracy are those which have been made into the near future, not the distant future. Hence, it is forecasts of one or two years on which consulting firms concentrate their resources. The real rate of interest, on the other hand, must commonly be forecast twenty or thirty years into the future.

3. Market rates: The third source of information concerning future real rates of interest is the money market. When an investment firm which believes that inflation will average 2 percent per year purchases 20 year bonds paying 6 percent, it is revealing that it expects the real rate of interest will average 4 percent over those 20 years. (The real rate of interest is the 6 percent observed, or “nominal,” rate of interest net of the 2 percent inflation.) Thus, if we knew the rate of inflation which investors were forecasting, that forecast could be used to deflate the nominal rates of interest observed in the market in order to obtain the implicit, underlying real rates. At the moment, such forecasts can be obtained with some accuracy. Not only do surveys of investors conclude that there is considerable agreement among them with respect to their forecasts of inflation – generally between 2 and 3 percent – but we know that the government is strongly committed to maintaining a long-run inflation rate below 3 percent. Thus, we can be confident that investors predict real rates of interest which are no less than the observed, nominal rates less 3 percent. (For information concerning the long-run expected rate of inflation, see Bank of Canada, Monetary Policy Report, May 1996.)

Alternatively, the Canadian government has for some time issued bonds which are denominated in terms of real interest rates, (real rate of interest bonds, or RRBs). By observing the rates of return at which these bonds sell, the real rate of interest which investors believe will prevail over the future can easily be determined. There are two drawbacks to the use of market interest rates to forecast future real rates of interest. First, the rate which is obtained from this method has not been stable, but has generally fluctuated between 4 and 6 percent since 1983. Hence, no definitive conclusion can be drawn. Second, as very few RRBs have been issued, the rates of return which they have obtained may not accurately reflect the rates in the market as a whole.

Forecasting the Discount Rate

Of the three techniques for forecasting real interest rates discussed in the previous section, the least satisfactory is the first one, based on historical rates. As those rates have varied so widely since the early 1970s, they convey little reliable information concerning the future. Of the remaining two, most economists prefer the market-based technique. A simple analogy will explain why.

Imagine that you wished to determine the average price which potential purchasers were willing to pay for twenty-year old, three bedroom bungalows in Edmonton. One approach would be to conduct a telephone survey of Edmontonians, asking them what they would be willing to pay for such homes. A second approach would be to observe the actual prices at which such homes sold in Edmonton. Clearly, the second approach is preferable. Why? Because rather than asking individuals how they think they will behave in some hypothetical situation, it observes how individuals actually behave when they have to commit large sums of money to their decisions.

Similarly, economists who are asked to forecast long-term interest rates recognise that little is at stake should those forecasts be in error. Whereas those who are involved in purchasing long-term bonds recognise that the smallest error can result in losses of tens of thousands, even millions of dollars. For this reason, Economica prefers to rely on the interest rates observed in the money market, rather than on surveys of economic consultants, to determine the long-run discount rate.

The following table summarises money market estimates of the long-run real rate of interest for three series: the rate of return on trust company five year guaranteed investment certificates, the interest rate on Government of Canada 10-year bonds, and the rate of return on RRBs. In each case, the figure represents the average of the rates reported in the second quarter (April-June) of 1996, net of the forecast rate of inflation. Two alternative real rates have been calculated for the GICs and the 10-year bonds: the first uses a forecasted rate of inflation of 2 percent and the second a rate of 3 percent. (The figure for RRBs is the same in both scenarios as the observed, market rate is already net of the rate of inflation.)

Real Rates of Return on Selected Long-term Investments: Canada 1996
Investment	2% Rate of Inflation	3% Rate of Inflation
Trust Company 5-year GICs	4.5%	3.5%
Government of Canada 10-year bonds	5.6	4.6
Real rate of return bonds	4.7	4.7

The figures in this table suggest that investors currently anticipate that the real rate of interest will fall somewhere between 3.5 and 5.0 percent. At Economica, we employ the mid-point of this range: 4.25 percent.

Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).

Employment of Persons With Disabilities: The Employment Equity Act 1986 to 1996

Posted on September 1, 1996April 18, 2017 By economica

by Gordon C.M. Wallace and Gail M. Currie

This article first appeared in the autumn 1996 issue of the Expert Witness.

Impaired earning capacity remains a significant head of damages in the evaluation of a personal injury action. The discipline of Vocational Rehabilitation has a longstanding history of assisting the Courts in understanding a disabled plaintiff’s occupational options through matching their vocational attributes, abilities, and interests with the requirements of specific jobs. (G. Wallace and D. Nordin, “Assessment of Residual Employability Potential” in E.L. Gross (ed). Injury Evaluation: Medicolegal Practices. Butterworths, Toronto, 1991). Unfortunately, in many circumstances, while appropriate occupational options may be identifiable, the reality is that disabled individuals often face significant barriers in obtaining and maintaining employment in the competitive labour market. These realities can have significant impact for the personal injury claim and therefore are important considerations for counsel to be cognizant of.

The awareness of the difficulties which individuals with disabilities face in regards to their employment is certainly not a new concern. In 1985, the report of the Parliamentary Committee on Equality Rights to the House of Commons noted that:

Disabled people suffer from extraordinarily high unemployment rates. When they are employed, they tend to be concentrated in the low paying, marginal sectors of the labour market. They also have expenses that non- disabled workers do not face, such as medication, special aids and devices, and special transportation services (page 105).

In an attempt to address some of the inequities for this and other disadvantaged populations, in January of 1985, the Federal Government introduced Bill C62 which provided for the establishment of Employment Equity Programs in all corporations under federal jurisdiction, including crown corporations with 100 or more employees. In 1990, this legislation encompassed 370 employers accounting for 630,000 employees. This covered only 5 percent of the Canadian labour force while nearly two thirds of this represented group were employed in Ontario 40 percent) or Quebec (20 percent). Almost the entire work force under this legislation was employed in service producing industries rather than good producing industries such as manufacturing and construction. The three main industrial sectors – banking, transportation and communication – each accounted for roughly 30 percent of the workforce.

Under this Bill, a person was included under the “disabled” category if they had the following three criteria:

Have a persistent physical, mental, psychiatric, sensory or learning impairment.
Consider themselves to be or believe that an employer or potential employer would be likely to consider them to be disadvantaged in employment by reason of impairment.
Identify themselves to an employer or agree to be identified by an employer as a person with disabilities.

In addition to the Employment Equity Act, the government also established a Federal Contractors Program designed to influence the behavior of firms with 100+ employees submitting tenders worth more than $200,000 to the government for goods and services provision. As well, the Affirmative Action Policy had been introduced by the Treasury Board in 1983 with an objective of enabling the equitable representation and distribution in the public service of Women, Aboriginal Peoples and Persons with Disability.

Unfortunately, even with their laudable intentions, these measures appear to have had very little impact in terms of increasing the employment of individuals with disabilities. In fact, in terms of “persons with disabilities”, a review of the Statistical Summary Employment Equity Act 1987-1990 (Employment and Immigration Canada, January 1992) indicates only modest gains over the reported four years. Specifically, the labour force representation of this group increased from 1.59 percent in 1987 to 2.39 percent in 1990. However, a further analysis of the “hiring” and “termination” data for this group indicates that there had been more of the latter and less of the former! In other words, more disabled persons had been terminated or left the workforce over this period than had been hired. It has been suggested that what the numerical increase actually represents is the increased identification of present employees who would fall under the definition of having a disability. For example, individuals who wear eyeglasses could be considered as having a disability under this criterion and several large employers appear to have made greater efforts at identifying these individuals within their labour force. Therefore, any percentage increase for this group came from greater self- identification among existing employees and not from increased recruitment of individuals with disabilities (Canadian Human Rights Commission Annual Report 1991, Minister of Supply and Services Canada, 1992).

More recent information indicates that the representation of persons with disabilities was 2.56 percent in 1993 and 2.63 percent in 1994. However, this latest increase was also due primarily to a higher rate of self- identification and changes in the composition of the group of employers reporting under the Act (Employment Equity Statistical Summary, 1987-1994, Human Resources Development Canada, 1995).

Comments made by witnesses before a Parliamentary Committee established in 1991 to review the Employment Equity Act published in the report, A Matter of Fairness (May 1992) are illustrative of the difficulties experienced by individuals with disabilities. For example, Mr. Gerry McDonald, Vice Chairman of the Coalition of Provincial Organizations of the Handicapped, offered (February 19, 1992):

Canadians with disabilities are dismayed because the promise to improvements to the socio-economic status of disabled persons have not materialized. Disabled Canadians continue to confront systemic discrimination in employment. This is despite numerous national, international and regional instruments that assert equality rights. In Canada it is clear that after five years of employment equity, virtually no progress has been made in the area of acquisition of permanent full- time employment in the federally regulated work force by people with disabilities.

Ms. Carol McGregor, a spokesperson for the Disabled People for Employment Equity was even more blunt, stating (February 24, 1992):

We have seen over the past five years an Act that has proved to be utterly useless.

Mr. Maxwell Yalden, Chief Commissioner of the Canadian Human Rights Commission, testified (February 5, 1992):

Because the real gains of persons with disability have been more than offset by those leaving the work force, there has been a net outflow…. It is worse than that, because in some areas – I think women are one and perhaps visible minorities another – even in hard economic times when there were a number of people being let go, those groups still continued to increase their hold in the work force, but the disabled went down. There was a net outflow.

One of the major problems that was identified with the initial Employment Equity Act Legislation was its lack of effective sanctions. The only monetary penalty built into the legislation was for companies who fail to report what their employment equity plans are. Unfortunately, the legislation did not provide for any monetary sanctions for companies who failed to implement these programs. Subsequently, in 1994 Bill C64, designed to amend the original Act, was introduced to Parliament. This new Bill contains three main elements to amend the original Employment Equity Act, namely: 1) The inclusion of the Federal Public Service under the Act; 2) The clarification and guidance regarding obligations of employers; and 3) The creation of a mechanism to gain compliance and employment equity.

The inclusion of the Federal Public Service under this Act will increase its coverage to approximately 900,000 employees or about 8 percent of the Canadian Labour Force. Provision was also made for an independent external agency, the Human Rights Commission, to be responsible for enforcement of employer obligations with a mandate for this organization to conduct employer audits to ensure obligations under this legislation are met. However, there has been little change in the area of sanctions with monetary ones still only being applicable to those employers who fail to report their employment equity plans. No financial sanctions are yet available for those employers who do not actually carry through on their plans. The Canadian Human Rights Commission is however, expected to negotiate written undertakings from employers to take specific measures to remedy any inequities in the employment of the designated groups. If the Human Rights Commission Officer fails to obtain a written undertaking from an employer, the Commission has the power to issue a directive to the employer to take the specified action. Tribunal rulings constitute a final step if an employer fails to act on a written undertaking or disagrees with a direction. However, no order can be made or direction given that would:

Cause undo hardship on the employer;
Require an employer to hire or promote un-qualified persons;
With respect to the public sector, require that people be hired or promoted in a manner inconsistent with merit under the Public Service Employment Act;
Require an employer to create new positions;
Impose a quota on an employer.

So just how far do employers have to go to create more equality in the work force under this Act? The Act specifically notes:

Every employer shall ensure that its Employment Equity Plan would, if implemented, constitute reasonable progress toward implementing employment equity as required by this Act.

The major concern here is, or course, what constitutes “reasonable progress”. To date, the experience of persons with disabilities enjoying increased employment as a result of federal legislation since 1986 has certainly been “modest” at best. Whether or not the new changes to the Act will substantially increase the employment of persons with disabilities and/or move them from “poorly paid employment ghettos” (A Matter of Fairness, Report of the Special Committee on the Review of the Employment Equity Act, May 1992) remains to be seen. Therefore, until such evidence can be documented, the complete evaluation of impaired earning capacity claims for personal injury cases need to consider this present reality of the Canadian labour market. It requires plaintiff’s counsel not only to consider the identification of alternative occupational options for their clients but to also address the reality of disabled individuals obtaining and maintaining competitive employment. In many cases, this will require assessment of the clients circumstances by both the disciplines of Vocational Rehabilitation and Economics.

Gordon Wallace, M.A., C. Psych. is the founder and a Senior Consultant of The Vocational Consulting Group Inc. Gail Currie, B.Sc., CCRC is a Vocational Rehabilitation Consultant in the company’s Edmonton office. The company also has offices in Vancouver and Kelowna and Calgary.

Head Office: #410 – 1333 West Broadway, Vancouver, B.C. V6H 4C1 (604) 734-4115 Fax (604) 736-4841

Damage Calculations in Fatal Accident Actions After Galand

Posted on September 1, 1996April 18, 2017 By economica

by Christopher Bruce

This article first appeared in the autumn 1996 issue of the Expert Witness.

In an article published in the summer 1996 issue of this newsletter, I reviewed the theoretical arguments raised by Coté, J. A. in Galand Estate v. Stewart (1992), 6 Alta. L. R. (3d) 399 (Alta. C.A.). What Justice Coté concluded in his decision was that, in certain circumstances, the estate of a deceased could rely on the Survival of Actions Act to make a claim for loss of earnings. What was less clear in Galand were the types of cases in which such claims would be allowed; and the methods by which damages were to be calculated. The purpose of this article is to identify some of the issues which can be expected to influence the decisions concerning these two issues.

Cases in which Claims will be Allowed

There are at least four types of cases for which it appears that claims will be allowed. First, it appears that an estate will be able to claim under survival of actions legislation when a plaintiff dies after a personal injury trial but before legal proceedings have been completed. In the British case of Pickett v. British Rail Engineering Ltd. (1980), A.C. 136 (H.L.), for example, the plaintiff died after a personal injury trial but during the appeal process; and in the Canadian case of Hubert v. De Camillis (1963), 41 D.L.R. (2d) 495 (B.C.S.C.), the plaintiff died after trial but before the decision had been rendered. In both cases, the estate was successful.

Second, in Galand, Justice Coté noted that

…by the date of trial some of the wage loss of a deceased person may well be past and already incurred and exactly quantified…. So even on the respondent’s view of the law, this cause of action may exist and survive (at 405).

Third, Justice Coté also argued that in a case in which a beneficiary of the deceased was not a dependent and

…the premature death of the deceased clearly deprived the beneficiary of part of his inevitable inheritance… [t]here is a plain financial loss (at 406).

Finally, two of Justice Coté’s examples pointed to the conclusion that he would have been willing to award damages under the Survival of Actions Act in a case in which the deceased had a “…completely secure salary and employment … at the time of his injury or death” (at 403). He referred specifically to the case of a tenured university professor (at 403) and to Wayne Gretzky when he was single (at 406).

The only Alberta case to award damages for lost income under the Survival of Actions Act since Galand is McFetridge Estate v. Olds Aviation Ltd. (unreported, Edmonton, April 12, 1996). In that case, the deceased had been a successful businessman whose future income stream Justice Lee found to be easily quantifiable. That is, it appeared to have fallen into the fourth of the categories identified above.

What is not yet known is how the Appeal Court will deal with cases of a more speculative nature, such as those involving the loss of lifetime income of an individual who was a minor at the time of his or her death. This issue may be decided later this year when the appeal is heard in Duncan Estate v. Bradley (1994), 161 A.R. 357 (Alta. S.C.).

Assessment of Damages

Section 5 of Alberta’s Survival of Actions Act states only that:

5. If a cause of action survives under section 2, only those damages that resulted in actual financial loss to the deceased or his estate are recoverable… (emphasis added)

What is not indicated is how the courts are to assess “actual financial loss” to an estate. Nor does the decision in Galand offer a great deal of assistance as the court was asked only to consider the issue of whether a cause of action survived a plaintiff’s death – not what that “action” might be.

Nevertheless, the courts have provided some information concerning the approaches which they prefer. Three of these will be considered here.

The loss of inheritance approach: In Toneguzzo-Norvell v. Burnaby Hospital, [1994] 1 S.C.R. 114, Madame Justice McLachlin (at 127-128) cited approvingly from Cooper-Stephenson and Saunders (Personal Injury Damages in Canada (1981) at 244) who argued that:

…the award of damages to a very young child for prospective loss of earnings during the lost years should reflect only that portion of the entire lifetime earnings which the court estimates would have been saved by the child for his estate, at the end of his pre-accident life expectancy (emphasis added).

The rationale which Cooper-Stephenson and Saunders offered for this position was that “…the prime purpose of the award during the lost years is to make provision for [the deceased’s] dependants” (at 243). In short, as the purpose of tort damages is to compensate the plaintiffs, an award based on a more liberal approach would result in a “windfall” for the dependants.

In Alberta, there is a number of weaknesses to this approach. First, the “windfall” argument has already been rejected by the majority in Galand. Second, as will be noted below, there is reason to believe that Galand sets a precedent for use of the “lost years” approach.

Also, Section 5 of the Act states that “…damages that resulted in actual financial loss to the deceased or his estate are recoverable” (emphasis added). On a plain reading, “loss to the deceased” would appear to imply something more than “loss of inheritance.” Finally, in Galand Justice Coté cited Pickett as precedent for the view that an estate should be able to “…recover for tortious loss of earnings or earning capacity of the deceased” (at 407, emphasis added).

The lost years approach: Assume that the plaintiff’s injuries have reduced her life expectancy from 40 years to 10 years. During the 30 years which have been “lost,” the plaintiff would have received income which would have been offset, to a certain extent, by expenditures on “necessities.” The theory behind the “lost years approach” is that, during those 30 years, the plaintiff has lost the pleasure associated with the difference between her income and her living expenses. (This issue was discussed in greater detail in the first issue of this newsletter.) During the remaining 10 years, she will be entitled to her full loss of earnings (as she will have to incur her full living expenses during those years).

Now assume that, instead of having a reduced life expectancy of 10 years, the plaintiff’s life expectancy has been reduced to two years. In a personal injury action, she would be entitled to damages equal to her income during those two years plus the difference between her income and her expenses in the remaining 38 “lost” years.

By simple extrapolation, it is seen that if the plaintiff’s life expectancy has been reduced to one year, or one month, or one week, a similar calculation can be made. And if we take the argument to its logical conclusion, if the plaintiff’s life “expectancy” has been reduced to one second, the “lost years” approach would suggest that damages should equal the difference between her projected lifetime earnings and her projected lifetime expenses in the 40 years which have been “lost.”

Both the Pickett and Hubert cases discussed above offered support for use of the lost years approach. If the estate of a plaintiff who has died soon after a trial is to be awarded damages based on the lost years approach, it would seem to be difficult to justify a different approach in the case of a plaintiff who has died soon before (or during) a trial. Furthermore, both Justice Coté’s approval of Pickett and his comment that “…the deceased had a cause of action for loss of future earnings because life expectancy was shortened.” (Galand at 404, emphasis added) seem to suggest that the Alberta Court of Appeal is prepared to employ the lost years approach.

Nevertheless, an inconsistency arises when the lost years approach is extrapolated from personal injury cases to fatal accident cases. One rationale for the lost years approach in the former is that the plaintiff could, in principle, replace the pleasure foregone during the lost years by spending her award during her remaining years. That is, the award in such a case can be seen as compensatory to the plaintiff. This rationale is missing in fatal accident cases (although it is also missing in personal injury cases involving plaintiffs who have become “vegetables”).

Loss of a capital asset: In a leading Supreme Court of Canada case, The Queen v. Jennings ((1966), 57 D.L.R. (2d) 644), Judson, J. concluded that if a plaintiff “…has been deprived of his capacity to earn income… [i]t is the value of that capital asset which has to be assessed” (at 656, emphasis added). Further, in Andrews v. Grand & Toy (1978) D.L.R. (3d) 452 (S.C.C.), Mr. Justice Dickson argued that this asset should be assessed at the value which it possessed before the injury; that is, unreduced for the lost years.

The controversial question then arises whether the capitalization of future earning capacity should be based on the expected working life span prior to the accident, or the shortened life expectancy…. When viewed as the loss of a capital asset consisting of income-earning capacity rather than a loss of income, the answer is apparent: it must be the loss of that capacity which existed prior to the accident (at 469-70).

But if one’s future earning capacity is to be treated as a capital asset, how is that asset to be valued? Two possibilities present themselves. First, as Mr. Justice Dickson implies, one could simply capitalize the future stream of income into a commuted value.

Alternatively, however, one could recognise that the value of a physical asset is not the capitalized value of its future stream of total earnings, but the value of those earnings net of the expenses of operation and maintenance. In that case, the loss of the capital asset, “future earning capacity”, would be found by capitalizing the individual’s future stream of earnings net of expenditures on necessities. That is, the capital asset approach may produce a result similar to that obtained using the lost years approach. Interestingly, this rationale for the lost years method does not encounter the objection raised above – that it assumes the plaintiff will live long enough to consume the award.

Implicitly, Justice Lee accepted the capital asset approach in McFetridge. There, the estate was awarded damages equal to the reduction in the value of the deceased’s businesses.

Comment

If the Court of Appeal does not reverse the Galand decision entirely when it hears the Duncan appeal, I believe that the law will develop as follows: First, the arguments made in the preceding section seem to suggest that it is the lost years approach which will be used to value damages, although the court may couch its decision in terms of the capital asset approach.

Second, over time, I believe that the courts will apply survival of actions legislation to all types of cases, including those involving minors. The reason for this is that once the courts allow actions in cases involving plaintiffs with “well-established” career patterns, such as tenured university professors, they will encounter difficulty distinguishing those situations from cases in which the deceased was “secure” in his or her career, such as a 35 year-old mechanic or engineer. This will give the courts difficulty distinguishing the latter from recent university or technical school graduates, graduates from high school students, and high school students from infants. Eventually, therefore, the estates of all fatal accident victims will be able to claim under the Survival of Actions Act.

Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).

Distinguishing Between Loss of Income and Loss of Earning Capacity: The B.C. Case of Pallos v. I.C.B.C.

Posted on June 1, 1996April 20, 2017 By economica

by Scott Beesley

This article first appeared in the summer 1996 issue of the Expert Witness.

In its recent decision in Pallos v. Insurance Corporation of British Columbia (1995, B.C.J. No. 2), the British Columbia Court of Appeal awarded $40,000 for “loss of earning capacity” to a plaintiff who had no “loss of earnings.” The basis of the claim was that, although the plaintiff had returned to his previous employment, at a salary commensurate with that earned prior to the accident, the injury had diminished his future job prospects.

Pallos raises an important issue which is often given less attention than it deserves in personal injury actions: how should the court deal with uncertainty concerning the course of the plaintiff’s future earnings stream? In Pallos the uncertainty was of an extreme form, as it was unclear whether the plaintiff would have sought alternative employment had he not been injured nor was it certain what effect the injury would have on the post-accident probability that he would be able to keep his job or to find another one.

Other cases present the courts with varying degrees of uncertainty. In this article, I consider four types of uncertainty, in increasing order of complexity. The fourth case represents the situation which was dealt with in Pallos.

At the lowest level of complexity, the court has determined what career path the plaintiff will follow (or would have followed) but is uncertain concerning factors specific to that career, such as the rate of growth of earnings, the level of fringe benefits to be paid, the probability of unemployment, or the age of retirement. This common form of uncertainty can be, and is usually, dealt with simply by using averages. Although different automobile mechanics may experience different rates of growth of earnings, for example, it is generally appropriate to assume that the plaintiff’s income would have experienced the average rate of growth of earnings, for mechanics with characteristics similar to those of the plaintiff (such as education, specialisation, and work experience).

At the second level of complexity, there is a dispute concerning the plaintiff’s career choice. Commonly, for example, the defendant will argue that an injured automobile mechanic should return to his previous employment (perhaps at a reduced capacity), whereas the plaintiff will argue that the plaintiff should retrain as a partsman. Often, this type of dispute can be resolved on the basis of an appeal to the facts. That is, it is often open to the court to argue that the facts indicate that one of the two (or more) courses of action is much more reasonable than the other. (The court might find, for example, that the plaintiff’s back injury is so severe that it is highly unlikely that he could resume his career as a mechanic.)

In the third situation, there are (or were) two or more careers open to the plaintiff, each of which is (or would have been) plausible. For example, it may be unclear whether the plaintiff would have taken a drafting diploma at a technical school or an engineering degree at university had she not been injured. The present, or lump-sum, value of the former would have been $700,000, whereas that of the latter would have been $1,100,000.

The court could employ the second approach identified above, and make a finding of fact concerning which of these streams the plaintiff would have followed. But the better course, I would suggest, is to weight each possibility by the probability that it would have occurred. This provides what is commonly referred to as a “weighted average” (or, technically, an “expected value”). For example, if it was felt that pre-accident there was a slightly higher probability that the plaintiff would have become a draftsperson than an engineer, the court might conclude that the probability of the former was 60 percent and that of the latter 40 percent. In this case, the weighted average of the two possible income streams would be:

Weighted average (pre)

= (0.60 x $700,000) + (0.40 x $1,100,000)
= $420,000 + $440,000
= $860,000

It is from this figure that the lump sum value of the post-accident income stream would be deducted in order to obtain the lump sum loss of future earnings.

The weighted average calculation, also referred to as the use of “simple probability,” has a long history of acceptance in Canadian courts. An early example is Bradenburg v. Ottawa Electric Railway (1909), 19 O.L.R. 34 at 36 (C.A.). Subsequent cases include MacDonell v. Maple Leaf Mills Ltd. (1972), 26 D.L.R. (3d) 106 at 109 (Alta. C.A.), Schrump v. Koot (1978), 18 O.R. (2d) 337 (C.A.) and Janiak v. Ippolito (1985), 16 D.L.R. (4th) 1 at 20 (S.C.C.). In the latter case the Supreme Court noted that “In assessing damages the court determines… what would have happened by estimating the chance of the relevant event occurring, which chance is then to be directly reflected in the amount of damages” (emphasis added).

Recent cases which apply this principle include Graham v. Rourke (1991), 74 D.L.R. (4th) 1 at 12-13 (Ont. C.A.) and Steenblok v. Funk (1990), 46 B.C.L.R. (2d) 133 (C.A.). Many other references, and a detailed discussion of related issues, can be found in Ken Cooper-Stephenson’s book Personal Injury Damages in Canada (2nd ed., Carswell, 1996), and I would like to acknowledge that the above citations were found in this text.

Use of the weighted average approach avoids a common problem in personal injury litigation – that the plaintiff may appear to be “better off” following the accident than before. For example, assume in the case above that the effect of the accident has been to increase the probability that the plaintiff will become a draftsperson from 60 percent to 80 percent – and decrease the probability that she will become an engineer from 40 percent to 20 percent. The defendant could argue that the plaintiff might have become a draftsperson before the accident and will now become an engineer after the accident, leaving her better off by ($1,100,000 – $700,000 =) $400,000.

The answer to this is that the defendant has ignored both the probability that the plaintiff would have become an engineer had the accident not occurred and the probability that she will become a draftsperson now that the accident has occurred. The best way to deal with this issue, we suggest, is for the court to weight each of the career opportunities by the probability that it would (will) occur and then to deduct the weighted average of the post-accident figures from that of the pre-accident. We already know in the case discussed above that the weighted average of the pre-accident earnings was $860,000. The comparable figure for the post-accident stream is:

Weighted average (post)

= (0.80 x $700,000) + (0.20 x $1,100,000)
= $560,000 + $220,000
= $780,000

Hence, the loss becomes ($860,000 – $780,000 =) $80,000. [Note: this calculation can readily be extended to cases in which there are three or four possible streams and to cases in which the numbers of streams pre- and post-accident are different.]

The final situation is that in which it is extremely difficult to attach probabilities to the possible future outcomes. This is the situation which was encountered in Pallos. There, the plaintiff had returned to his pre- accident employment, at an income which was similar to that which he had been earning prior to the accident. The court found that the nature of the plaintiff’s injuries was such that he would now have much greater difficulty obtaining employment with an alternative firm than he would have prior to the accident. What was unclear, however, were the probabilities that he would have sought alternative employment prior to the accident or that the firm would now lay him off, forcing him to seek alternative employment post- accident.

It might be possible to resolve this conundrum employing the weighted average approach; but the difficulties of obtaining appropriate probabilities make such a solution problematic. Implicitly, the two alternatives considered by the court were (i) to make no award; and (ii) to make a “fair assessment.” The B.C.C.A. chose the latter; Finch J.A. awarded $40,000 for what he called “loss of earning capacity.”

Although we sympathise with the approach taken by Mr. Justice Finch, we submit that it may be inferior to the weighted average approach. Given Mr. Pallos’ education and work experience, the number of opportunities realistically open to him had he left his current employer was limited. (Technically, the number may be unlimited, but most of his alternatives would have provided similar income levels.) Hence, the primary uncertainty to be resolved was the probability that he would have sought alternative employment. This is a probability which the courts in general could select, based upon the facts of the case. Similarly, the probability that a plaintiff like Mr. Pallos will be laid off from (or otherwise) leave his employer, post- accident, could also have been selected by the court. Although the selection of these probabilities may have to be based on subjective factors, I would suggest that the process of that selection would make the decision much more transparent and easier to translate to other cases.

This difficulty of translation has already become apparent. In Nelson v. Kanusa Construction et al. (1995, B.C.J. No. 958), a B.C. trial decision which followed Pallos, the plaintiff was awarded $50,000, also for “loss of earning capacity,” even though the award given to Ms. Nelson for loss of earnings appeared to have compensated her adequately.

Nevertheless, a substantial subset of cases may remain in which the plaintiff’s prospects are so uncertain that it is extremely difficult either to identify them all or to attach probabilities to them. In these cases, the Pallos approach – of providing a lump-sum to compensate the plaintiff for a loss of earning capacity – may be appropriate.

Scott Beesley is a consultant with Economica and has a Master of Arts degree (in economics) from the University of British Columbia.

Annuity Concepts (Continued)

Posted on June 1, 1996March 23, 2017 By economica

by Heber G. Smith

This article first appeared in the summer 1996 issue of the Expert Witness.

In the previous edition of The Expert Witness our contribution discussed annuities in general as well as some features that qualify annuities as the ideal tool to deliver a specified sum to a specified party at specified times. Whilst the ultimate purpose of this series is to provide users with an effective understanding of how they can use structured settlement annuities, a thorough background in annuity options may be helpful, not only to the litigation counselor in the remediation of tortous actions but also to the estates and wills practitioner. This article will address how the use of “non-commutable” terminology can give fluid expression to the wishes of the annuity settlor.

Costs

The settlor of a trust, intent on generating periodic payments rather than lump sum cash to a beneficiary, will most certainly face some onerous costs in an attempt to achieve an expression of his/her desires. But a cost far greater than that of disbursements for legal fees, fund management and trust costs are those costs associated with the failure of the trust to perform financially to the expectations of the testator. Most practitioners are familiar with the occasional inadequacy of investment performance, especially when considered net of costs and fees, but the biggest land mine in the path of the testator’s plan is the potential for litigation and the ultimate insufficiency of the trust to achieve the settlor’s wishes.

The inclusion of a simple irrevocable clause within the terms of an annuity contract may preclude such failure.

Income versus Capital

In all too many circumstances, the beneficiary has and may exercise, the litigation alternative to a trustee declared proviso for trust income or partial trust income. A dissatisfied income beneficiary may, possibly without expense to himself/herself, attack trust capital. Even in the event that the beneficiary might be unsuccessful in such an endeavor, that endeavor may be at the expenses of the estate or trust.

A “non-commutable” annuity, however, may not and cannot be converted to cash. This proviso within an annuity may or may not be ascribed to the initial payee under such contracts. In addition, the provision may apply only to the primary beneficiary or payee or possibly to both the primary and secondary right holder but not to a subsequent right holder. Once an annuity settlor has dealt with the issue of potential income beneficiaries, he or she may elect that the subsequent right’s holder (beneficiary or payee) be entitled to commute the then present value of the annuity payments.

A testator, facing the uncertainties with respect to the execution of his or her wishes under the terms of a trust, may find that an annuity represents a refreshing alternative especially when one considers the fact that the annuity contract is without additional costs or fees.

Heber Smith is the principal of Smith Structured Settlements Inc. a structured settlement and annuity brokerage with offices in Calgary and Vancouver. He is also a partner in Structured Settlement Software, a firm that provides tax driven software to the American structured settlement industry.

Forecasting the Earning Capacity of Self-Employed Individuals

Posted on June 1, 1996March 23, 2017 By economica

by Denise Froese

This article first appeared in the summer 1996 issue of the Expert Witness.

Financial experts encounter two major problems when attempting to forecast the earnings of self-employed individuals. First, although tax returns and financial statements are often available, these documents may not provide an accurate picture of the plaintiff’s potential in any given year. This may be the case for one or more of the following reasons. The structure of the taxation system may allow self-employed individuals to claim some of their personal expenses as business expenses, thus reducing their taxable incomes. The owner-operator of a company may not receive payment for his product or service in the year he earned the income. The plaintiff may receive cash or payment-in-kind for his product or service and, therefore, not report that income. The plaintiff may be able to enter into an income-splitting arrangement with a spouse who is a co-owner of the company.

Resolution of these issues often requires the assistance of the plaintiff’s accounting firm. (Further information about the problems which must be taken into account can be found on pages 10-11 of Christopher Bruce, Assessment of Personal Injury Damages, 2nd Edition, Butterworths, 1992.)

Second, even if the expert is able to determine that the net income reported by the owner-operator of the company represents his actual income in any particular year, it may still be difficult to project the self- employed plaintiff’s future earning potential, had the accident not occurred. This is because the available documents often will not yield useful information about the cyclical and/or seasonal nature of the industry the company belongs to. In particular, the firm’s financial data may not identify whether the industry was at a “peak” or a “trough” in business activity, nor whether the growth of the firm’s business was consistent with overall trends in the industry or whether the firm was growing more (or less) rapidly than the industry as a whole.

Many of these problems can be dealt with through the use of Statistics Canada’s Small Business Profiles. These publications contain data compiled on a biannual basis from tax returns submitted to Revenue Canada by businesses reporting gross revenues between $25,000 and $5,000,000. The Small Business Profiles present detailed operating ratios, financial ratios, balance sheet information and employment data for most industries by province and territory for the 1987, 1989, 1991 and 1993 taxation years. (Data for the 1995 taxation year will not be available until June of 1997.) More importantly, these profiles report the distribution of net profits, for both profitable and non-profitable businesses, in each industry.

As an example of a situation in which the Small Business Profiles can prove valuable, Economica was recently retained by the defendant to provide evidence concerning a plaintiff who had operated a small, specialized company in the construction industry. Although his business had been operating for less than two years at the time of his accident in late 1989, he had earned a substantial profit in the six months preceding the accident. Indeed, Small Business Profiles indicated that he was earning the average profit level of the firms in the top 25 percent of the industry. Based on this limited evidence, the plaintiff’s expert projected that the plaintiff would have maintained the level of net income he had earned in that six month period for the remainder of his working life (almost 30 years).

What Economica was able to show, using the Small Business Profile for that industry, was that the annual profits of the top 25 percent of profitable companies in the same business as the plaintiff decreased by 76 percent between 1989 and 1993. Moreover, data from Statistics Canada showed that construction activity peaked in the plaintiff’s province in 1988/89, and that at the time of the plaintiff’s accident, the construction industry was on the verge of entering a slump from which it has yet to recover. (Activity decreased by 78.2 percent between 1989 and 1993, which corresponds directly with the decline in the net profits earned by companies providing the same service as the plaintiff.) Therefore, this information suggested that the plaintiff’s net profit would have declined significantly from the profit level he was achieving at the time of his accident, and that he would not have been able to maintain his 1989 level of income throughout the remainder of his working career.

Until January 1997, Denise Froese was a consultant at Economica.

Adjusting Claims for Hours Devoted to Household Chores

Posted on June 1, 1996March 23, 2017 By economica

by Derek Aldridge

This article first appeared in the summer 1996 issue of the Expert Witness.

When a claim is made for loss of household services capacity, we are faced with the challenging task of determining the claimant’s pre-accident household service contribution, and comparing this to his or her post-accident capacity for household services. The difference between the pre- accident contribution and the current contribution represents the claimant’s loss of household service capacity. One simple way of measuring this loss is to calculate the number of additional hours that it would take a replacement worker to perform all of the tasks which the claimant can no longer do. This is the approach taken by Economica.

However, the number of additional hours that a claimant would require to complete the chores which can no longer be performed may overstate the amount of time required by replacement workers; and therefore, using this estimate without adjustment would overstate the claimant’s true loss. Accordingly, an adjustment needs to be made to accurately estimate the claimant’s loss: replacement workers will typically be more productive than the claimant, so the “loss” of household service hours must be adjusted downwards to reflect this productivity. The question one asks now is, “How much more productive are replacement workers compared to the typical claimant?” The answer to this question will guide the adjustment we need to make to the number of lost household service hours claimed. Fortunately there is research in this area which we can rely on.

In his book Economics and Home Production – Theory and Measurement (Brookfield USA: Avebury, 1993), Euston Quah estimates the efficiency of replacement household service workers (i.e., “domestic help”). Based on a survey of 167 households Quah found that for 2-member households, hired help was 64 percent more efficient than the household members. For 3-5-member households, hired help was 46 percent more efficient; and for households with 6 or more members, hired help was 33 percent more efficient. For those families without children, Quah reported efficiency gains of 62 percent. For families with 1-2 children, he found efficiency gains of 43 percent, and for families with 3-5 children, efficiency gains amounted to 40 percent.

Quah concluded that the productivity of workers hired by small households was relatively high because those households tended to hire workers only to undertake specialised tasks, such as ironing. Larger households hired less specialised, housecleaning staff. Hence, as most calculations of the value of housework assume that it is non-specialists who are being hired, we recommend that the lower productivity factors identified above, 33-40 percent, be applied. This implies that the number of “lost hours” claimed should be reduced by 25-30 percent. (A worker who is 33 percent more productive requires 25 percent fewer hours to complete a given task.)

Derek Aldridge is a consultant with Economica and has a Master of Arts degree (in economics) from the University of Victoria.

Fatal Accident Cases After Galand

Posted on June 1, 1996April 18, 2017 By economica

by Christopher Bruce

This article first appeared in the summer 1996 issue of the Expert Witness.

The Alberta Court of Appeal decision in Galand Estate v. Stewart (1992), 6 Alta. L. R. (3d) 399 opened the possibility that the estate in a fatal accident action could claim for the deceased’s loss of earning capacity (both past and future). Subsequently, two trial decisions – Duncan Estate v. Bradley (1994), 161 A.R. 357; and McFetridge Estate v. Olds Aviation Ltd. (unreported, Edmonton, April 12, 1996) – have been rendered which offer interpretations of the Galand decision.

In this, the first of two articles on the Galand decision, the arguments raised in these three decisions are summarised. A second article, to be published in the next edition of this newsletter, will discuss the implications of these decisions for the calculation of damages in fatal accident actions.

Galand Estate v. Stewart

In Galand, the estate of the deceased based a claim for the “…value of the present capital loss of earning capacity of the deceased…” on sections 2 and 5 of Alberta’s Survival of Actions Act:

2. A cause of action vested in a person who dies after January 1, 1979, survives for the benefit of the estate….

5. If a cause of action survives under section 2, only those damages that resulted in actual financial loss to the deceased or his estate are recoverable… (emphasis added)

The defendants raised two substantive arguments against the existence of the plaintiff’s cause of action. First, they argued that a loss of earnings could not constitute an “actual financial loss,” as required under section 5; and, second, they questioned the policy of providing a “windfall” to persons who are not dependents, on the ground that such a provision was not consistent with tort law’s fundamental goal of compensation.

Actual Financial Loss

In Galand, Coté J.A. (with Belzil J.A. concurring) considered and rejected three versions of the defendant’s position concerning actual financial loss. First, he did not accept the argument that a loss of future earnings was not “actual” because it was necessarily “speculative” or “contingent.” He countered with the example of a fatal accident victim with no dependents who had a completely secure salary and employment, such as a tenured university professor. Second, he rejected the proposition that “actual” and “real” necessarily implied “present,” not “future.” Finally, he did not agree that s. 5 barred claims for “general damages,” such as losses of future earnings. In his words, “[h]ad the Legislature meant ‘special damages’, it would have said so” (at 407).

Hembroff J. made it clear in Duncan that he did not agree with the majority reasoning in Galand. In particular, he quoted Black’s Law Dictionary as defining “actual” to mean

“… having a valid objective existence, opposed to that which is merely theoretical or plausible; opposed to hypothetical or nominal…”

[Randolph Langley, in a paper entitled Wrongful Death Claims, prepared for the Legal Education Society of Alberta, notes, however, that Black’s definition of “Damages: actual damages” includes:

“… Synonymous with “compensatory damages” and with “general damages” (emphasis added, Black’s 6th Edition, at 390).]

Windfall Gain

Coté J.A. also rejected the argument that actions for loss of future earnings should be denied because they represented a windfall to the beneficiaries of the estate rather than compensation. First, he noted that in some circumstances an individual who was the beneficiary of an estate might not be a dependent under the Fatal Accidents Act. Such an individual would be deprived of part of his inheritance from the deceased if he could not make a claim based on the Survival of Actions Act. Second, he noted that if the deceased had lost an income-producing machine at the moment of death, there would have been no doubt that his estate was entitled to claim full compensation for destruction of that machine. Yet such compensation might also represent a windfall to his estate.

Again, Hembroff J. dissented, citing Madam Justice McLachlin’s argument, in a case involving a young girl who had a severely shortened life expectancy, (Toneguzzo-Norvell v. Burnaby Hospital [1994] 1 S.C.R. 114), that

“… the award for lost earning capacity will serve but one purpose: to enrich her heirs” (at 127, emphasis added).

Similarly, Hembroff J. concluded that the “..tragic loss of a son should not be the notional income producing machine that puts money, ‘windfall or otherwise’ into the hands of his parents” (at 83).

Comment

Justice Hembroff’s objections notwithstanding, Justice Coté’s decision concerning “actual financial loss” was enunciated sufficiently clearly that most lower courts will find they are forced to conclude that estates do have a cause of action for general damages – it is only the measure of damages (to be discussed in the next issue of this newsletter) which remains uncertain.

A similar conclusion must be reached with respect to the treatment of beneficiaries of the estate of a deceased who are not also dependents. Here, Justice Coté was also clear, that the estate’s claim is to survive.

The decision in Galand with respect to “windfall gains” was stated much less clearly, however. The only assistance which Justice Coté provided to the trial courts derived from his analogy between the earning capacity of Wayne Gretzky and that of an “income-producing machine;” and from his decision that a loss of earning capacity could be considered to be an actual financial loss.

Two conclusions seem possible from this ruling. The first is that compensation is to be awarded only in those cases in which the deceased had a well-established earnings stream. The second is that compensation is to be awarded in all cases in which it can be shown, on balance of probabilities, that the deceased would have been a productive member of society. (Justice Coté’s decision concerning actual financial damages would appear to preclude the conclusion that damages are never to be awarded.)

Of these possible interpretations, Justice Coté appears to prefer the former. The examples which he provides in support of his conclusion that a loss of earnings is an actual financial loss all concern situations in which the individual’s earning capacity was well established – see his examples concerning tenured professors and Wayne Gretzky. Furthermore, his apparent reluctance to award damages “…in the case of the death of young children without a job or other source of income…” (at 407) could reasonably be interpreted to result from the difficulty of calculating such damages.

To conclude, it appears that the estate will be able to claim damages for loss of earnings when the deceased had a well-established earnings stream. It is not yet known, however, where the line will be drawn between these cases and those in which no clear earnings pattern has been established. The Court will have an opportunity to clarify this issue later this year when it is scheduled to hear an appeal of Duncan.

Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).

Spring 1996 issue of the Expert Witness newsletter (volume 1, issue 1)

Posted on March 1, 1996February 25, 2017 By economica

Shortened Life Expectency: The “Lost Years” Calculation
- by Scott Beesley
- In this article Scott Beesley analyses the impact which a reduced life expectancy has on the plaintiff’s claim for loss of future earnings – the “lost years deduction.” In a future issue, this discussion will be extended to the calculation of losses in fatal accident actions in which the deceased has left no dependents – following from the Alberta decisions in Galand and Duncan.
The Annuity Solution to Fund Cost of Future Care
- by Heber G. Smith
- In this article Heber Smith provides the first in a series of articles concerning the intricacies of structured settlements. His article addresses such topics as annuity titles and rights, the specifics of structured settlement annuities, new developments in structured settlements and the creative use of annuities in remediating personal loss actions.
What is a “Discount Rate”?
- by Christopher Bruce
- In this article Christopher Bruce provides a simple introduction to a concept which litigators must use every day – the discount rate, or “real rate of interest.” This article is the first in a series which will discuss the underlying concepts employed in the derivation of the lump sum values of future streams of losses.
Loss of Earnings for Wrongful Confinement and Wrongful Sterilization: The Case of Leilani Muir
- by Christopher Bruce
- In this article Christopher Bruce offers a brief comment on the case Muir v. Alberta, in which damages were awarded to the plaintiff because she was wrongfully confined in a home for the mentally defective and was wrongfully sterilized. However, the court denied her loss of earnings claim.
Do Sons Follow their Fathers?
- by Christopher Bruce
- In this article Christopher Bruce offers a brief comment on the link between a father’s earnings and his son’s.

Do Sons Follow their Fathers?

Posted on March 1, 1996March 23, 2017 By economica

by Christopher Bruce

This article first appeared in the spring 1996 issue of the Expert Witness.

The forecasting of lost earning capacity becomes particularly difficult when it is a child who has been injured. In the absence of clear evidence to the contrary, the courts will generally assume that the child would have followed a course similar to that of his or her parents. A recent study provides evidence concerning the validity of this assumption.

Corak and Heisz (in Canadian Business Economics, Fall 1995) showed that the incomes of fathers were only weakly correlated with the incomes of their sons. For example, males whose fathers’ incomes were in the middle third of the income distribution were only slightly more likely to be in the middle third themselves than they were to be in the top or bottom third.

Nevertheless, having a father in the top 20 percent of the income distribution did impart an appreciable advantage. Thirty percent of the sons whose fathers were in that portion of the income distribution rose to that level themselves; whereas only 12 percent of the sons whose fathers were in the bottom 20 percent of the distribution rose to the top 20 percent.

On average, having a father in the top 20 percent of the income distribution increased a son’s income by 15 percent compared to sons whose fathers were in the middle of the distribution; and having a father in the middle 20 percent of the income distribution increased a son’s income by 15 percent compared to sons whose fathers were in the bottom 20 percent of the distribution.

In short, his father’s income appeared to have a significant influence on a boy’s income only if the father was either rich or poor. This finding is consistent with the observation from other Statistics Canada studies that there is a strong correlation between the educational levels of children and of their parents. The reason for this is that incomes do not vary strongly among educational levels except at high and low educational levels. For the majority of individuals, education has only a weak effect on income. It is only when education falls into the lowest levels that income drops significantly; and it is only when education rises to the university level that income rises significantly.

Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).

Loss of Earnings for Wrongful Confinement and Wrongful Sterilization: The Case of Leilani Muir

Posted on March 1, 1996March 23, 2017 By economica

by Christopher Bruce

This article first appeared in the spring 1996 issue of the Expert Witness.

In Muir v. Alberta damages were awarded to the plaintiff on two grounds: first, that she was wrongfully confined, at the age of 10, in a home for the mentally defective; and, second, that while so confined, she was wrongfully sterilized. On the first of these claims, she was awarded $250,000 plus $115,500 interest for pain and suffering but was denied both aggravated damages and damages for loss of income. On the second claim, she was awarded $250,280 for pain and suffering and $125,000 for aggravated damages but was denied punitive damages.

Madam Justice Veit denied the claim for loss of earnings primarily on the ground that Ms. Muir had come from a dysfunctional family, leading her to suffer from severe emotional problems prior to her wrongful confinement. The confinement itself was found not to have exacerbated these problems.

Does this imply that all individuals in Ms. Muir’s situation will be denied damages for loss of earnings? We think not. Three sources of claims for lost earnings appear to have survived the decision in Muir.

First, if the plaintiff did not come from a dysfunctional family, a claim for loss of earnings could arise from the wrongful confinement.
Second, it might be argued that, had the plaintiff been placed in a foster home or group home for the care of emotionally disturbed children (possibilities which were canvassed by Madam Justice Veit), she would have overcome the effects of her dysfunctional upbringing. Hence, a loss of earnings would have arisen from the government’s failure to take advantage of one of these alternatives.
Finally, it is possible that a claim for loss of earnings could arise from the action for wrongful sterilization. Madam Justice Veit concluded that the “…sterilization had a catastrophic impact on Ms. Muir.” (Emphasis added, p. 59) She also accepted a psychologist’s opinion that sterilization can have “profound detrimental effects on … education…” (p. 46) and a psychiatrist’s testimony that the impact of sterilization on “…a young woman … would be hard to over-estimate.” (p. 38) On these bases, it could be argued that a wrongful sterilization had impaired the capacity to earn income.

Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).

What is a “Discount Rate”?

Posted on March 1, 1996March 23, 2017 By economica

by Christopher Bruce

This article first appeared in the spring 1996 issue of the Expert Witness.

Alberta is one of only four provinces in which the discount rate is not mandated. As I argued in Ontario’s 2 1/2% Solution (Canadian Bar Review, December 1982) this means that we are able to react much more flexibly to changes in the economic situation than are the six provinces whose rates are set by a central authority. Indeed, the superiority of Alberta’s approach is seen in the fact that whereas interest rates have varied significantly over the last 15 years, not one of the provinces with mandated rates has adjusted that rate.

Nevertheless, the lack of a mandated rate does carry the drawback that an onus is placed both on financial expert witnesses and on counsel to understand how the discount rate is determined and to identify whether economic forces have changed in such a way as to make previous assumptions about that rate obsolete. The purpose of this article will be to provide a basic explanation of what the discount rate is and of how it works. In a second article, I identify a number of alternative methods of forecasting the discount rate and use what is generally considered to be the preferred method to identify such a rate for Alberta.

Assume that a plaintiff will require dental work one year from now. If that work was carried out today, it would cost $1,040. The question which faces the legal system is: “How much does the plaintiff have to be compensated today, in order to ensure that he/she will have enough money to pay for this procedure one year from now?” The answer to this question depends, first, upon the effect of the rate of inflation on the cost of the procedure; and, second, upon the rate of interest at which the plaintiff can invest his/her award.

The effect of the rate of inflation is relatively straight forward. If, for example, the cost of dental procedures is expected to increase by 2.5 percent in the next year, this plaintiff will need $1,040 increased by 2.5 percent one year from now. That is, the amount required will be:

$1,040 + (2.5% x $1,040)
= (1.00 x $1,040) + (0.025 x $1,040)
= (1.00 + 0.025) x $1,040
= 1.025 x $1,040
= $1,066

In short, to find the inflated value one year from now, the current value (here, $1,040) is multiplied by 1 plus the rate of inflation (here, 1.025).

The second step is to determine how much has to be paid to the plaintiff today in order to ensure that he /she will have $1,066 one year from now. Assume for this purpose that the rate of interest which plaintiffs can expect to receive on secure investments is 6.6 percent per annum. It is intuitively clear that $1,000 invested at this rate will yield $1,066 (the desired amount) one year from now. Formally, this $1,000 figure, which is called the present discounted value or commuted value of $1,066, can be derived in the following way: Call the present discounted value $P. When $P is invested at 6.6 percent interest, we want it to yield $1,066. Hence,

$P + (6.6% x $P) = (1.00 x $P) + (0.066 x $P)
= (1.00 + 0.066) x $P
= 1.066 x $P
= $1,066

That is, we know that

1.066 x $P = $1,066

Therefore, to find $P, we need only divide both sides of this equation by 1.066, to obtain

$P = ($1,066 / 1.066)
= $1,000

Remembering that the $1,066 figure in this equation was found by increasing the current cost of the dental procedure, $1,040, by the rate of inflation, 2.5 percent, it is now seen that amount which must be paid to the plaintiff today, $P, may be obtained from the formula:

$P = $1040 x (1.025 / 1.066)
= $1,040 x (1.00 / 1.04)
= $1,000

What this set of calculations is intended to show is, first, that $P can be found by multiplying the current cost of the expense to be compensated, here $1,040, by (1 + inflation), here 1.025, divided by (1 + interest), here 1.066. Second, (1.025 divided by 1.066) can be replaced by (1.00 divided by 1.04). This 1.04 figure is known by economists as the real rate of interest or the discount rate. This is the figure which expert witnesses use to determine the present, or lump sum value of a future cost. It is called the real rate of interest because it was calculated by dividing 1.066 by 1.025; that is, (1.025/1.066) = 1.00/(1.066/1.025) = (1.00/1.04). Dividing (1 + interest) by (1 + inflation) in this way has the effect of “netting out” the impact of inflation from the observed, or nominal, interest rate, leaving only that element of interest payments which is independent of inflation – the “real” rate of interest.

Economists and other financial experts have used the real rate of interest to discount future losses because it has been less volatile than the nominal rate of interest. (The nominal rate increases and decreases with the rate of inflation while the underlying real rate remains stable.) Recently, however, the real rate has been almost as variable as the nominal rate. Nevertheless, because the courts have become accustomed to the use of the real rate, the Expert Witness will follow that convention.

Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).

The Annuity Solution to Fund Cost of Future Care

Posted on March 1, 1996March 23, 2017 By economica

by Heber G. Smith

This article first appeared in the spring 1996 issue of the Expert Witness.

Ask any seasoned personal injury litigation professional what the advantages of a structured settlement are and you’re certain to hear that “the periodic payments are tax-free”. While true, there is more, much more to the structured annuity that makes it the preferred settlement vehicle. In order to fully appreciate the structure concept, how ever, it is important to understand the fundamentals of an annuity.

The much maligned annuity truly is a financial performer. A very competitive annuity marketplace has led to rates of return that out-muscle the after-management-fee yield available through a well managed bond portfolio. But the true magic of an annuity is it’s capacity to provide income – when it is needed and in the amounts that are needed. From a personal injury or wrongful death settlement point of view, every payment that is required to be paid, or expected to be paid, will be paid. And at the end of the required period all of the funds will have been fully and purposefully spent; truly a no-waste solution.

Pay Too Much; Solve Too Little

While it may be actuarially correct to remunerate a plaintiff in accordance with the possibility or probability of his (or her) surviving each successive year, does it make sense practically to compensate every cost of future care claimant to the end of the life expectancy table? Furthermore, does it make sense for the claim ant to expend only a portion of the required care cost, thereby permitting the reinvestment of the fund, in order to provide for the remote possibility of his surviving to the end of the life expectancy table? For example; a twenty five year old male has about a 30% chance of not surviving beyond age 70. Actuarially speaking, our 25 year old must spend progressively less of his required cost of care and progressively more must be reinvested to provide for the eventuality that he may survive past age 100, or to the end of the mortality table. If his cost of care at age 70 is $10,000 annually his fund would provide that $7,000 be paid out of the award or settlement and $3,000 must come from another source.

The above is academically fair – at least for a large number of claimants. But what of our single claimant? In order to provide for the possibility of a longer than average life expectancy he must deprive himself of much of his required care, although, depending on when he dies he may be survived by some very happy beneficiaries. If he assumed normal life expectancy, spent fully on his cost of care and outlived the investment, funding for his care would then cease or the family and/or society would pick up the cost.

Typically those who fund the excess are defendant insurers and the beneficiaries are not the claimants, but the estates of the claimants. An annuity can, however, pay fully 100% of the required cost of care every year that he remains alive.

By understanding how an annuity works you will be better prepared to advise your clients how to negotiate a settlement. Let’s look at how an annuity works!

Annuity Terms and Concepts

Annuities Defined

An annuity is an investment vehicle that pays periodic payments consisting of interest and principal until such time as the fund becomes extinguished. In this manner it resembles a mortgage in reverse, where the annuitant assumes the role of the bank and the insurance company the borrower. The annuitant may elect to have the term of the payments set out as a specific period of time (as a specified number of years) or set to some undetermined eventuality (to the death of the annuitant), or a combination thereof.

Term Certain Annuities

The term of the annuity may be for a certain number of years (i.e., 10 years, 25 years, etc.) and the entire fund including principal and interest will be paid out coincident with the final payment. At any given time the value of the annuity may be determined using tables or a spreadsheet that calculate the then present value of the remaining payments.

Life Annuities

The term of a life annuity is the life of the annuitant (or in the case of structured settlement annuities, the measuring life). The last payment that would be made to an annuitant would be the last payment due prior to death. A life annuity provides payments that continue for life, regardless of how long the claimant remains alive. By taking advantage of the annuity issuers capacity to spread the risk of “living too long” amongst many such claimants, not every claimant need provide for the contingency that it may be he who remains alive beyond the end of his appropriate life expectancy.

One of the common criticisms of life annuities is “It’s OK while I’m alive, but on my death the insurance company keeps all of my money”. To some extent that criticism is valid. That is why most annuitants elect a life annuity with a guaranteed period.

Life Annuities with a Guaranteed Period

A guaranteed life annuity overcomes the above criticism in that it contains a provision that guarantees the payments to continue for a minimum number of years and thereafter for so long as the annuitant or measuring life remains alive. Understanding annuity concepts and life expectancy enables the annuity broker to assist the parties in selecting the most advantageous guarantee period to place on the annuity. The existence of family dependents, existing life insurance policies and other assets would have an influence on the determination of the guarantee period.

“Rated-Up” Life Annuities

To successfully lead evidence at trial that a significant diminution in life expectancy may be ascribed to a given plaintiff may be difficult. Without the most compelling evidence a caring judge might be very reluctant to rule that the unfortunate victim before him was certainly going to die at some date much earlier than normal life expectancy.

An annuity issuer on the other hand is not faced with the onerous task of ruling on the future economic well being of a plaintiff and can easily categorize a given accident victim’s injuries and ascribe a life expectancy assessment within which that individual may be grouped. Whether he lived too long or died too soon would not be of concern to the insurer since it need only be concerned with averages. As a result, annuity issuers often attribute a much more pessimistic life expectancy than do the medical experts or the courts. The outcome is simple; less years to pay = lower cost.

The fact that major annuity issuers compete fiercely with one-another further enhances the defendant’s opportunity to purchase an annuity priced on the basis of the most pessimistic assumptions.

Indexed Annuities

Some annuities provide increases each year, typically to offset inflation. These are referred to as indexed annuities. The indexing rates normally vary from 2 to 4 percent annually and it is possible to purchase annuities indexed to the actual rate of inflation. To provide increased payments in the later years the issuer holds back a portion of what otherwise would be paid to the annuitant and reinvests it.

Misunderstanding can often arise with respect to assessing the rate of return on indexed annuities. The rates of return on level annuities are relatively easy to estimate but not so easy on indexed annuities. While level annuities may generate higher incomes in the early years, inflation erodes the purchasing power of future income which make level annuities inappropriate for long term solutions.

Shortened Life Expectency: The “Lost Years” Calculation

Posted on March 1, 1996March 23, 2017 By economica

by Scott Beesley

This article first appeared in the spring 1996 issue of the Expert Witness.

It is not uncommon for a plaintiff’s injuries to have reduced his or her life expectancy sufficiently that he/she is now expected to die before the “normal” retirement age. In such cases, the court will be forced to determine compensation for the income which the individual would have earned between the (reduced) age of death and the (former) age of retirement. A number of recent Canadian cases have wrestled with this issue. The purpose of this article is to offer a rationale for the calculation of compensation in these cases; and to compare that rationale with the methods adopted by the courts.

A Rationale for the “Lost Years” Calculation

Assume that a 45-year old woman has suffered an injury which will reduce her life expectancy such that she is now expected to die at age 52. Had she not been injured, she would have worked to age 62, earning $30,000 per year. The defendant might argue that, as she will not live beyond age 52, the plaintiff will not need to be “compensated” during those lost years. The plaintiff might be expected to respond that, as the defendant has denied the plaintiff the opportunity to earn income from ages 52 to 62, restitutio would require that she be compensated for the entire value of her foregone income during that period in this case, a lump sum value of approximately $180,000.

Although both arguments have merit, both are flawed. The defendant’s argument ignores the fact that the plaintiff has lost the opportunity to enjoy the income which she would have earned between 52 and 62. The plaintiff’s argument, on the other hand, ignores the fact that the plaintiff would not have “enjoyed” the full value of her income had she lived. Some portion of that income would have been used simply to keep her alive. Now that her life expectancy has been shortened, she has “saved” this amount.

These considerations suggest an approach to the calculation of the plaintiff’s damages for reduced life expectancy. In each year in which the plaintiff would have lived, but will not now, calculate the dollar cost of “necessities,” that is, of the amount which would have been required to keep her alive. Deduct this amount from the plaintiff’s income in each of those years. The remainder is the amount which would have been available to spend on “pleasure” and which has now been lost. It is this loss which is to be compensated.

The appeal of this approach is that it gives the plaintiff an amount which she could, in principle, use to replace the loss of pleasure which she has suffered due to the reduction in her life expectancy. That is, the level of compensation calculated using this approach is truly restitutionary, as the common law requires.

The primary difficulty which arises when applying this approach concerns the measurement of the value of “necessities.” A popular method is to approximate this figure using the average family’s expenditures on such categories as food, clothing, shelter, and transportation. Typically, these expenditures are found to constitute approximately 55 percent of family income. Two problems arise with respect to use of this figure, however. First, it is clear that a significant percentage of the expenditures on each of these categories is for items which would not normally be considered to be necessities. Restaurant meals are included in the food category, for example; as are expenditures on steak and frozen dinners. Similarly, the clothing category commonly includes expenditures on items which few of us would consider to be truly “necessary.” Instead, much of the 55 percent figure identified above is devoted to expenditures which provide the individual with “pleasure.” If it is the loss of expenditures on pleasure items which is to be compensated, those elements of food, clothing, shelter, and transportation which provide pleasure should not be deducted from the plaintiff’s damages.

Second, if the plaintiff is a member of a family, not all of her income would have been spent on herself. Indeed, we know from fatal accident litigation that the total amount which most individuals spend on goods and services which benefit them alone is approximately 30 percent of after-tax income. As only some portion of that percentage is spent on necessities, the deduction for personal necessities may be as little as 10 – 15 percent.

These arguments suggest that it would be preferable to employ a technique which measured the cost of necessities directly. Fortunately, in Canada such a technique is readily available. Christopher Sarlo, in his book Poverty in Canada (The Fraser Institute: Vancouver, 1992) and in a subsequent article, “Poverty Update” (Fraser Forum, January 1996, 25-31) has undertaken a detailed analysis of the cost of maintaining long term physical well-being. For able-bodied individuals, he proposes to include in the list of required items “….a nutritious diet, shelter, clothing, personal hygiene needs, health care, transportation and telephone.” (Poverty in Canada, p.49) Wherever possible, he uses objective criteria to determine the required amounts and to price those amounts. For example, he bases his estimate of food requirements on the Canada Food Guide and his shelter and clothing requirements on recommendations developed by the Montreal Diet Dispensary (a Montreal social services agency). His 1995 estimates of the cost of necessities for families of one, two, and three individuals in each of Saskatchewan, Alberta, and British Columbia are presented in Table A. It is Sarlo’s figures which we believe most accurately measure the concept of “necessity” implied in the lost years calculation.

TABLE A – Annual Costs of Necessities by Family Size and Province: 1995
Province	Family Size
Province	1	2	3
Saskatchewan	$ 5,948	$ 9,093	$12,086
Alberta	6,478	9,253	12,241
British Columbia	8,108	11,223	15,007

Some have suggested an alternative approach, in which the plaintiff is considered to have “reduced needs” and hence will not require any of the lost income for themselves. Advocates of this method argue that the only compensation payable is that which replaces the plaintiff’s support of dependants. Essentially all other uses of income are considered “personal living expenditures.” This argument certainly protects dependants, but leaves plaintiffs completely uncompensated for their loss of pleasure in spending income which would have been earned in the lost years. Consider a thirty year-old plaintiff who is expected to die at 45. There are many ways in which such a person could enhance their remaining years of life by spending money awarded as compensation for “lost years” income. The defendant has already taken perhaps 30 years of the plaintiff’s life. To suggest that there should be no compensation for all the income and pleasure lost is, we submit, unreasonable.

Those arguing for the “dependants-only” approach admit that in principle, an aware plaintiff could use awarded monies to enhance their life in the time left to them, yet they do not support any such award. It is hinted that such awards are somehow undeserved, unless the plaintiff spends the money on foster children (in lieu of those they cannot now have) or another worthy charity. Even then, it is claimed that those making awards should be aware that they are draining the defendant’s bank account or the liability insurance pool. I submit that it is precisely the function of dam age awards to transfer costs to those who have caused the harm, and in doing so deter whatever reckless behavior resulted in injury. There is also an admission that household services may be a legitimate claim, but that is just another way of protecting dependents from loss.

Note that there are myriad practical difficulties with basing awards on support of dependants and little else. Should the award be based on a hypothetical (statistically likely) pre-accident family, or on the actual post-accident situation? It may be that the plaintiff is still capable of having a relationship and/or children, but has no dependants as of the trial. Any such case would make it difficult to assess lost dependency. If future dependency is assessed in a manner akin to current fatal accident cases, the future income of the spouse will have to be assumed.

Should the courts wish to deduct more than the low percentage implied by our approach, it has been suggested in previous cases that a deduction of 33 to 53 percent is appropriate. A discussion of some cases is provided below. The alternate approach described above, on the other hand, would result in very large deductions, at or near 100 percent in cases where the plaintiff was without dependants.

Recent Court Decisions

Four court cases, all from British Columbia, have dealt explicitly with the “lost years” deduction in personal injury cases. In the first of these, Bastian v. Mori, (Vancouver Registry No. C876136 [1990] B.C.J. No. 1324) Hood J. relied upon expert evidence to conclude that

….it is appropriate to deduct from the amount ascertained the amount that Danny would have expended on the basic necessities of life while earning that income.

…In any event I am satisfied on the evidence before me that 53% rounded off fairly represents Danny’s “cost of living” which he would have expended while earning his future income from age 30 to age 65 (pp. 53, 58-59, Emphasis added).

In Semenoff et al. v. Kokan et al. (1992) 84 D.L.R. (4th) 76, the British Columbia Court of Appeal was provided with no expert evidence; yet deducted 33 percent for hypothetical living expenses from damages for the lost years. Melvin J. then followed Semenoff in his decision in Sigouin (Guardian in litem of) v Wong (1992) 10 C.C.L.T. (2d) 236, again deducting 33 percent for “living expenses.” Interestingly, however, whereas the court in Semenoff had reduced the lost years deduction because the plaintiff was a married man, the plaintiff in Sigouin was an infant.

Finally, in Toneguzzo-Norvell v. Burnaby Hospital, (1994) 2 W.W.R. 609, the Supreme Court of Canada deducted 50 percent for “personal living expenses” in the case of an infant. Yet it quoted approvingly from Cooper-Stephenson and Saunders (Personal Injury Damages) who had argued that

…the award of damages to a very young child for prospective loss of earnings during the lost years, should reflect only that portion of the entire lifetime earnings which the court estimates would have been saved by the child for his estate, at the end of his pre-accident expectancy. It may result in a very small award… (Toneguzzo at 618. Emphasis added.)

As in both Semenoff and Sigouin, the court in Toneguzzo had only received the benefit of very casual evidence with regard to the cost of personal living expenses. Apparently, the expert’s complete evidence amounted to the following:

Q. …But would you agree that your average person, depending on their in come, would spend something between 50 to 75 percent of their income on necessities, the lower amount being at the higher income levels and the higher percentage being at the lower income levels?

A. It doesn’t as you said, without being too precise, it doesn’t sound like an unreasonable range.

Q. Within your own experience, that 50 to 75 percent sounds roughly correct?

A. Surely. (Toneguzzo-Norvell v. Burnaby Hospital (1993) 73 B.C.L.R. 116 (B.C.C.A.) at 129-130).

It can be concluded from these decisions that the need for a lost years deduction has become accepted by the Canadian courts in personal injury cases. Nevertheless, there is still uncertainty concerning the basis on which that deduction is to be calculated. The courts have said nothing more than that the deduction is to allow for “personal living expenses.” Expanding that definition as a means of limiting awards is in my view unreasonable. The core of the issue is whether or not plaintiffs are compensated for the pleasure they have lost as a result of not being able to spend the income earned in the lost years. I believe that some such compensation should be paid, and that a deduction along the lines of Sarlo’s necessities estimate is correct. However, there has yet to have been a full airing of expert opinion concerning the value of these expenses. Whether such an airing will result in the use of the approach recommended by Sarlo remains to be seen.

Scott Beesley is a consultant with Economica and has a Master of Arts degree (in economics) from the University of British Columbia.

Economica

Assessment of damages in personal injury and fatal accident litigation

Year: 1996

Assessment of damages in personal injury and fatal accident litigation

Contents:

The Opportunity Cost Method

The Replacement Cost Methods

Selection Among Methods

Factors affecting the income tax rate (and the tax gross-up)

Summary

Theoretical Approaches to Calculation of Dependency

a) The sole dependency method

b) The “traditional” cross-dependency method

c) A “revised” cross-dependency method

Three Types of Marriages

Conclusion

Contents:

Mandated Discount Rates

Three Methods for Determining Discount Rates

Forecasting the Discount Rate

Cases in which Claims will be Allowed

Assessment of Damages

Comment

Contents:

Costs

Income versus Capital

Galand Estate v. Stewart

Actual Financial Loss

Windfall Gain

Comment

Contents:

Pay Too Much; Solve Too Little

Annuity Terms and Concepts

Annuities Defined

Term Certain Annuities

Life Annuities

Life Annuities with a Guaranteed Period

“Rated-Up” Life Annuities

Indexed Annuities

A Rationale for the “Lost Years” Calculation

Recent Court Decisions