Month: June 1996

Summer 1996 issue of the Expert Witness newsletter (volume 1, issue 2)

Posted on By economica

Contents:

  • Fatal Accident Cases After Galand
    • by Christopher Bruce
    • In this article Christopher Bruce discusses the theoretical arguments raised by Mr. Justice Coté’s decision that an estate is able to rely on the Survival of Actions Act to sue for a deceased’s loss of earning capacity.
  • Adjusting Claims for Hours Devoted to Household Chores
    • by Derek Aldridge
    • In this article Derek Aldridge reports on evidence which suggests that individuals hired to perform housework may be more productive than most householders. Hence, the number of hours which must be replaced may be less than the number a plaintiff formerly performed.
  • Forecasting the Earning Capacity of Self-Employed Individuals
    • by Denise Froese
    • In this article Denise Froese introduces Statistics Canada’s Small Business Profiles, a source of information concerning the earnings of self-employed business owners.
  • Annuity Concepts (Continued)
    • by Heber G. Smith
    • In this article Heber Smith continues his series on structured settlements with a note concerning the “non-commutable” nature of an annuity.
  • Distinguishing Between Loss of Income and Loss of Earning Capacity: The B.C. Case of Pallos v. I.C.B.C.
    • by Scott Beesley
    • In this article Scott Beesley provides an analysis of the implications of the British Columbia case, Pallos v. I.C.B.C. In Pallos, the B.C. Court of Appeal ruled that although the plaintiff had returned to his former employer, earning as much as he had prior to the accident, his injuries acted to reduce his future “earning capacity.” He was awarded $40,000 on this head of damages. Mr. Beesley shows that the approach adopted in Pallos is an extension of a widely-used concept, “weighted average.”

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

Posted on 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.

leaf

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 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.

leaf

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 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.

leaf

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

Adjusting Claims for Hours Devoted to Household Chores

Posted on 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.)

leaf

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 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.

leaf

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).