Winter 1998 issue of the Expert Witness newsletter (volume 3, issue 4)

Contents:

  • Issues Arising in the Calculation of Damages Under the Survival of Actions Act (Part 1)
    • by Scott Beesley
    • In this article Scott Beesley discusses the issues that arise in the calculation of damages under the Survival of Actions Act. Mr. Beesley addresses the possible size of the “necessities” deduction.
  • Duty of Care
    • by Christopher Bruce
    • In this article, Christopher Bruce continues with the third in his series on the economic analysis of tort law. Dr. Bruce discusses the “duty of care” issues including the economic reasoning behind liabilities in torts.
  • Mitigation vs. Rights in Self-Employed Cases
    • by Scott Beesley
    • In this article, Scott Beesley discusses some interesting points concerning the issue of injured business owners and their future loss of income.

Mitigation vs. Rights in Self-Employed Cases

by Scott Beesley

This article was originally published in the winter 1998 issue of the Expert Witness.

Should an injured person hire a replacement? Sell the business? Lease assets? Or, finally, operate as best they can without a replacement?

We presume that an injured business owner does as well as they can, under the circumstances. Shortly after an injury, it will often be difficult to assess how complete the recovery will be. I would suggest that a plaintiff who has spent 15 years building a business cannot be expected to quickly conclude that a sale is their best option. They may believe that they have a right to continue to operate the business, even if it can be demonstrated that to continue does not minimise the loss. If the court accepts that such a right exists, the loss would be calculated under the presumption that the business will continue to be run by that person indefinitely. Conversely, if the court states that “maximum mitigation” must be pursued, whatever that implies, then each alternative must be assessed to discover which minimises the loss.

In most cases the outcome mixes these alternatives. The pre-trial loss generally allows for good-faith errors, as I believe it should. If the plaintiff did what seemed best, possibly hoping for a recovery that did not occur, then the pre-trial loss calculation uses actual post-accident income, not what should have been generated, as seen with benefit of hindsight. The future loss estimation then presumes that the best possible mitigation will be pursued.

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

Duty of Care

by Christopher Bruce

This article was originally published in the winter 1998 issue of the Expert Witness.

This is the third in a series of articles in which I examine the application of economic reasoning to questions of liability in torts. In the previous two articles, I argued that the principles of tort liability can best be understood if it is assumed that the goal of the courts has been to deter future inefficient behaviour – rather than to compensate victims for past harms.

One corollary of that analysis is that if the threat of tort damages is not the most effective means of preventing a particular type of harm, the courts should refuse to treat the case under the rubric of tort law. In short, one would expect that there would be a “gatekeeper” doctrine in law that would allow the courts to divide the cases appearing before them into two streams: “tort cases” and “not tort cases.”

Economists argue that “duty of care” rules act as this doctrine. That is, to say that a party owes a duty of care is tantamount to saying (i) that any (potentially) negligent behaviour in which the party engages could be deterred by threat of tort damages; and (ii) that tort law is the most efficient technique for deterring any such behaviour. The advantage of viewing duty of care as having this gatekeeping function is that it provides a relatively simple framework in which to understand one of the most complex and misunderstood areas of tort.

Foreseeability

In some cases, it is clear, even before the court has heard evidence concerning the actions of a party, that the threat of tort damages could not have induced that party to change his or her behaviour. The clearest instance of this situation is that in which the party in question could not have foreseen that its actions had the potential to cause an injury.

In the classic Canadian case of Nova Mink v. Trans-Canada Airlines [1951] 2 D.L.R. 241, a low-flying airplane so scared the animals in a commercial mink farm that they ate their young, causing the owner considerable harm. The airline was held to owe no duty of care to the mink farm and, therefore, was not required to pay damages.

This decision is consistent with the view that tort actions are to be allowed only when they can deter harmful behaviour. (And it is strongly inconsistent with the view that the function of tort law is to compensate “deserving” plaintiffs.)

To have ruled in favour of Nova Mink would have established a precedent to the effect that injurers owe a duty even when they cannot foresee the consequences of their actions. Yet when those consequences could not (reasonably) have been foreseen no precautions against such consequences could have been taken. Therefore, any court action in such a situation could have produced no change in the behaviour of the parties. It could only have resulted in a transfer of income from the defendant to the plaintiff, at a great cost (in terms of judicial expenses) to society.

The Misfeasance/Nonfeasance Distinction

Even if the defendant has foreseen the harmful event, he/she will often not be found to owe a duty of care if his/her failure to act is one of nonfeasance rather than misfeasance. If it is the actions of the defendant which create the circumstances in which a third party may be harmed, failure to take precautions to avert that harm is called misfeasance. In that circumstance, the defendant will be held to owe a duty of care. If, however, the defendant has merely observed that a third party may be harmed if a certain precaution is not taken, and has not taken that precaution, that failure to act is termed nonfeasance. In that circumstance, the defendant may be found to owe no duty of care (assuming that he/she did not create the circumstances – i.e. that he/she was not also a misfeasor).

For example, if A knocks down a stop sign and lack of that sign subsequently contributes to the injury of B at that intersection, A may be found to have owed a duty of care to B – and may be found negligent for having failed to report the initial accident. On the other hand, if, after A has knocked over the stop sign, C notes the absence of the sign and fails to report that fact, C will not be found to have owed a duty of care to B.

On economic grounds this distinction initially appears arbitrary. If it is efficient for a person who knocks over a stop sign to report that fact to the authorities, it must also be efficient for an individual who observes that a stop sign has been knocked over to report that fact. How, then, can the difference in legal duty between these two situations be reconciled?

The answer may lie in the relative difficulty of identifying potential defendants. When A has knocked over the stop sign it will be much simpler to identify him as the defendant, ex post, than it will be to so-identify “innocent” passerby C. Whereas there will be only one individual like A (or at least a very limited number of such individuals), who will generally leave evidence of their involvement; there may be a very large number of individuals like C. Furthermore, very few individuals like C will leave any evidence of their presence at the scene. And most, if identified as being present, will be able to deny plausibly any knowledge of the potential harm, or may be able to argue that they thought someone else was attending to the matter. Thus, whereas the pursuit of efficiency may require that the individual whose actions initiate a harmful situation owe a duty to those who are (potentially) harmed, that pursuit may require that some alternative mechanism be employed to induce third parties to offer their assistance.

One such alternative would be to offer third parties incentives to induce involvement, rather than deterrents to prevent non-involvement. That is, the common law might provide a means by which those who performed “good deeds” – benefactors – would be able to force those who benefited from those deeds – beneficiaries – to provide them with rewards. The advantage of this approach, in terms of the analysis of the preceding paragraph, is that the problem of identifying potential benefactors, ex post, would be avoided. Those who observe a (potentially) harmful situation and feel that the benefit of their actions will exceed the costs will present themselves as “rescuers”, that is, they will become involved in the attempt to rectify the harmful situation.

In fact, we observe that if the costs of identifying benefactors are low relative to the benefits of the rescue, the law does operate in this manner. Awards are provided to those who rescue salvage at sea; doctors can charge fees to individuals whom they have rescued from imminent danger; and individuals who have stored lost property can claim for their expenses.1

The preceding analysis also helps to explain why a duty of care is found in one class of (apparent) nonfeasance – that in which it is inexpensive to identify the potential benefactor, ex post. In particular, a duty is often owed in situations in which the nonfeasance occurs on the property of the potential benefactor and in cases in which the benefactor has a pre-existing legal and/or contractual relationship with the beneficiary. For example, a homeowner has a duty to visitors to keep his sidewalks clear of ice; a municipality may have a duty to the users of its roads to ensure that stop signs are erected (and maintained) at dangerous intersections2; and shopkeepers may have a duty to their customers to ensure the safety of their premises. In each case, there is a party who is clearly-identifiable, ex post, who could have acted to protect the plaintiff.

There is also an efficient exception to this exception. Various altruistic groups – usually governments and charities – offer free services that may be interpreted as the provision of warnings concerning potential “harms”. For example, a local government may offer to send out its engineers to check earthen banks to ensure that there is no danger of them becoming unstable.3 Failure to respond to a request to provide these services clearly constitutes a nonfeasance. Yet, although the nonfeasor is easily identified, no duty of care is found. The reason that this ruling may be considered to be efficient is that if the “altruist” is found liable for failing to provide a service, the response of the altruist can be expected to be to withdraw that service. Such an outcome cannot generally be considered to be in society’s best interest.

Conclusion

The economic analysis of torts leads to the suggestion that the function of duty of care rules is to act as a “gatekeeper,” separating tort cases from non-tort cases. If the harmful behaviour of either party could have been deterred through the threat of tort sanctions, (and if such sanctions are the most efficient method for altering that party’s behaviour), the case should be considered to fall within the rubric of tort law. Otherwise, the gatekeeper should redirect the case away from the tort system.

Footnotes

1. For an economic analysis of the laws concerning “rescue”, see W. Landes and R. Posner, “Salvors, Finders, Good Samaritans, and Other Rescuers….,” 7 Journal of Legal Studies (January 1978), pp. 83-128. [Back to text]

2. See Anderson v. County of Ponoka (1980) 12 A.L.R. 320. [Back to text]

3. See Windsor Building Supplies v. Art Harrison Ltd. (1980) 14 C.C.L.T. 129. [Back to text]

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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).

Issues Arising in the Calculation of Damages Under the Survival of Actions Act (Part 1)

by Scott Beesley

This article was originally published in the winter 1998 issue of the Expert Witness.

Note that this article is the first of a two-part article. You will find part 2 here

Under the Fatal Accidents Act, it is only the dependants of the deceased who can claim for loss of income. The recent Alberta Court of Appeal decisions in Galand and Duncan, however, have created the possibility that the Survival of Actions Act may be used to allow the estate to claim for loss of income.

A fundamental debate triggered by this interpretation of the Survival of Actions Act concerns the size of the “lost years” or “necessities” deduction. This concept arises from that class of personal injury cases in which the plaintiff has suffered a reduced life expectancy. In such cases, one portion of the award derives from the income that would have been earned in the years beyond the (now) reduced lifespan, i.e. in the “lost years.” In this calculation, a deduction is made to account for the fact that some expenses will not be incurred, once the plaintiff dies.

This is the original lost years deduction. The net amount left after that deduction represents, in principle, spending from which the plaintiff would have received pleasure or enjoyment. Note that while there is still room for debate about the appropriate size of this deduction (and it seems not to be a settled issue), the rationale for an award is very clear: The plaintiff has been severely injured, such that their expected survival is now reduced, but during their remaining years they can obtain pleasure from an award which replaces some of their lost income.

A fatal accident can be thought of as an event which results in a life expectancy of zero, i.e. as the limiting case of a reduced expectancy. Yet for any significant remaining life expectancy (beyond a few days or weeks?) these situations are fundamentally very different, and there is no reason why the lost years deduction in the two types of cases should be the same. One can only note that the award in a reduced life expectancy case should certainly be at least as large as a deterrence-driven award in an equivalent fatal case.

In the case of Survival of Actions Act claims, the intriguing fact is that the Court of Appeal made its precedent-setting decisions without stating any underlying rationale. Why should a claim continue when no survivors exist? Why should even a reduced claim, with a lost years or necessities deduction applied, continue? The traditional view, which obviously still has many adherents, suggests that indeed it should not continue, since to allow such claims would provide windfall gains to those who would not otherwise have benefited from the earnings of the deceased. The only obvious rationale for the continuance of these estate claims is deterrence and/or punishment, and I believe that does provide a sufficient rationale for such claims.

Each year, thousands die in traffic accidents in Canada, and to that we can add hundreds more in industrial mishaps and other types of accidents. The pain, grief and economic damage done is enormous, as are the health-care costs involved. One might also argue that the present system leaves parents and siblings under compensated for the loss of a family member, since in many cases children assist their relatives, and in particular the deceased might have helped his or her parents as they aged. It seems odd that if one victim had a spouse and three children, and another was single, the amount payable by the defendant’s insurer was (historically) very significant in the former case and negligible in the latter. Yet the negligence involved was the same, the annual income lost was the same, and the economic loss to society (usually a productive worker) was the same. If we wish to deter reckless driving, and careless behaviour in other areas of life, then it appears there should be consistent penalties for similar wrongs. At one extreme of opinion, this would imply virtually the same award in the two cases given, and no necessities deduction at all.

In the alternative, it has been suggested that a very large deduction should apply, with virtually all the projected spending of the deceased being deducted. The arguments advanced for this viewpoint have focussed on the “no windfall gains” argument, either by making that case directly or by citing precedents which in turn rely on that idea. This amounts to implying that deterrence should be only a minor consideration, and that compensation is to be the overriding standard in the determination of any award. This argument is often made by defendants, and the typical conclusion is that only lost savings should be awarded, or equivalently (as noted above), all consumption spending should be deducted. The sum calculated roughly estimates the present value of what the deceased would have left to his or her heirs, had there been any, which is often very little in current dollars.

I am unaware of any article or judgement that argues from first principles why all consumption spending should be excluded. In each case the discussion turns on interpretation of prior judgements with a view to justifying as small an award as is possible. I believe, in fact, that one would be hard pressed to find a rationale which supported any particular scale of deduction, because the balancing of the idea of no windfall gains with that of deterrence is inherently subjective. The extremes are pleasantly clear: Award nothing (deduct it all) if you virulently oppose windfall gains, and award all lost income (deduct nothing) if you want to put all the emphasis on deterrence.

(Like any economist, I should note that theory would say we should somehow tabulate the costs of accidents and the cost of prevention, and minimise overall social costs. But this in itself is extremely difficult, and very sensitive to assumptions which vary with the beliefs of the investigator. Further, minimising social costs would require knowing how people would react to each possible level of deterrence, and we cannot easily predict such behaviour. Finally, the problem cannot be converted to one of mathematics without assessing the intrinsic value of a life, and I for one would argue that lifetime income alone would provide too low a weighting in such a calculation.)

In Duncan, Justice Kerans provided some guidance regarding the size of the deduction, and the ration-ale involved. Note the following statement: “My life-savings would not tell one what I spent during my life on pleasure, as opposed to what I had to spend in connection with the earning of my income”. He referred also to the correct deduction as the “expenses that the victim would have incurred in the course of earning the living we predict he would earn” (emphasis added). The difficulty is that these phrases still leave enormous room for argument. Do they infer that only whatever is required to stay alive is to be deducted, since all other spending produces some pleasure? Perhaps a somewhat higher deduction is implied, assuming that success in a particular career path requires a certain standard of dress and even lifestyle. If Justice Kerans had written “expenses that the victim would have incurred in order to earn the living we predict he would earn,” then, clearly, a relatively minimal deduction would apply. But as written, it is not clear, for example, whether income which would have supported a family in the future is to be viewed primarily as a necessary expense (and deducted) or as something which would have provided pleasure (and should under some interpretations be compensated). Perhaps in another case it will be apparent that the deceased would never have married. Does that then imply much greater spending on him or herself, and again is that spending counted in the award or deducted? It is asking a lot of the courts to assess the marital prospects (and chance of divorce) of each fatal accident victim, if it is found that such considerations should be analysed in every case. Justice Kerans, referring again to the amount of the deduction, noted (in Duncan):

…That sum will vary with the kind of employment, and the state in life of the victim. Neither “poverty-line” expenses nor “lost savings” are a reliable indicator of that sum. Rather, it should be a fair calculation of the likely future cost of lives.

With respect, I note that the second amount Justice Kerans refers to (lost savings) should actually be described as “all expenses except savings,” since that is what is argued for by those who wish to minimise awards. (Most people involved in these cases know the respective positions of those at the extremes of the debate, but the quote as it is may confuse anyone new to the topic, so a clarification seems in order.) The idea that the deduction will vary with the state in life of the victim is at odds with the idea that the deduction reflects necessities, strictly defined, since the latter would not vary with income. If the deduction is to change with income, then should it be a fixed percentage, or some other form of variation? Should any other variables matter? The answer depends entirely on the rationale which is eventually settled upon.

After canvassing a number of alternative methods for calculating this deduction, in Duncan, Justice Kerans settled on an approach which he attributed to Constance Taylor, the plaintiff’s counsel. This method, which Justice Kerans refers to as the “available surplus” approach, was first enunciated in the U.K. Court of Appeal in Harris v. Empress Motors [1983] 3 All E.R. 561 and later adopted in one of the first Canadian cases concerning the “lost years deduction,” Semenoff v. Kokan (1991) 84 D.L.R. (4th) 76. In the latter case, the court concluded that the “conventional deduction” was 33 percent of before-tax income. But Justice Kerans also suggested that the income taxes the deceased would have paid should form part of the deduction, and he concluded:

…Cases suggest a discount of 50% to 70%. My sense of the matter is that this is an apt range. But I suggest that expert evidence could help the judge to assess this cost. The plaintiff actuary here did no calculation. He instead accepted 50% or that “suggested by the cases”. Again, that calculation should include one for tax.

Justice Kerans, then, appears to be suggesting a discount of 50 to 70 percent of before-tax income (i.e. composed of 30 to 40 percent in tax and, presumably, 20 to 30 percent for necessities). Note that for Albertans at average income levels, income tax is lower than Justice Kerans suggested, at approximately 25 percent of gross income. Using a necessities deduction at the midpoint of Justice Kerans’ range, 25 percent, the implied total deduction is 50 percent of before-tax income.

We note also that Justice Kerans explicitly rejected an approach which awards only lost savings, stating:

…The flaw in the “lost savings” approach is that it is heir-centred, not victim-centred. It asks what the heirs lost, not what the victim lost. But the suit here is not for the loss to the estate, it is a suit by the victim for his loss, a claim that by operation of statute survives his death and can be made by his estate for him. Worse, it has the air about it of an attempt to undermine the statute. As a result of this flaw, the approach will fail to take into account what has been called “discretionary” spending, like holidays and entertainment and other “treats”. It will also fail to take into account gifts to children and spouses, and thereby underestimate even an heir-centred award.

Finally, if it is eventually decided that only savings will be awarded in these cases, it should be realised that an accurate definition of savings should include the principal component of mortgage payments, as well as financial and capital asset accumulation. We note that the Harris decision cites another English case, Sullivan v West Yorkshire Passenger Transport Executive, which used a savings-only award but (in my view correctly) included mortgage principal payments in assessing the relevant percentage.

Case Review

I cited earlier a quote from Duncan in which Justice Kerans implied that spending which would have provided pleasure is to be compensated. Assuming that expenditures which are necessary for the maintenance of life do not provide “pleasure,” restitution implies that compensation is to be provided only for that portion of income which remains after the deduction of necessities. A clear statement of this principle is found in Toneguzzo-Norvell v. Burnaby Hospital [1994] 1 S.C.R. 114 where Madam Justice McLachlin concluded at page 127:

…There can be no capacity to earn without a life. The maintenance of that life requires expenditure for personal living expenses. Hence the earnings which the award represents are conditional upon personal living expenses having been incurred. It follows that such expenses may appropriately be deducted from the award.

The deduction used in Toneguzzo was 50 percent of before-tax income, a figure confirmed by the Supreme Court of Canada.

I note that the dispute would not be resolved by any clearer statement that pleasure is to be compensated, while necessities are not, since the line between the two is subjective. Is one car a necessity, a pure luxury beyond transit, or something in between? How much of spending on food provides pleasure? Housing? And so on through virtually all common purchases. Only a few luxury items, gifts, expensive vacations etc. seem to clearly have no necessities component, while conversely almost every ordinary expense for an average income person contains an element of pleasure (i.e. a component of cost which is the excess over the “necessities-only” equivalent). In defending a large deduction, what is implied is that either there is no pleasurable component in ordinary spending, or (and this seems to be the case) that pleasure lost is not what is being compensated. What is being replaced, according to Duncan, is what would have been the deceased’s “available surplus.” As mentioned above, Justice Kerans suggested that a 50 to 70 percent total deduction seemed correct, and after adjusting for his slight overestimation of tax, a 40 to 60 percent range results. The implied surplus is the remaining amount, roughly “60 to 40” percent, of before-tax income. Alternatively, one can deduct estimated tax and then deduct another 20 to 30 percent of before tax-income for necessities. We can compare the roughly 50 percent (from before-tax) deduction implied in Duncan with the figures cited in other cases (below).

A March 20, 1997 judgement from the Alberta Court of Queen’s Bench, in the case Brown v. The University of Alberta Hospital, concluded that the 50 percent deduction of Toneguzzo was not a strict precedent but instead a rough guideline, to be altered as evidence suggested in each case. Mr. Justice Marceau wrote:

…Having rejected the lost savings approach, I turn now to determine the proper deduction that should be made for personal living expenses. In this regard, it is significant that all four of the post-Toneguzzo decisions find that the latter does not stand for the proposition that a 50% deduction must be made; rather, the cases all take the position that the proper deduction must be assessed on a case-by-case basis.

Mr. Justice Marceau went on to cite an Ontario case, Dubé v. Penlon Ltd., in which a 33 percent lost years deduction had been applied under circumstances similar to those in the case he was judging, and he referred to that deduction as “conventional.” We note that the deductions in Toneguzzo and Dubé were from before-tax income, implying that the deductions from after-tax income were quite modest, along the lines of 15 to 35 percent.

Note that a 50 percent deduction from before-tax income is consistent with the decisions in Andrews v Grand & Toy Alberta Ltd., [1978] 2 S.C.R. 229, Harris, Toneguzzo, Bastian v Mori [1990; BCSC], and an Ontario case, Duncan v Kemp [1991]. The 33 percent deduction from before-tax income was used in Semenoff, Dubé and Brown.

Expert Evidence

In Brown v. The University of Alberta Hospital, Justice Marceau noted that a 33 percent lost years deduction is “conventional,” but he also stated, “the proper deduction must be assessed on a case-by-case basis.” In Duncan Estate v. Baddeley, Justice Kerans suggested, “expert evidence could help the judge to assess this cost.” Also, he noted, “the plaintiff actuary here did no calculation.”

To determine the appropriate lost years deduction, a calculation must be made of the amount of income that is necessary to maintain the person at a reasonable standard of living. Note that this does not suggest that one can simply add together a person’s expenditures on traditional “necessity” items such as food, clothing, and shelter; then conclude that this is the amount required to maintain a reasonable standard of living; then claim that it is therefore an appropriate lost years deduction. What this approach fails to recognise is that a significant percentage of Canadians’ expenditures on these items provide pleasure.

For example, whereas Canadian families earning $20,000 spend approximately 19 percent, or $3,800, of their incomes on food, families earning $50,000 spend approximately 15 percent, or $7,500, on that category. Any claim that all expenditures on food are “necessary” suggests that none of the extra $3,700 spent by high income families provide pleasure. Clearly this is not the case. When families’ incomes rise from $20,000 to $50,000 they do not “need” additional food. Instead, they increase their expenditures on “non-essential” items. Similar arguments can be made with respect to shelter, clothing and transportation.

Recognizing that, in our view, “basic necessities” (and therefore, the lost years deduction) do not vary with income, the question remains: how are they to be measured objectively? Fortunately, an economics professor, Christopher Sarlo, has calculated detailed measures of the “personal expenses required for the maintenance of life” for families of various sizes in different regions of Canada. He defines an expenditure to be “necessary” if it is

…required to maintain long term physical well-being. For able-bodied persons, the list would consist of a nutritious diet, shelter, clothing, personal hygiene needs, health care, transportation, and telephone. . . . It is assumed that the type and quality of each item . . . is at least at the minimum acceptable standard within the community in which one resides. (Sarlo 1992, page 49)

The above definition coincides extremely closely with the use of the phrases “basic necessities” and “. . . expenditures necessary to earn . . . income” used by the courts. Therefore, the estimates which he provides can act, we submit, as objective measures of those concepts.

In Alberta, Sarlo found that, in 1994, a single person could meet his or her needs with approximately $6,351 per year (approximately $6,964 in 1999 dollars). This implies that if an individual’s after-tax income would have been $20,000 per year during the lost years, 34.38 percent would have been spent on necessities; whereas if the individual’s after-tax income would have been $50,000, only 13.75 percent would have been spent on those items. The remainder – 65.62 percent in the first case and 86.25 percent in the second – would have been available to purchase goods and services which have provided pleasure. It is this amount which has been lost to the estate, if it is assumed that it is a loss of pleasure which is to be compensated.

In light of the above information, a smaller deduction, on the order of 20 percent of after-tax income, could be supported. As noted above, this lower deduction finds support in Semenoff, Dubé and Brown, each of which used 33 percent from before-tax income as the entire deduction. Justice Kerans’ comments, as noted earlier, imply that a deduction of 20 to 30 of before-tax income should be made for necessities, in addition to the deduction of income tax itself. Given average earnings of approximately $40,000, the implied necessities deduction of $10,000 (25 percent of pre-tax) is noted to equal 33 percent of the $30,000 in after-tax income. (Coincidentally, the tax and necessities components of the overall deduction are equal at roughly $10,000, given an average person’s income and following the percentages suggested in Duncan.) The figure of 33 percent is therefore the after-tax “necessities” fraction which, when combined with tax on an average income, produces an overall deduction of 50 percent of before-tax income, as used in Toneguzzo and closely matched in Harris, Andrews, Bastian and Duncan v. Kemp. Finally, it is possible that the courts may wish to use a larger necessities percentage, such as a deduction of 40 percent of after-tax income. In our recent cases, we have therefore used an annual deduction which ranges from 20 to 40 percent of after-tax income, as well as providing the figure at 33 percent.

One final comment regarding the previous cases is in order. The cases cited generally involve either a reduced life expectancy or the existence of dependants. In the former event, we noted earlier that a reduced life expectancy case is fundamentally different from one in which the person is dead. The injured party can at least enjoy any funds awarded for their remaining lifetime. When actual (as in Harris) or hypothetical (as in Semenoff) dependants are involved, some courts have considered funds which support a family to be eligible under the Survival of Actions Act, (SAA), while other decisions treat all such funds as part of the deduction.

This question is the source of a good part of the uncertainty in these estate claims. In a case which actually has dependants, this difference is not too important, since the family support in question is going to be paid under a dependency claim. It is in cases such as Duncan itself that this issue is important should income (or much of it) which would have gone to a hypothetical family for support be awarded under the SAA, on the grounds that it would have provided pleasure to the deceased? Or, in the alternative, should such income be deducted, on the grounds that as a necessity or obligation, it would not have been part of available surplus, however defined? Semenoff, for one, analysed a severely injured, newly married man as if he would have had two children, and deducted 25 percent which he would have spent on himself only, plus a further 8 percent, representing roughly ¼ of common expenses of 33 percent. Note that the implication is that a large majority (a fraction of 67/75) of the funds that the deceased would have spent on his wife and children was awarded, even though no children will ever exist. But Semenoff was a reduced expectancy case, not a case exactly like Duncan, so it is not clear what sort of precedent it sets.

Though I cannot claim to have searched for all relevant prior cases, the examples commonly cited during the debate on this issue are remarkable in that no cited case appears to match the circumstances of Duncan. That is, there are no precedents which address the question of what is a reasonable estate award in the case of an unmarried person who has died immediately as a consequence of an accident, and why that award is reasonable.

It is intriguing that this discussion has continued with repeated references to cases which are so different from the “pure” estate claim Duncan represents. I would suggest that, ideally, the legislature should address this issue from first principles, and resolve the conflict between compensation and deterrence.

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In our next issue, I will discuss the methodology of these calculations and the issue of dual claims under the Survival of Actions and Fatal Accidents Acts.

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

Autumn 1998 issue of the Expert Witness newsletter (volume 3, issue 3)

Contents:

  • The Economics of Negligence Rules
    • by Christopher Bruce
    • As a continuation of his series, Christopher Bruce expands on the use of economic analysis in tort law. He argues the economic approach can also be used to cast light on the development of the tort rules of negligence.
  • Using Industry Growth Rates to Update Census Occupational Earnings Figures
    • by Kris Aksomitis
    • In this article Kris Aksomitis discusses the method used to adjust average income figures derived from the Census from past dollars to today’s dollars. He compares average incomes taken from the 1996 Census with adjusted figures from the 1991 Census to illustrate the accuracy of these adjustments.
  • Drawbacks to the Use of “Preliminary” Estimates
    • by Thomas R. Ireland
    • In this article, Dr. Thomas Ireland explains, in letter format, the dangers of relying on preliminary estimates. Dr. Ireland is a well-known economist and is involved in the assessment of personal injury damages.
  • Timing, Turning Bad into Good
    • by Heber G. Smith
    • In this article Heber Smith sheds light on how to survive the markets with global events such as the Asian Crisis and the Russian meltdown. This article is of particular interest to holders of structured settlements.
  • The MacCabe Judgment: Allowing the Use of Earnings Statistics for Males When Estimating the Future Income of a Female
    • by Derek Aldridge
    • In this article, Derek Aldridge explains how the MacCabe judgment is important from the economist’s view. What does the judgment imply about future cases involving injured or deceased females? There are many questions unanswered.

The MacCabe Judgment: Allowing the Use of Earnings Statistics for Males When Estimating the Future Income of a Female

by Derek Aldridge

This article was originally published in the autumn 1998 issue of the Expert Witness.

On October 5, the Alberta court released its decision in the case of MacCabe v. Westlock RCSSD #110 et al (action: 9303 05787). The judgment is important for many reasons, though the most important aspect from an economist’s point-of-view is that it recommended the use of male earnings statistics to estimate the future earnings potential of a female. In particular, it was found that Ms. MacCabe would have followed a career path similar to that of the average male. That is, the court concluded that she would not have taken significant amounts of time out of the workforce for child rearing, and she would not have worked part-time. Therefore, it found that earnings statistics for males should be used to predict what her income would have been.

Some of the most important sections from the decision (related to the male/female income statistics issue) are reproduced here:

[para468] Clearly the evidence establishes that the exceptional individual characteristics of the Plaintiff are such that her abilities would have commanded the equivalent salary of her male counterparts. She would have established a strong attachment to her career. The use of male wage tables is justified. In any event, I am of the view that any award which I grant to the Plaintiff should not and cannot be solely determined by her gender.

[para469] It is entirely inappropriate that any assessment I make continues to reflect historic wage inequities. I cannot agree more with Chief Justice McEachern . . . in Tucker, supra, that the
courts must ensure as much as possible that the appropriate weight be given to societal trends in the labour market in order that the future loss of income properly reflects future circumstances. Where we differ is that I will not sanction the “reality” of pay inequity. The societal trend is and must embrace pay equity given our fundamental right to equality which is entrenched in the constitution. . . .

[para470]  . . . The Court cannot
sanction future forecasting if it perpetuates the historic wage disparity between men and women. Accordingly, if there is a disparity between the male and female statistics in the employment category I have determined for the Plaintiff the male statistics shall be used, subject to the relevant contingencies. . . .

[para481]  I agree with Dr. Bruce that absent
the accident, the Plaintiff would have been committed to her career and there would not have been a significant withdrawal from the labour force. . . .

So what does this imply about future cases involving injured or deceased females? It seems clear to us that if it is accepted that a young female would have followed a career path similar to that of the average male (in which she works full-time and does not take significant amounts of time out of the workforce for child rearing), then it follows that income statistics for males should be used to estimate her pre-accident income. (We discussed this issue in the Autumn 1997 issue of the Expert Witness.)

But what if it is found that a young woman would have followed a traditional female career path? In this case we suggest that using income statistics for females will still probably underestimate the true income path, but using those statistics for males will probably overestimate the true income. The reality likely lies somewhere in between the two alternatives. However, the MacCabe judgment appears to leave open the possibility that earnings statistics for males could be used even for female plaintiffs who would have followed “traditional” female career paths. It may be the case that the courts will choose to apply earnings statistics for males, regardless of the evidence about the woman’s likely career path – as a sort of “social justice” choice (Recall paragraph 469 of MacCabe: “I will not sanction the ‘reality’ of pay inequity.”)

However, the same argument could possibly apply to other situations in which a certain group of people earn less, on average, than the average male. For example, it is well-known that, on average, Natives earn less than non-Natives. From the MacCabe decision it may follow that one should use average income statistics for males to estimate the potential income of a young Native male (or female), with no adjustment to account for the reality that the average Native earns less than average non-Native. Conversely, perhaps the defense could argue that a person who has been disfigured in an accident should not be compensated for the “appearance-discrimination” component of his loss of income because that would be an endorsement of the “reality” of discrimination. If the court chooses to correct for the reality of pay inequity, then this could raise some difficult issues for those of us involved in loss of income cases.

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

Timing, Turning Bad into Good

by Heber G. Smith

This article was originally published in the autumn 1998 issue of the Expert Witness.

In the past, my financial advisors were quick to remind me how splendidly they were handling my finances. More recently, however, they are somewhat sheepish discussing the more than modest shrinkage in my meager retirement assets, referring to such world events such as the Asian Crisis and the Russian meltdown as possible causes.

Upon closer scrutiny, I discovered what may have been long apparent to investors more skilled than I — that portfolio performance isn’t always a function of management but of timing. During a bull market, most equity positions increase in value but during bear markets, the converse is usually true. To make matters worse, an investor who is dependent on a market-based portfolio for needed income, will find that the concept of dollar cost averaging works against him/her when withdrawing regular fixed dollar sums from equity portfolios during a bear market. The timing of such sells to satisfy fixed income requirements dictates that, on average, more assets are sold low than are sold high. In order, therefore, to enable a personal injury client to reap the income required for the settlement duration, we suggest that an action settled during the early stages of a bull market is best. Consider the following chart (below left), which illustrates regular withdrawals of $1,200 per month adjusted for a 25% tax rate when $250,000 is invested in the TSE 300 in the fall of 1992. The result is an increasing portfolio value.

Figure 1

Figure 2

* An assumption of stock market cyclicity of 6 years was used so that the same TSE 300 data repeated every 6 years leaving the starting time as the differentiating variable.

Conversely, a different picture appears if the same $1,200 per month adjusted for tax is withdrawn from the same sized portfolio beginning in the spring of 1998 (above right). Under this scenario, the personal injury claimant has the added anxiety of wondering whether his funds may dissipate before their specified time. Unfortunately for the claimant, a personal injury settlement date is not dependent and timed for receipt according to stock market investment cycles.

Hope in the ability to time markets need not be as critical a factor. By using a combination of a structured settlement and dollar cost average purchases in the TSE 300, one can reduce risk and, during volatile markets, virtually assure an increase in settlement withdrawal periods.

Consider providing for a claimant’s income requirements via a structured settlement for the first 16 years and the purchase of a second annuity to support the dollar cost average purchases in the TSE 300 over the same period. The following graph depicts the value of the investment fund at the end of the 16 years when purchased in the spring of 1998 in comparison to the value of the investment fund purchased by using an annuity and dollar cost averaging over the same period.

Figure 3

So what makes it all work? It is the combination of financial planning tools; diversification and risk reduction that go a long way to turn what could be bad timing into good (or at least better timing). But the biggest factor is the imputed contribution made to the settlement by Revenue Canada Taxation in the way of tax forgiveness on the interest element of the annuity contract supporting the settlement. In combination, the above enables a claimant to grow the investment fund prior to withdrawals thereby increasing the number of payment periods and reducing anxiety due to dissipating funds.

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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.

Drawbacks to the Use of “Preliminary” Estimates

by Thomas R. Ireland

This article was originally published in the autumn 1998 issue of the Expert Witness.

In a recent posting to an e-mail service for economists who act as expert witnesses, Thomas Ireland, a well-known American economist, wrote about an issue that usually receives little attention — the dangers of relying on preliminary estimates. Although we do not agree with all of Dr. Ireland’s conclusions, we feel that many of the points he raises are of sufficient interest to be reported here. Accordingly, we reprint the following letter, with Dr. Ireland’s permission.

Fairly recently, I sent a letter to an attorney who had requested that I avoid producing any report except the final report of my opinions. This involved a situation in which I was asked to prepare preliminary estimates, but might not be asked to finalize my reports until several months later. It occurred to me that the text of this letter might be of interest to fellow practitioners.

Dear Attorney:

The purpose of this letter is to explain why I feel that I need to develop preliminary reports. I write my reports in the form of a letter addressed to an employing attorney unless asked to use a different format. In a very real sense, however, I write them to myself as well. This is for three reasons. First, in developing most reports, I must make a number of very small decisions that do not have a large impact on my damage assessments, but are things I need to remember at depositions and at trials. In my tables, is “age” shown as the plaintiff’s age at the start of the year, or on his birthday during the year? What issue of USFinancial Data was the source of my discount rate? How did I annualize the earnings figure in the year of injury? And so forth. If I am preparing a preliminary table, I need this kind of information if I pick up the file three months later and am trying to figure out exactly what I did to produce the exact numbers in my tables.

Second, my reports are not full of fluff that is designed to make it look like I did more work than I did (like many other economist reports that I see). They are simple narratives explaining what I was asked to do, what assumptions I was asked to make, what materials I was given to prepare, what I took from those materials, what additional assumptions I made, what my opinions are and how my tables work to produce those opinions. In effect, as I am writing the narrative parts of my report, I am subjecting my calculations to a step by step logical consideration of whether I have performed those steps correctly. I find mistakes much more easily when writing my narrative than by staring at tables or spreadsheets.

In other words, I need to develop a preliminary report to remember what I did and to check my calculations at the time I create them. Attorneys hate to see what they regard as unnecessary documents that might come back to haunt them. But the cost of not creating documents may be serious and much more embarrassing errors or failures of memory. For me to prepare extensive notes rather than narratives would take more of my time and be more likely to result in errors. Further, the notes themselves then become a document that could cause more trouble than a narrative. As I write my narratives, even in a preliminary report, every word is considered from the standpoint of whether I would want to be cross examined about the meaning of that word. I try to be very precise in my narratives, but am much less careful in notes I write to myself. I now typically type all of my handwritten notes as a part of deposition preparation to make sure that I have no handwritten notes that I do not understand.

Third, I want attorneys to read my narratives to see whether I may have misinterpreted any of the information they have provided to me. Sometimes important facts are given to me by telephone and I may have written them down incorrectly. Sometimes documents that I have been given create misleading impressions. I have found that attorneys are very good at picking up errors that relate to demographic facts in my reports. That is a very important part of the process of checking the validity of my analysis.

Perhaps a fourth reason is that right after I write a report, I see what I intended to write, but not necessarily what I did write. Several weeks later, I will see what I did write and be able to catch things that I could not have caught at the time I wrote a report.

The bottom line here is that if you ask me not to produce preliminary reports, you are asking me to take a greater chance of making an important mistake or being unable to explain how I arrived at one of the values in one of my tables.

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Dr. Thomas Ireland is a professor of economics at the University of Missouri at St. Louis.

Using Industry Growth Rates to Update Census Occupational Earnings Figures

by Kris Aksomitis

This article was originally published in the autumn 1998 issue of the Expert Witness.

The most reliable source of information about the incomes of specific occupations is the census. Unfortunately, census data are collected only once every five years — and income data are not published until three years after they are collected. (For example, income data from the 1995 census were not available until July of 1998.)

As a result, if census data are to be used, some method must be found for updating those data between the most recent census year and the year in which the information is required. For example, to use census income data in early 1998 (before the release of the 1995 census data), estimates of 1998 earnings had to be based on data from the 1990 census. This updating is achieved by increasing the relevant census figure by an estimate of the percentage increase in earnings between the most recent census year and the year in question.

The data series which is most often used to obtain this estimate is Statistics Canada’s Annual Estimates of Employment, Earnings and Hours (Cat. 72F0002XDE). This series reports estimates of average weekly earnings by
industry. Hence, as the desired figure is income by
occupation there is some concern that growth rates based on the Statistics Canada occupational earnings series will fail to provide an accurate estimate of the desired increase.

To my knowledge, no one has attempted to test whether industry growth rates provide an accurate estimate of occupational growth rates. That is the purpose of this article.

Here, I calculate the growth rates of incomes in various
occupations between the 1990 and 1995 censuses and compare those growth rates to estimates of those rates, which have been obtained from the annual growth rates of
industry earnings.

Methodology

The purpose of the article is to test the accuracy of using industry growth rates to predict average earnings for specific occupations. As such, the procedure uses the following steps:

  • First, a number of occupations were selected as a basis of comparison. The selection process was fairly arbitrary, but an attempt was made to include occupations from a number of distinct industries.
  • Second, data were collected for the chosen
    occupations from the 1990 Census and the 1995 Census. These figures represent the actual annual average incomes for these occupations in the respective years. The ratio of the incomes in 1995 and 1990 were calculated for each occupation.
  • Third, data were collected on industry income growth rates. These figures were calculated from average weekly earnings for the specific industries in question, and were used as proxies for salary growth rates within those industries.
    [Note that the calculated figures for both industry and occupation are simple percentages and not compound growth rates. For example, the calculated “all occupations” growth factor of 13% means that earnings increased 13% in total over the 5 years, or slightly less than 2.5% compounded annually. For each industry or occupation, the growth factor was calculated by dividing the value of 1995 earnings by the value of 1990 earnings.]
  • Fourth, the “actual” rate of growth of earnings for each occupation was compared to the growth rate of earnings from the industry that I believed to be most closely related to the occupation in question. In the table, below, I refer to these industry growth rates as “estimated” rates of growth as they represent our best estimates of the growth of occupational earnings.
  • Finally, the actual occupational growth rates were compared with both the estimated growth rates and the average, “all-industry” growth rate.

Analysis

The table presents the results. A number of interesting observations can be drawn from the data. The first, and most important observation, is that the industry specific growth rates provide a better estimate than the overall average growth rate in all but five cases.

From this observation, it can be argued that, for the most part, the industry-specific estimated growth rates provide a better estimate of earnings growth than do the average growth rates for the entire economy. Of the occupations I examined, only for male food service supervisors did the average growth rate provide a significantly better estimate than did industry-specific growth.

A second observation is that the estimates provided by the industry specific growth factor is quite accurate in the majority of the cases. For example, in 12 of the 22 cases, the estimated earnings are within 5.1% of the actual earnings. This indicates that, in these cases, the annual compound growth rate predicted by the estimate is within 1% of the actual annual growth rate in earnings.

Some of the errors can be explained by the small sample size of the occupations. This would appear to be the case, for example, with respect to female petroleum drillers. In other cases, for example male bookkeepers, it may be that individuals were spread among so many industries that no estimate from a single industry could be expected to prove accurate.
[Interestingly male bookkeepers and female drillers were the only two occupations of those I’ve examined whose
earnings were lower in 1995 than in 1990. In every other case, actual earnings increased over the 5-year Census period and the earnings estimates by the model provided a reasonable estimate of actual earnings.]

A final observation from the data is that the correlation between actual and predicted earnings seems highest in occupations which are characterised by a high degree of unionization. For example, accurate estimates were obtained for police, social workers, registered nurses and railway workers.

Conclusions

Overall, it seems that industry-specific growth rates provide a reasonable estimation of occupational growth. In the majority of cases, the specific industry growth rate provided a better estimation of actual earnings growth than did the general economy growth rate. Further, in many cases the industry wage growth rate provided an excellent proxy for the specific occupational growth rate, especially in those occupations that were most highly unionized and clearly defined as part of that industry.

Figure 1

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Kris Aksomitis was a research associate with Economica Ltd. and an MA student in Economics at the University of Calgary.

The Economics of Negligence Rules

by Christopher Bruce

This article was originally published in the autumn 1998 issue of the Expert Witness.

In the summer 1998 issue of this newsletter, I introduced the academic discipline of “the economic analysis of tort law.” I argued in that issue that the traditional legal analysis of torts employs an ex post orientation. That is, legal scholars traditionally assume that the function of tort law is to compensate victims for harms that have already occurred. Economists, on the other hand, argue that the evolution of torts can better be understood if one uses an ex ante paradigm. In this paradigm, the courts behave as if they are less concerned with the resolution of the cases before them than they are with the establishment of precedents that will affect future behavior. In particular, economic analysis “predicts” that the courts will prefer those rules that encourage parties to select cost-minimising behaviors.

In the summer 1998 article, I provided examples of a number of situations in which the courts appeared to have made explicit use of ex ante reasoning. In this article, I will argue that the economic approach can also be used to cast light on the development of the tort rules of negligence.

Legal Versus Economic Analysis

If one adopts the proposition that the function of tort law is to compensate accident victims, it is difficult to rationalise the rules of negligence. Those rules require that the victim show that the defendant was negligent before compensation will be ordered. But as many defendants are not negligent, many victims are not compensated. Why would a body of law whose purpose was to compensate victims contain a major “escape clause” which would deny compensation to a large percentage of victims?

One could begin to answer this question by modifying the traditional argument. Perhaps tort law is not designed to compensate all accident victims, just those who are deemed “worthy.” But this begs the questions of who is worthy and why it is that the “worth” of the victim should be defined by the behavior of the defendant.

I will argue in this article, that negligence rules can better be understood if we view their purpose as being cost-minimisation. Under this approach, a party will only be found to have been negligent (and therefore potentially liable to pay damages) if he or she had failed to take some precaution for which the cost was less than the benefit (measured in terms of accident costs avoided). That is, I will argue that the function of the tort rules of negligence is to send signals to potential (future) “injurers” that if they fail to take appropriate precautions, they will be made to bear the costs that result.

Negligence Rules: an Economic Exposition

The economic model can best be understood using a numerical example. Assume the following “facts,” (based, loosely, on Anderson v. County of Ponoka [1980] 12 ALR 320):

  • One of the stop signs at the intersection of two country roads is knocked over sometime on Saturday evening.
  • The County responsible for those roads becomes aware of this on Sunday morning but decides to wait until Monday morning to replace the sign, in order to save $100 overtime pay to its road crew.
  • Sunday evening, Mr. A, unaware that the sign is missing, assumes that he has the right-of-way, enters the intersection without slowing, and collides with Ms. B’s car.
  • The two cars and their occupants suffer damages which total $25,000.
  • At trial, the court accepts the evidence of a traffic expert that the probability, per day, that such an accident will occur is 3/1,000 if there is no stop sign in place and 1/1,000 if there is a stop sign.

Was the county negligent? Economic analysis predicts that the court will say “no.” Why? Assume that rural stop signs are frequently knocked down on Saturday evenings. If the relevant highway departments wait until Monday to replace the stop signs, there will be three accidents every 1,000 times a sign is knocked down. Hence, there will be $75,000 damages for every 1,000 such occurrences. ($75,000 = 3 x $25,000.) If the counties replace the stop signs immediately, the number of accidents will fall to one in every 1,000 occurrences, reducing the accident costs to $25,000, a saving of $50,000. But, in order to obtain that “saving,” counties will have to send out 1,000 repair crews at an overtime cost of $100 each, or $100,000 in total. The $50,000 “saving” will have cost $100,000.

Put another way, the average cost of precautions, per event, will be $100 and the average benefit of those precautions (measured in terms of accident costs saved) will be (2/1,000) x $25,000, or $50. As the economic model predicts that the court will only encourage behaviour whose cost is less than the benefit, the economic prediction is that the court will not find the county to be negligent in this case.

It can be seen from this case that three factors are predicted to enter the court’s calculations:

  • the cost to the defendant of taking a precaution to avoid the accident, (C);
  • the probability that a precaution which could have been taken by the defendant would have prevented the accident, (P); and
  • the expected cost of the accident, (A).

In particular, it is predicted that the defendant will be found to have been negligent if there was some precaution, not taken by the defendant, whose cost was less than the cost of the accident multiplied by the decrease in the probability of an accident which would have occurred had that precaution been taken. In algebraic terms, the party is found negligent if C < (A x P).

Is the Law Consistent With the Economic Model?

In the U.S., this prediction was confirmed in one of the leading cases on negligence, U.S. v. Carroll Towing. In that case, Justice Learned Hand concluded that negligence was to be found only if the burden (cost) of precautions was less than the probability of the accident multiplied by the gravity (cost) of the accident — precisely the formulation which I derived above from the economic model.

In British/Canadian jurisprudence, confirmation of the prediction is less direct, but persuasive nevertheless — sufficiently persuasive that in recent editions of Canadian Tort Law Allen Linden has organised his discussion of the rules of negligence around the “Learned Hand rule.” In Wagon Mound No. 2, for example, the court concluded that a party could be found negligent even if the probability of an accident was low as long as the cost of the accident was high. Arguably, it was the court’s view that the cost of the accident multiplied by the probability that it could be avoided should be weighed against the cost of avoidance in order to determine negligence — again, precisely the prediction made by economic reasoning. Other leading cases which are consistent with the economic model include Bolton v. Stone, Priestman v. Colangelo, and Reibl v. Hughes.

Applying Economic Analysis to the Law

Many “day-to-day” cases also employ reasoning which is consistent with the economic approach to the determination of negligence. For example, in Hewson v. City of Red Deer (1977) 146 DLR (3d) 32 (Alta. CA), a City employee left the keys in the ignition of a bulldozer. Subsequently, the bulldozer was stolen and driven into the side of Hewson’s house. The City was found not to be negligent largely because (a) the bulldozer was left two blocks from Hewson’s house; (b) it was left at midnight; and (c) the operator was absent for only 25 minutes. All three of these factors suggest that the probability of an accident was quite low. And the first factor suggests that the average damages which might occur if the bulldozer was stolen were low (because the bulldozer would have to be driven a long distance before causing any harm.)

In Weaver v. Buckle (1982) 35 AR 97 (Alta. QB), Weaver (a child) ran out in front of Buckle’s car and was injured. The court implied that it would not normally have found Buckle to be negligent for causing this accident. However, as the road was narrow, it found that he should have been driving more slowly, to take account of the general conditions of that road. The court concluded that if he had been driving more slowly, the probability that this accident would have occurred would have been reduced substantially. Buckle was found 60 percent liable. In economic terms, this finding suggests that it is not simply this accident which determines the “costs of an accident” (A, in my terminology). Rather, it is all accidents which might have been prevented had the defendant taken additional precautions.

In Jordan v. Schofield (1996) 148 NSR (2d) 104 (NSSC), Schofield’s 7 year-old son played with a lighter and caused a fire in an apartment building belonging to Jordan. The court concluded that Schofield was not negligent. Although parents are responsible for taking “reasonable” precautions to watch their children and to put harmful things out of their way, at some point the costs of additional precautions become prohibitive. Parents will not be found negligent for failing to take precautions beyond that point. For example, parents will not be negligent for leaving children unattended around “ordinary” dangers (such as knives or scissors) for a few minutes. They may, however, be negligent for leaving their children unattended around such dangers for longer periods of time, or for leaving them for only a few minutes around more dangerous items (such as fires burning in fireplaces). In economic terms, the cost of taking additional precautions is to be weighed against the probability that an accident will occur if those precautions are not taken.

To conclude, given that no Canadian court has formally adopted the “Learned Hand rule” it would be difficult to base an argument before our courts on economic reasoning alone. Nevertheless, if one accepts that the three components of the “Learned Hand Rule” (C, P, and A) play an implicit role in the determination of negligence, an understanding of their function may help to clarify the legal analysis in difficult cases.

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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).

Summer 1998 issue of the Expert Witness newsletter (volume 3, issue 2)

Contents:

  • The Effect of Alcoholism on Earning Capacity
    • by Nicole MacPherson
    • In this article Nicole MacPherson investigates the effect of alcoholism on earning capacity. She has found that alcoholism has both direct and indirect effects on earnings. Ms. MacPherson brings to our attention both the obvious and overlooked effects of alcoholism.
  • Applying Economic Analysis to Tort Law
    • by Christopher Bruce
    • In this article Christopher Bruce expands the use of economic analysis in tort law. Dr. Bruce identifies the distinguishing characteristics of the economic approach versus the more traditional methods of legal analysis. This is the first of a series of articles to follow regarding the economic analysis of torts.
  • Not All “Bears” Are Bordering Extinction
    • by Heber G. Smith
    • In this article Heber Smith explains how the claimant converts his or her award to income for the future. He contrasts mutual funds, with high returns and perhaps less stability, with annuities, having lower returns and lower risk. This discussion leads into future articles regarding strategies of structured settlements.
  • Doctors Are Not Experts on Life Expectancy
    • by David Strauss, PhD, FASA and Robert Shavelle, PhD
    • In this article David Strauss and Robert Shavelle argue that physicians are usually not experts on life expectancy. They note, however, that doctors’ opinions regarding life expectancy have been relied on by the courts. They identify the different roles of physicians and actuaries in life expectancy determination.
  • Software Review: Personal Injury Damages Partner (Carswell)
    • by Derek Aldridge
    • In this article Derek Aldridge reviews a CD ROM titled Personal Injury Damages Partner, available from Carswell. The CD contains a searchable collection of full text and digest summaries of personal injury cases.

Software Review: Personal Injury Damages Partner (Carswell)

by Derek Aldridge

This article was originally published in the summer 1998 issue of the Expert Witness.

The Personal Injury Damages Partner (PIDP) has the potential to be a very useful research tool for anyone specialising in personal injury damages. The software is a CD ROM product ($1,200 for a one-year subscription, with updates 6 times per year – see www.carswell.com) that runs under Windows 95, 3.1, and NT. Carswell describes the content as follows:

The information includes Goldsmith’s Damages for Personal Injury and Death which consists of digests of cases dating back to 1935. As well, the full text of selected cases dating back to 1986 have been included. Personal Injury Damages Partner also contains cross-references and topical indices in the Find infobase.

Certainly the information contained on the CD will be valuable to anyone involved in personal injury cases. However, learning to access this information (i.e., learning the user-interface) could be a daunting task for the less-advanced computer user. The CD does not come with any documentation, not even basic set-up instructions on the disc case – an unfortunate oversight. Advanced users shouldn’t have too much trouble getting started, but Carswell should do some work to bring this program up to the “ease of use” level that is expected these days.

Once I learned the basics of the program, I found it easy to browse through different personal injury topics. For example, one can easily browse through summaries of cases by injury type: hip injuries, paraplegia, brain injuries, speech impairment, and so forth. The case summaries are hyper-linked to the full text judgments which can be read on screen or printed. You can also easily browse through cases which were heard by a specific judge. And there is a general index that you can use to browse the cases. Browsing by topic worked well, but I found the search engine frustrating – I was able to construct queries but the results were not linked to the full-text judgments, summaries, or even the case name. The program simply showed me paragraphs from unknown judgments with my query words highlighted. Some good query examples should have been provided with the software.

The “front-end” interface (called Folio 3.1) which is used to access and search through the information on the disc looks and acts vaguely like a Web browser – there are coloured hyperlinks which you double-click with the mouse to jump to the destination. The Folio program is fairly easy to use, but I think it would be much easier to get up to speed if Carswell could set up their database so we could use our own Web browser to navigate the database. Unfortunately, the program’s help system is specific to the Folio user-interface and does not offer help that is specific to the Personal Injury Damages Partner.

One obvious question is what advantage does this program have over QuickLaw? Two important ones come to mind. First, the program focuses on personal injury cases, so one is not searching or browsing among countless decisions that do not concern personal injury actions. Also, since the product is contained on a CD, searching and browsing is much faster, and the program is more portable, than using the QuickLaw on-line service. Of course the CD media also has its disadvantages over QuickLaw – the information on QuickLaw is always up-to-date, while the information on PIDP is always out-of-date. Hopefully Carswell will eventually allow the user to access the very latest information over the Internet, otherwise, for the personal injury specialist, the PIDP can only be a companion to QuickLaw, not a replacement (assuming that having up-to-date information is essential).

This could be a very useful product if Carswell would improve the ease-of-use and offer a manual and some decent on-line help. As it is, PIDP will be great if you are willing to invest in a lot of training time (or if you are already familiar with the Folio 3.1 interface); but if you have very little patience for software that is not easy to use, then your time will be better spent improving your QuickLaw skills.

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

Doctors Are Not Experts on Life Expectancy

by David Strauss, PhD, FASA and Robert Shavelle, PhD

This article was originally published in the summer 1998 issue of the Expert Witness.

In personal injury cases, courts have traditionally relied on doctors for opinions on plaintiffs’ remaining life expectancy. We show here that such questions are really beyond the expertise of physicians, and that their testimony is readily challenged.

The analogy with life insurance is helpful. When applying for a life insurance policy you are first examined by a doctor, who assesses various risk factors. The results are transferred to the insurance company’s actuaries, who use the risk profile to assess your survival prospects. Thus both medical and statistical/actuarial skills are needed. Only a physician is qualified to appraise the individual, and only a statistician or actuary is qualified to turn the appraisal into a life expectancy.

Most physicians readily agree that they are not expert in actuarial issues. Nevertheless, pediatricians are still routinely asked to testify on the life expectancy of children with birth defects, while therapists or other medical specialists are consulted regarding adult accident victims. Their testimony on what are really statistical issues is often unfortunate. The following examples, with some modification, are drawn from actual cases.

“As a gerontologist I work with elderly persons. All the persons with cerebral palsy that I examine are at least fifty years old. Therefore I believe that this child with cerebral palsy will probably live to at least 50.”

We pass over this in silence.

“I believe that this child will certainly live to age 40, although probably not to age 50.”

It is, of course, absurd to say that any child – even one in perfect health – will “certainly” live to any age. Further, the probability that the age at death will fall in a narrow range such as 40-50 is bound to be quite low. The statement seems to confuse the life expectancy, which can often be estimated with some precision, and the actual age at death. The latter can rarely be predicted with any accuracy.

The annual mortality rate for children like the plaintiff is 1%. After 50 years, therefore 50% [ = 50 x 1%] of such children would have died. The median survival time is thus 50 additional years.”

There are two mistakes here. First, the math is wrong: in fact, 99% of the current survivors will survive one additional year, and therefore the proportion surviving 50 years is 61% (=.9950), not 50%. Second, the analysis ignores the dramatic increase in human mortality with age. As a result it gives wildly unrealistic long-term estimates, predicting, for example, that 37% of the population will survive to age 100.

* * *

Witnesses lacking statistical or actuarial training are frequently unable to define life expectancy, compute it in a simple case, or distinguish it from the median survival time. This may be exposed with a simple illustration.* If the witness cannot even explain what a life expectancy is, the testimony will lack credibility.

A physician’s opinion will be based either on a reading of the research literature or “on the basis of my clinical experience.” In the former approach, the plaintiff is matched to some group of individuals whose survival has been studied and reported. There are, for example, several studies of long-term survival for persons with cerebral palsy, traumatic brain injury, and spinal cord injury. Unfortunately such studies provide at best a crude estimate of life expectancy. The attorney can establish that:

  • The studies generally follow a cohort of persons who initially were of a given age and in a given condition. If the plaintiff is older and currently in this condition, it would be necessary to assume that cohort members surviving to the plaintiff’s age are still in that same condition. This assumption may be quite unreasonable, especially for young children who may have fair prospects for improvement.
  • Most studies provide survival curves, giving the fraction of persons in the cohort who survive to a given age. This will provide a median survival time only if the mortality is so high that 50% of the subjects die within the study period, and it rarely will permit the computation of a life expectancy.
  • The cohorts studied in literature are necessarily based on coarse classifications of one or two risk factors. Ironically, the clinician’s strength – the ability to make fine judgements about numerous patient characteristics – does not come into play.

It must therefore be recognized that published articles provide at best a rough approximation to a given plaintiff’s life expectancy. Indeed, some of the articles include a warning to this effect, a point that the opposing attorney may wish to emphasize.

Clinicians who instead rely on their experience for opinions are even more vulnerable. The lack of a solid basis can be revealed with questions such as:

  • How many patients closely resembling the plaintiff have you examined? [The answer will be at most a few dozen.]
  • Did you follow up on the survival or death of all of these patients? Give the specifics of your procedure. In particular, how did you follow the patients who moved to a different town or even to a different state? How did you ascertain who died? Where and in what form did you keep your records of the children’s survival time? Did you periodically reassess their functional levels during the follow up?
  • If you have been practicing for 20 years (say), how could you have ever observed a child surviving more than an additional 20 years? Does this lack affect your opinion? Why or why not?
  • Are you aware of the literature on statistical methods for estimating survival probabilities? Which methods did you use?

Such questions should make the limitations of the doctor’s expertise very clear.

Footnotes

* As an example, if 1/3 of members of a population will live exactly 2 more years, 1/3 will live exactly 3 more years, and 1/3 will live exactly 10 more years, then the life expectancy is (2 + 3 + 10)/3 = 5 years and the median is 3 years (the middle value). [Back to text]

References

1. Hutton JL, Cooke T, Pharoah POD. Life expectancy in children with cerebral palsy. British Medical Journal 1994; 309:431-435.

2. Chrichton JU, Mackinnon M, White CP. The life expectancy of persons with cerebral palsy. Developmental Medicine and Child Neurology 1995; 37:567-576.

3. Evans PM, Evans SJW, Alberman E. Cerebral palsy: Why we must plan for survival. Archives of Disease in Childhood 1990; 65:1329-1333.

4. Strauss DJ, Shavelle RM, Anderson TW. Life expectancy of children with cerebral palsy. Pediatric Neurology 1998; 18:143-149.

5. Strauss DJ, Shavelle RM. Life expectancy of adults with cerebral palsy. Developmental Medicine and Child Neurology, in press.

6. Roberts, AH. Severe Accidental Head Injury. London: Macmillan, 1979.

7. Strauss DJ, Shavelle RM. Long-term survival of children and adolescents after traumatic brain injury. Archives of Physical Medicine and Rehabilitation, in press.

8. DeVivo MJ, Stover SL. Long-term survival and causes of death. In: SL Stover, JA DeLisa, GG Whiteneck (Eds.), Spinal Cord Injury, pp. 289-316. Gaithersburg MD: Aspen, 1995.

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David Strauss, PhD, is a Fellow of the American Statistical Association and Professor of Statistics at the University of California, Riverside. He has frequently provided expert testimony on life expectancy in Britain, Canada, and the United States. He is director of the UC Riverside Life Expectancy Project, which specializes in the survival and life expectancy of persons with disabilities such as cerebral palsy and traumatic brain or spinal cord injuries.

Robert Shavelle, PhD, is a Visiting Professor at UC Riverside and a member of the Life Expectancy Project.

Not All “Bears” Are Bordering Extinction

by Heber G. Smith

This article was originally published in the summer 1998 issue of the Expert Witness.

Plaintiff counsel’s job respecting a personal injury action is securing an acceptable offer. All of his/her energies are expended to that end with the result that little attention is given to after-settlement considerations. Now that the claimant has the cash, how does he/she convert the cash into income to provide for lost future income or the cost of future care?

Impressive gains in the market have headlined all financial publications in recent years. Consider recent mutual fund advertisements citing returns of 20.8% in one year and 21.2% in two years. What sensible personal injury or wrongful death award would not be enticed by the siren of such gargantuan returns?

In contrast, today’s interest and annuity rates seem inordinately low and may drive investors that should seek safety to the equity markets. However, consider the risks and costs with embarking on such a strategy.

One risk that needs to be considered is the nature of equity markets. In many respects we may have become lulled into a false sense of security with the extraordinary increases over the past few years. Recent market volatility and uncertainty are causing many investors to rethink their positions. As a result there has been a movement toward higher quality equities and a resurgent interest in bonds. Another uncertainty that today’s investor faces is trying to determine the length of this increased volatility and uncertainty. Is today’s uncertainty merely a pause, or does it foreshadow a greater correction? Historically, the usual market uptrends have been sporadically dotted with significant downturns that have taken many years to recover to pre-correction levels. Under these conditions, recipients of lump sum awards fully vested in equity markets could become severely disadvantaged especially if the downturn was to last for an appreciable amount of time. In the current issue of Investment Executive, Carlyle Dunbar is quoted as saying: “though they [investors] won’t sell if the market drops, most aren’t expecting a drop of 20% or 25%. The reality has been that most investors – especially newcomers go into shock when a bear market develops.”

Another consideration is the fiduciary role of financial advisors who are governed by the “prudent-man” rule. Should a lump sum recipient retain a financial advisor, it is likely that their risk position be classified as conservative. Under this classification, a recipient’s assets would be allocated across equities, fixed income and cash equivalents. The fact fixed income and cash equivalents typically return less than common equities would preclude the possibility that the recipient would achieve the type of returns advertised by many funds.

The prudent man rule dictates that, amongst other criteria, a financial advisor provides for “reasonable diversification”. Such diversification might suggest a common 50/40/10 (equity/bond/cash) portfolio investment split. Some formulas may suggest a 60/30/10 but the former may be more responsive for an investor requiring income. Consider the following example:

Equity Bond Cash
Percentage Allocation 50% 30% 10%
Assumed Return 10% 5.5% 3%
Management Fee 2% 1% 0.5%
Tax 20% 40% 40%

Weighted Average, Net After Tax Rate of Return: 4.53%

Given that the above strategy assumes a high measure of equity exposure, one may wonder why the recipient of a personal injury award or wrongful death settlement might not consider a structured settlement when the net return is approximately 5.5% (the equivalent of a pre-tax rate of return of 9.17% for a tax payer in a marginal rate of 40%). An investment strategy, incorporating a structured settlement tailored to the specific circumstances of the claimant, will result in superior returns at a lower risk.

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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.

Applying Economic Analysis to Tort Law

by Christopher Bruce

This article was originally published in the summer 1998 issue of the Expert Witness.

Economists have made important contributions to the analysis of many areas of the law – particularly competition law, labour law, regulation, and international trade – during the last 200 years. It is only in the last quarter century, however, that economists – and legal scholars using economics – have turned their attention in a systematic way to the analysis of torts, contracts, and criminal law. In spite of the youth of the sub-discipline that investigates these branches of the law, it has quickly become a major force within U.S. and, to a lesser extent, Canadian and European law schools. All of the major U.S. law schools – Harvard, Yale, Princeton, Chicago, Stanford, and Berkeley among them – now offer courses in the Economic Analysis of Law and have professors with Ph.D.s in Economics on faculty. (Only the University of Toronto, among Canadian schools, has followed suit.)

Those reading this newsletter will be familiar with some elements of the economic analysis of personal injury damages – for example, through my textbook Assessment of Personal Injury Damages (Butterworths, 1992). But economics, being the imperialistic science that it is, has not stopped there. Economic models have been applied to virtually every aspect of tort law – negligence rules, causation, onus of proof, intentional torts, informed consent, volenti, to name only a few. I do not wish to claim that the economic analysis of these doctrines should supplant the traditional legal analysis. However, I do think that there may be situations in which practitioners may find it useful to consider some of these issues from a different angle.

In this article, and a number of others to follow it, I would like to provide some insight into one such angle – the economic analysis of torts. In this introductory article, I begin by identifying the primary characteristics that distinguish the economic approach from more traditional methods of legal analysis. I then use this approach to discuss collateral benefits and negligence rules.

Characterising the Economic Analysis of Torts

Two fundamental characteristics distinguish the “economic” analysis of torts from other approaches to the study of tort law.

First, economists take a “positive,” or “scientific” approach to the identification of legal doctrines. Instead of trying to determine what the law “should be,” economic analysts attempt to determine what the law “is.” That is, they use the deductive approach to derive hypotheses about the principles which underlie judges’ reasoning and then test those hypotheses by comparing their predictions against the decisions which judges have made. As a simple example, economic analysis can be used to “predict” that the courts will, under most circumstances, reject the defence of “custom.” That prediction can be “tested” by observing whether the courts do or do not accept that defence.

Second, all economic analysis of tort law begins from the working hypothesis that judges behave as if they were attempting to devise legal rules which would encourage individuals to maximise social benefits net of social costs. (For example, if there is some accident-avoiding behaviour whose cost is less than the resulting saving in accident costs, the courts are predicted to adopt rules which will encourage adoption of that behaviour.) It is not argued that judges consciously act in this way; simply that the doctrines that have been selected by the common law courts have developed as though this was the goal of the courts.

This view of the functioning of the courts suggests that the courts will behave as if they were employing an ex ante (or “forward-looking”) approach to decision-making. In this approach, the courts recognise that any decision they make in the current case may influence the behavior of parties in similar, future cases. Hence, it becomes important to set a precedent which will direct future parties to behave in the socially desirable manner.

This approach can be contrasted with the traditional view of the court’s decision-making process, which I call the ex post (or “backward-looking”) approach. In this approach the court is assumed to take the position that, as the tortious act has already occurred, that act cannot be undone. Rather, all the legal system can do is to ensure that the victims are restored, as well as possible, to the position they would have been in had the act not occurred. Contrary to the economic assumption, no thought is given to the impact which decisions will have on future behaviour.

The ex post view is common to most textbooks and was given its most famous expression by the Supreme Court of Canada in Ratych v. Bloomer. There, Justice McLachlan concluded that the function of damages in tort law was to “restore the plaintiff to his pre-accident position.” Further, she emphasised that

[t]he law of tort is intended to restore the individual to the position he enjoyed prior to the injury rather than to punish the tortfeasor whose only wrong may have been a moment of inadvertence. [Emphasis added]

That is, the Court has said that tort damages are intended strictly to compensate harms that occurred in the past, not to deter negligent behavior that might occur in the future.

The response which those who rely on “positive” analysis of the law make to this argument is that the most reliable way to determine what someone thinks is to observe what they do, not what they say. In short, the best way to identify the underlying principles of tort law is to review the courts’ decisions, not their arguments. What I propose to argue in the following sections is that the courts’ decisions can often be more easily understood if it is assumed that they are trying to influence future behavior than if it is assumed they are attempting to “right past wrongs.”

The Collateral Benefits Rule

A clear example of the courts saying one thing and doing another arises in their interpretation of the “collateral benefits rule.” On the one hand, the Supreme Court has made it clear that it prefers the ex post approach. On the other hand, the trial courts have consistently adopted the ex ante approach.

1. Orphaned Children: Consider for example the situation in which orphaned children have been taken into the care of relatives.* Although Ratych would appear to suggest that the children’s claim for loss of dependency was thereby extinguished, most of the decided cases have rejected this view. The trial courts have recognised that the plaintiffs would be “double compensated” but have argued that to deny compensation would be to establish a dangerous precedent for future cases.

The leading statements of the latter view appear in Tompkins (Guardian ad litem of) v. Byspalko (1993) 16 C.C.L.T. (2d) 179 and Ratansi v. Abery [1995] 5 B.C.L.R. (3d) 88. In both cases, the trial judges argued that if Ratych was followed, the risk would be created that

… in some cases, family members who would otherwise take orphaned children into their care may decline to do so until or unless an award has been made in the children’s favour.

And in Tompkins, Spencer, J. went further, arguing that “… a surviving parent may refrain from remarriage, advantageous from the children’s point of view, because the presence of a new spouse who replaces services to the children may reduce their award”

2. Charitable Donations: Similarly, the rationale that is commonly given for the “charity exception” is that to deny a plaintiff compensatory damages because he or she had received a charitable donation would discourage individuals from making those donations. A clear example of this principle was stated in the Northern Ireland case of Redpath v. County Down Railway [1947] N.I.L.R. 167 where Andrews L.C.J. noted that if

the proposition contended by the defendants is sound the inevitable consequence in the case of future disasters of similar character would be that the springs of private charity would be found to be largely if not entirely dried up.

Surprisingly, further confirmation of this view comes from the author of Ratych, Madam Justice McLachlan. In her dissent in Cunningham v. Wheeler (1994) 113 D.L.R. (4th) 1 she argued that “… people should not be discouraged from aiding those in trouble.”

3. Implications: The common thread running through all of these decisions, I would argue, is that the courts will often consider the impact that their current rulings can be expected to have on individuals’ future behavior. In this view, the function of torts is not merely to compensate particular plaintiffs for past wrongs, but is also to protect potential plaintiffs from future harmful behavior. Children whose parents have been killed are to be protected against the possibility that their relatives may delay the adoption process; and victims of catastrophic events are to be protected against the possibility that donors may be discouraged from providing assistance.

This view opens a number of interesting possibilities for argument in similar future cases. For example, the practice has been to assume that a widow(er)’s loss of dependency comes to an end once she (he) remarries (assuming that the new spouse has a similar income to the first spouse). It could be argued, however, that this rule may encourage widow(er)s to postpone any relationships with the opposite sex until after the fatal accident case has been settled. As it cannot be in the public interest to discourage dating and marriage, a legal rule which has the effect of providing that discouragement may well be contrary to public policy.

In each case, economic analysts of the law would argue that the courts were behaving as if their goals were to encourage (socially) desirable behaviour and to discourage (socially) undesirable behaviour. In the next section, I will argue that it is rules of negligence which distinguish desirable from undesirable behaviour.

Negligence Rules

Assume the following facts:

  • One of the stop signs at the intersection of two country roads is knocked over sometime on Saturday evening.
  • The County responsible for those roads becomes aware of this on Sunday morning but decides to wait until Monday morning to replace the sign, in order to save $1,500 overtime pay to its road crew.
  • Sunday evening, Mr. A, unaware that the sign is missing, assumes that he has the right-of-way, enters the intersection without slowing, and collides with Ms. B’s car.
  • The two cars and their occupants suffer damages which total $5,000.
  • At trial, the court accepts the evidence of a traffic expert that the probability, per day, that such an accident will occur is 3/10 if there is no stop sign in place and 1/10 if there is a stop sign.

Was the county negligent? Traditional, ex post legal analysis has difficulty answering this question definitively. On the one hand, ex post analysis holds that the function of tort law is to compensate “worthy” victims, creating a presumption that the county should be found responsible. On the other hand, that analysis also argues that a defendant should only be found liable if he or she failed to take those actions that would have been taken by a “reasonable” person. But what actions would have been reasonable in this case? I will argue that the answer the courts will usually give to this question is consistent with the ex ante, or economic, analysis of the law.

In particular, if the function of the law is to encourage behaviour that maximises social benefits minus social costs (the economic prediction), a “reasonable” action will be one for which the benefits exceed the costs. That is, economic analysis predicts that the county will be found negligent only if the cost of ensuring that the stop sign was re-erected exceeded the benefit of doing so. In this section, I will show that the factors that enter the determination of those costs and benefits are the same as those that the courts usually take into account when determining negligence.

Assume that rural stop signs are frequently knocked down on Saturday evenings. If the relevant counties wait until Monday to replace their stop signs, there will be three accidents every 10 times a sign is knocked down. Hence, there will be $15,000 damages for every 10 such occurrences. ($15,000 = 3 x $5,000.) If the counties replace the stop signs immediately, the number of accidents will fall to one in every 10 occurrences, reducing the accident costs to $5,000, a saving of $10,000. But, in order to obtain that “saving,” counties will have to send out 10 repair crews at an overtime cost of $1,500 each, or $15,000 in total. The $10,000 “saving” will have cost $15,000. Put another way, the average cost of precautions per event (knocked over stop sign) will be $1,500 and the average benefit of those precautions (measured in terms of accident costs saved) will be (2/10) x $5,000, or $1,000. (Note: the reduction in the probability of an accident, when the county sends out a repair crew, is only 2/10 because the crew does not reduce the probability of an accident to zero.) As the economic model predicts that the court will only encourage behaviour whose cost is less than the benefit, the economic prediction is that the court will not find the county to be negligent in this case.

It can be seen from this example that three factors were predicted to enter the court’s calculations:

  • the cost to the defendant of taking an additional precaution to avoid the accident, (here, $1,500);
  • the probability that an additional precaution would have prevented the accident, (here 2/10); and
  • the expected cost of the accident, (here, $5,000).

In the U.S., this prediction was confirmed in one of the leading cases on negligence, U.S. v. Carroll Towing. In that case, Justice Learned Hand concluded that negligence was to be found only if the burden (cost) of precautions was less than the probability of the accident multiplied by the gravity (cost) of the accident – precisely the formulation which was derived from the economic model.

In British/Canadian jurisprudence, confirmation of the prediction is less direct, but persuasive nevertheless – sufficiently persuasive that in recent editions of Canadian Tort Law Allen Linden has organised his discussion of the rules of negligence around the “Learned Hand rule.” In Wagon Mound No. 2, for example, the court concluded that a party could be found negligent even if the probability of an accident was low as long as the cost of the accident was high. Arguably, it was the court’s view that the cost of the accident multiplied by the probability that it could be avoided should be weighed against the cost of avoidance in order to determine negligence – again, precisely the prediction made by economic reasoning. Other leading cases which are consistent with the economic model include Bolton v. Stone, Priestman v. Colangelo, and Reibl v. Hughes.

Conclusion

Economists often define their discipline to be the analysis of “the allocation of scarce resources among competing ends.” When this approach is applied to common law, it suggests that one of the functions of torts might be to establish rules that encourage individuals to use resources effectively. Common law precedents should not discourage relatives from adopting orphans, for example. Nor should they find defendants to be liable if they have taken all precautions for which the benefits (of those precautions) exceed the costs.

In this article, I have argued that this “law and economics” method of analysing the common law predicts that

  • the courts will employ the ex ante approach when resolving tort disputes; and
  • they will base the determination of negligence on: the probability of an accident occuring, the costs of the accident, and the costs of avoiding the accident.

I have also provided evidence that, at least in some cases, the Canadian courts have followed this approach.

I do not wish to conclude from this that the courts should follow the economic approach, nor that they will always adopt it. I merely offer it as another tool for those who are looking for an underlying rationale to the courts’ behaviour. Perhaps in some cases, the advocate and the court will find it of value to think explicitly in terms of the signal which the decision in the current case will send to others in situations similar to those in which the plaintiff and defendant found themselves. In future articles in this series I will discuss the economic analysis of such doctrines as custom, causation, duty of care, volenti, and restitutio in integrum.

Footnotes

* The foregoing analysis is based on an article that I wrote for The Lawyers Weekly (April 24, 1998). This article is also available, as “Duty to Care for Orphaned Minors,” on this website. [back to text of article]

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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 Effect of Alcoholism on Earning Capacity

by Nicole MacPherson

This article was originally published in the summer 1998 issue of the Expert Witness.

It seems common sense to argue that alcoholics will experience reduced earning capacity. Thus, all else being equal, alcoholics will be eligible for lower damage awards than will other plaintiffs. What is often not clear, however, is how severe the effects of alcoholism will be.

The purpose of this article is to summarise the statistical literature concerning the effects of alcohol consumption on earnings and employment. One of the most important findings of this literature is that alcoholism has both direct and indirect effects on earnings. That is, there is evidence that alcoholics’ earnings are depressed both because alcoholism causes reduced labour productivity and because it discourages investments in “human capital” (e.g., education). Problem drinking is also found to increase unemployment.

Direct Effects

Alcoholism is considered to be a disease, and affects earnings as such. The physical and mental health problems associated with problem drinking have direct effects on labour market productivity and reliability. That is, sickness, hangover, late arrivals, extended lunch breaks, and early departures are some work characteristics that lead to reduced reliability and productivity. This in turn leads to lessened earnings and fewer promotions and raises.

Alcoholism can have other direct effects on wages, namely, alcoholism can affect career choices and stability. It is possible that alcoholics self-select into jobs that are less demanding, and therefore lower paying. The further advanced the state of alcoholism, the less the alcoholic is concerned about his or her career. Therefore, alcoholics tend to gravitate towards jobs that are not strenuous or taxing.

Indirect Effects

An important way in which alcoholism can affect earnings is through its effect on human capital characteristics. If the disease is advanced in youth, the alcoholic may not have the stamina to complete schooling, post-secondary or otherwise. This possible lack of education could lead to lower wages and selection into “dead-end” jobs. It is important to note that alcoholics may select into such jobs because of choice (the direct effect) or because of a lack of education (the indirect effect).

It is likely that alcoholics will have difficulties maintaining employment due to their condition. The reduced reliability discussed above can lead to job losses and decreased employability. The subsequent lack of work experience can lead to lower wages and earnings.

A significant indirect effect arises from familial and relationship problems associated with alcoholism. Alcoholics have higher divorce rates than non-alcoholics. As well, there is a higher probability of an abusive home life among problem drinkers. The emotional and mental strains arising from these factors can be expected to have negative impacts on productivity, and therefore earnings.

Empirical Evidence

Alcoholism’s effect on earnings has been the subject of a number of recent scholarly articles, which attempt to estimate this impact empirically. These studies indicate that, when direct and indirect effects are combined, alcoholics earn approximately 40 percent less than non-alcoholics. When human capital characteristics are controlled for, alcoholism alone leads to an 18 percent reduction in wages. That is, almost one half of the effect of alcoholism on earnings is due to lower human capital characteristics, namely education and work experience. Conversely, this implies that an alcoholic will earn approximately 18 percent less than will others with similar education levels and work histories.

It is significant to note that alcoholics earn less not only because of the effect heavy drinking has on human capital, but also because of the nature of alcoholism. A recent study found that alcoholics are more likely to be unemployed than alcoholics, and earn less when they are employed, even after controlling for the effect of education and experience. As the disease progresses, the earnings potential of the alcoholic lessens.

Alcoholism and employment have a causal relationship. Alcohol abuse negatively affects employment, but lack of work also affects drinking habits. Depression and stress resulting from unemployment can lead to increased reliance on alcohol and other drugs. Alcoholics can enter a vicious circle in that the longer an individual is unemployed, the more advanced the state of alcoholism. As the disease becomes more debilitating, becoming employed is increasingly difficult.

Recent medical research has found that moderate alcohol use leads to health benefits such as reduced risk of cardiovascular disease. Since healthy employees are productive employees, it is not unreasonable to suggest that moderate drinking can lead to greater productivity, and therefore higher earnings. In fact, there is evidence to support the hypothesis that alcohol and earnings have a parabolic relationship. That is, teetotalers and heavy drinkers both earn less than moderate drinkers. In fact, studies show that non-drinkers earn between eight and ten percent less than moderate drinkers. It has been estimated that wages peak for individuals consuming an average of 2.40 drinks per day, which is consistent with the medical literature. Individuals who do not drink at all may miss out on the health benefits of moderate drinking, as well as on social opportunities and networking to further their careers. Conversely, alcoholism deteriorates one’s state of health. As well, alcoholics may endure public shame because of their condition, and this can decrease the opportunities to advance their careers at social functions.

It is vital to realize that a future alcoholic may currently display only minor symptoms of problem drinking. Alcoholism is a disease, and when left untreated can have ravaging effects on the individual’s physical and mental states. These effects can have significant negative impacts on employment, productivity, and earnings.

The lost productivity and lowered earnings of alcoholics are significant costs that have merited recent attention in the economic literature. The alcoholic and his or her family suffers from lowered earnings. Employers and co-workers suffer from the alcoholic’s lost productivity. In addition to the well-known costs of alcoholism, illnesses, automobile accidents, and crime, problem drinking leads to decreased productivity and therefore, lower wages and earnings.

References

Berger, M.C., and Leigh, J.P. “The effect of alcohol use on wages”, Applied Economics, 1988, 20, 1343-51.

—. “Schooling, Self-Selection, and Health”, Journal of Human Resources, 1989, 24 (3), 433-455.

Boffetta, P., and Garfinkel, L. “Alcohol drinking and mortality among men enrolled in an American Cancer Society prospective study”, Epidemiology, 1990, 1, 342-348.

French, M.T., and Zarkin, G.A. “Is moderate alcohol use related to wages? Evidence from four worksites”, Journal of Health Economics, 1995, 14, 319-344.

Hamilton, V., and Hamilton, B. “Alcohol and earnings: Does drinking yield a wage premium?”, Canadian Journal of Economics, 1997, 30 (1), 135-151.

Kenkel, D.S. “Health Behaviour, Health Knowledge, and Schooling”, Journal of Political Economy, 1991, 99 (2), 287-305.

Mullahy, J., and Sindelar, J. “Gender Differences in Labor Market Effects of Alcoholism”, American Economic Review 1991, 81 (Papers and Proceedings), 161-165.

— “Alcoholism, Work, and Income”, Journal of Labor Economics, 1993, 11 (3), 494-520.

— “Employment, unemployment, and problem drinking”, Journal of Health Economics, 1996, 15, 409-434.

Shahaheh, B. “Drug and alcohol abuse in the workplace: Consequences and countermeasures”, International Labour Review, 1985, 124 (2), 207-223.

Zarkin, et. al., “Alcohol use and wages: new results from the National Household Survey on Drug Abuse”, Journal of Health Economics, 1998, 17, 53-58.

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Nicole MacPherson was a Master of Arts student at the University of Calgary. She wrote a thesis on the topic of “Alcohol, Gender, and Labour Market Outcomes.”

Spring 1998 issue of the Expert Witness newsletter (volume 3, issue 1)

Contents:

  • The Role of the Expert Witness in Developing “New” Law
    • by Christopher Bruce
    • In this article Christopher Bruce explores the role of the expert witness. He delineates both the advantages and disadvantages to the legal system when an expert adopts a “constructive” rather than a “passive” approach. While recognising the pitfalls with either approach, he points out the potential benefits that may accrue when the specialist is allowed to bring his/her expertise to bear, shedding light upon the complexities of personal injury litigation.
  • Unresolved Issues in the Valuation of Estate Claims Under Survival of Actions
    • by Derek Aldridge
    • In this article Derek Aldridge expands upon previous articles in our newsletter which have arisen from the Duncan v. Baddeley court of appeal decision. He raises several questions concerning the calculation of losses in light of this decision, and suggests that it may not be possible to resolve these issues until it is determined whether the Court’s goal is one of compensation or deterrence.
  • BOOK REVIEW: The Expert: A Practitioner’s Guide, (Carswell) 1997
    • by Christopher Bruce
    • Christopher Bruce reviews this collection of 27 essays concerning expert testimony, each essay having been written by one or more experts in the relevant discipline. The purpose of the book, according to the foreword, is to provide trial lawyers with a basic understanding of both “… the role of the expert in the legal process … [and] … the fundamental concepts of the discipline within which the expert operates.”.
  • Outstanding Issues in the Valuation of Household Services
    • by Therese Brown and Christopher Bruce
    • In this article Therese Brown and Christopher Bruce wrap up the series of five articles on household services which have been presented in our newsletter. They deal with several of the issues which have not been dealt with specifically in previous articles. Included are the following: the suggested approach when a plaintiff is still able to undertake a particular household activity, albeit more slowly than previously; a discussion of how long to run the loss of household services; and the effect of retirement on the loss of household services.

Outstanding Issues in the Valuation of Household Services

By Therese Brown and Christopher Bruce

This article was originally published in the spring 1998 issue of the Expert Witness.

In this, the final in a series of articles on the estimation of the loss of household services we discuss a number of issues which have received relatively little attention from the courts. These include:

  • the estimation of loss when the plaintiff can complete all necessary household chores, but these tasks take longer to complete than before the accident;
  • determining the age at which the loss of household services should be presumed to end; and
  • the effect of retirement on the number of hours of household services.

The Efficiency Issue

A common problem is that the injured plaintiff is sometimes still able to complete all the household chores that he or she performed prior to injury, but these tasks now take longer to complete. For instance, a female plaintiff may be able to continue with meal preparation and washing up, but whereas she had previously required 10 hours a week for this task, she finds that it now takes her approximately 15 hours a week.

One approach would be to argue that, as the plaintiff is able to “produce” the same number of household services as before her injury, she has lost nothing. However, this ignores the fact that she has lost the use of five hours per week in some other activity. Those hours may have come, for example, from hours worked or from leisure time. If it is the former, her damages could be valued using her wage rate. More commonly, however, it is leisure time that suffers, and only very rough estimates of the value of this use of time are available

A third approach, which we prefer, proceeds in two steps. First, we determine how many hours of household chores would remain to be completed if the plaintiff was to work the same number of hours in the home as she would have before the accident. Second, the cost of hiring replacement workers to perform those “missing” hours is calculated.

In the example cited above, assume that the plaintiff was to perform 10 hours of meal preparation after the accident. As she is working at only 10/15ths the speed that she had been working before the accident, she will complete in those hours, 10/15ths as much as she would have prior to the accident. That is, she will complete as many chores as she would have previously in 6.67 hours. This implies that 3.33 hours worth of chores remain to be done. It is the cost of hiring a housekeeper for this number of hours that we suggest should be used to represent the plaintiff’s loss.

At What Age Does the Loss End?

Two alternative approaches have been suggested to determine the age at which individuals would normally cease to engage in household production. The first such approach simply assumes that individuals cease to provide household services after their retirement ages. This approach is generally unsatisfactory, however, as the evidence suggests that the vast majority of seniors, some of whom may exhibit mild to moderate disability, do not require assistance with activities such as shopping or housework, the instrumental activities of daily living. Eric Moore et al, in their publication Growing Old in Canada, point to Statistics Canada data which indicates that 90.4% of men and 84.5% of women from 65 to 74 years old are in this category. Neena Chappell, in her book Social Support and Aging, argues that, while the existence of chronic health conditions is not uncommon in seniors, such conditions often do not lead to functional disability or limitations in activity.

A second commonly used approach is to continue the loss of household services only to age 80. There is considerable evidence to support this type of approach. Reference to statistical information about the living arrangements of today’s seniors, as well as their participation in household activities, makes it apparent that increasing numbers of seniors live independently to this age, requiring little or no assistance.

Herbert C. Northcott, in Aging in Alberta, makes evident the growing trend for seniors to remain in private households. While 13.4% of seniors in 1976 were institutionalised, this proportion dropped to 9.0% in 1991. Possible reasons for this decline include the increasing ability and desire of seniors to continue to live independently, as well as the shortage of institutional beds. At any rate, there is reason to suggest that the trend toward decreasing institutionalisation will continue.

Many seniors living at home do not require help with household work. The Statistics Canada publication A Portrait of Seniors in Canada makes this apparent. Of those 65 and older living at home in 1991, only 36% required assistance with housework. Fewer still required assistance with grocery shopping and yard work (31.5% and 30.0% respectively). Only 26% of this group required help with meal preparation. By far the greatest proportion of this assistance (68%) came from the individual’s spouse.

Much of the research would indicate, therefore, that not only are most seniors remaining in their own homes, but also most of them are managing to do so with little or no assistance. For this reason, it would seem prudent to recognise the extent to which most seniors are able to continue with productive contributions in the area of household services.

After age 75, however, an increasing number seniors suffer from chronic health conditions which limit their activity. An example of such an indicator is reported in the Statistics Canada Publication A Portrait of Seniors in Canada. While only 36% of 65 to 74 year-old non-institutionalised seniors reported activity restricting health problems, 46% of their counterparts aged 75 and older reported such restrictions. In addition the rate of institutionalisation does increase with advancing age. Herbert Northcott reports that in 1991, in Alberta, the rate of institutionalisation was only 2.8% for those aged 65 to but rose to 18.3% for those 75 years of age or older.

For these reasons, our approach is to seek a middle ground. It would appear that to assume that household productivity or participation in household services will decline significantly at 65 or 70 years of age would be to discount the contribution that many seniors are willing and able to make long past that arbitrarily assumed time. On the other hand, to continue the loss of household services to life expectancy would ignore the evidence that seniors in later years do increasingly face the risk of institutionalisation and activity-limiting disability. We find the statistical evidence supports the continuation of the loss of household services until approximately age 80.

Does a Change Occur in Household Services Contribution at Retirement?

Intuition suggests that the number of hours devoted to household work will decrease at retirement. This, however, is not what the statistics suggest. In fact, the contribution to household activities tends to increase significantly at retirement. An excellent source of information concerning the number of hours thus contributed is available from the Statistics Canada publication, As Time Goes By…Time Use of Canadians. For example, a married, retired male’s contribution at age 65 (3.1 hours per day) is almost double that of the married, full-time employed male’s contribution at age 45 to 64 years of age (1.7 hours per day). These available statistics can be readily used to forecast the future household contributions of the plaintiff at retirement. Our approach is to consider the number of hours that the plaintiff contributed prior to the accident and then increase them by the same percentage that the average individual’s contribution would increase, as indicated by this resource.

There may be concern expressed about this type of approach, for the reason previously mentioned, that an increase in household services at retirement may not be intuitively obvious. In our view, the approach we take – to adjust the individual’s contribution to reflect what actually occurs with individuals of the plaintiff’s ilk – is the only responsible approach to take in the interests of accuracy.

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

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).

BOOK REVIEW: The Expert: A Practitioner’s Guide, (Carswell) 1997

Edited by Mr. Justice K. Matthews, J. E. Pink, A. D. Tupper, and A. E. Wells

Reviewed by Christopher Bruce

This article was originally published in the spring 1998 issue of the Expert Witness.

The Expert is a collection of 27 essays concerning expert testimony, each essay having been written by one or more experts in the relevant discipline. The purpose of the book, according to the foreword, is to provide trial lawyers with a basic understanding of both “… the role of the expert in the legal process … [and] … the fundamental concepts of the discipline within which the expert operates.”

Measured against this goal, the book must be considered to be a success. Although the chapters are of extremely variable quality, anyone wishing to obtain an introduction to the role, and basic methods of analysis, of disciplines as widely diverse as forensic psychology, accounting, engineering, toxicology, and photography will find this book of value. I was fascinated, for example, by the scientific description of how a fire spreads (Chapter 24, “Forensic Fire Investigation”) and by the differences between the expert’s “model” of memory and that of the layman (Chapter 11, “Eyewitness Evidence Identification and Testimony”).

Nevertheless, the book suffers from two major weaknesses. First, from the point of view of civil litigation lawyers, the book focuses too narrowly on the experts who appear in criminal trials. Although one can imagine uses in civil trials for drug experts, pathologists, DNA experts, fire investigators, and handwriting analysts, their fields of specialty are not the everyday stuff of litigation. Furthermore, while concentrating on experts such as these, the book excludes many of the experts commonly found in civil litigation, particularly vocational psychologists, economists, therapists, and cost of care experts.

Second, in my view, the editors misunderstand what it is that lawyers would find useful in such a book. It is clear that each author has been asked to provide a 10 to 15 page summary of the role which an expert in his or her discipline can play in court, along with a brief outline of the basis of the scientific approach which characterises that discipline.

But consider: how often is it that a lawyer will not know what type of expertise is required for a particular circumstance? If photographic evidence is in dispute, it is not necessary to read a book on experts to know that it might be useful to hire a photographic expert. And if a claim has been made that an individual was abused as a child, most legal practitioners are knowledgeable enough to realise that they should seek out a psychologist with some expertise in “recovered memory.” Even if the field of expertise was sufficiently arcane that most lawyers would be unfamiliar with it, (forensic odontology is covered in Chapter 7), a single chapter listing the various disciplines and providing a one or two page summary of their areas of expertise would have been sufficient.

Furthermore, when an expert has been hired, one of the functions of that individual will be to educate the lawyer concerning the methodologies used by the expert’s discipline. It is not necessary to provide detailed descriptions of these methodologies in a book such as this.

Rather, it is my view that the primary function of a book on experts should be to provide two types of information:

  • a discussion of the law concerning expert witnesses; and
  • a critical analysis of the weaknesses of the methodologies employed by the various disciplines – in order to help you to avoid flaws in your own case and to find flaws in your opponent’s case.

With respect to the former goal, the first two chapters in this book – Mr. Justice Sopinka’s “The Use of Experts” and Richard Scott’s “Judges Instructions Re: Experts” – provide useful introductions. Justice Sopinka’s discussion of hearsay evidence will be particularly valuable to most litigators.

With respect to the identification of weaknesses in expert testimony, the book was disappointing. Only two chapters were of real value. The first of these was Earl Cherniak’s chapter on “Examination of the Expert Witness” which contains a number of useful tips from one of Canada’s foremost litigators.

I also found Dr. Reginald Yabsley’s chapter, “The Medical Expert,” to be refreshing. All of the other experts in this book merely described the fundamental methodologies employed by their disciplines and provided examples of testimony. At virtually no point did they turn a critical eye on their areas of expertise. Most of these chapters were little more than advertisements for their various disciplines. Dr. Yabsley, on the other hand, added two important elements to his chapter. He identified a number of weaknesses that are often found in medical testimony and he provided detailed analyses of two expert medical reports. Hence, unlike the other chapters in this book, his chapter provides a considerable amount of assistance to the cross-examiner.

In short, I would recommend this book only to those law firms with large practices in both civil litigation and criminal law. Until the editors restructure the book to provide a more balanced, critical review of each discipline, it is only the first four chapters which most litigators will find of value.

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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).

Unresolved Issues in the Valuation of Estate Claims Under Survival of Actions

by Derek Aldridge

This article was originally published in the spring 1998 issue of the Expert Witness.

It has been nearly a year since the Duncan v. Baddeley court of appeal decision (Alberta Appeal #9503-0408-AC) allowed the estate of the deceased to claim for loss of income on behalf of the deceased. In that time we have been involved in estimating the estate’s losses in several of these cases. Discussions among our own staff (at Economica) and with our clients have raised numerous questions about the correct economic approach to valuing these losses.

As most of our readers know, the Duncan decision allowed the estate of a deceased individual to make a claim for the loss of the deceased’s income, under the Survival of Actions Act. This is in contrast to the usual claim under the Fatal Accidents Act in which it is only the surviving dependants who can make a claim for loss of dependency on income and household services.

Unfortunately, it remains quite unclear exactly how an estate’s loss is to be calculated. The guidelines offered in Duncan suggest that we should estimate what the deceased’s lifetime income likely would have been, deduct an amount for tax, and deduct a further amount representing what the deceased would have spent on necessities – or expenses incurred in the course of earning an income (The latter deduction is often referred to as the lost years deduction). However, although this general approach is outlined in Duncan, there remain many uncertainties.

First, consider the situation in which a deceased has left no dependants to make a claim for loss of dependency under Fatal Accidents. (Later I will address the situation in which there are dependents, leaving open the possibility of overlapping claims under Fatal Accidents and Survival of Actions.)

Fatal accident cases without dependants

The most important unresolved issue concerns the appropriate deduction from the deceased’s potential income. What should the size of this deduction be? Why is there a deduction at all?

It appears that the courts have endorsed the idea that a deduction should be made for cost of “necessities” that the deceased would have purchased, in the course of living and earning an income. This is similar to the “lost years” deduction that has been accepted in personal injury cases in which the plaintiff’s life expectancy has been reduced. (In these cases, the plaintiff is compensated for the income that he would have earned in the years that he is now not expected to be alive, less the portion of income that would have gone toward his basic necessities.) However, under Survival of Actions claims, we are not compensating the income-earner, so the logic behind this deduction is unclear. By allowing these estate claims, the court seems to have the goal of deterrence, rather than compensation, in mind. If so, then perhaps there should be no necessities deduction at all. Presumably if an “income-generating machine”, owned by the deceased, was destroyed in the same accident which killed the deceased, the estate would receive full compensation for the value of the income-generating machine – without any deduction.

If the goal is to compensate the estate for the deceased’s “lost pleasure” (analogous to compensation for “lost years” in a personal injury case), then we should deduct an amount corresponding to the basic necessities of living. Expenses beyond this surely would have provided pleasure to the deceased.

Without a goal of compensation in mind, it seems that any calculation of a lost-years deduction (and hence, the fraction of income payable to the estate) is arbitrary. In my view, it sounds equally reasonable to compensate the estate for half of the deceased’s income; or the amount by which his income would have been above-average; or the amount by which it would have been above the “poverty-line”; or any other amount.

Are we attempting to compensate the estate for what the deceased’s economic contribution to the world would have been, as if he had been an income-generating machine? If so, then we should be measuring something quite different than after-tax income less some deduction. And of course, the deceased’s economic contribution would have included non-market household services.

Household services is an issue that has not been addressed in these estate claims. So far it seems that only an amount corresponding to the deceased’s potential income is claimable, and the value of his or her services is not. However, it may be found that the deceased would not have ever been employed in the labour force, never would have earned a salary, but would have made significant labour contributions within his or her own home. The traditional homemaker role for women immediately comes to mind as an example. If it is believed that a deceased woman would have worked strictly as a homemaker, does her estate have a claim for a loss? From an economic standpoint it seems that it might. If the woman would have worked exclusively in the home, then she most likely would have had a spouse who was employed outside the home. There would be an implicit transfer of the spouse’s employment income to the homemaker (the homemaker is, to some extent, trading her household services for a share of her spouse’s employment income), and this income might be claimable.

Another way of looking at it is this: Suppose two young unmarried women died in an accident. The court finds that the first woman would have eventually worked as a full-time homemaker and mother in her own home, but would not have worked outside the home. The court also finds that the second woman would have worked for someone else, as a full-time nanny and homemaker, and would have earned $30,000 per year. Even though both of these women would have added similar economic “value” to society, the current economic approach which compensates for the lost labour market contribution would only allow a claim by the estate of the second woman.

Even if we ignore the issue of what deduction to make and assume that only employment income is to be considered, we still face uncertainty regarding tax. Under the Fatal Accidents Act, the award is based on the deceased’s after-tax income, to reflect that the dependants would have benefited from a share of after-tax income. Then the total award is “grossed-up” for tax that the dependant will pay, so that in every year of the future, he or she will have available the same income that he or she would have benefited from if the deceased had lived. The Duncan judgment suggests that we should also deduct tax, but there is no mention of a gross-up. Of course, the estate (whoever that might be) will face an increased tax burden due to the interest generated by the award and will therefore receive insufficient compensation without a gross-up. However, how do we gross-up an award to the estate? That would require that we know who (and how many) will benefit from the award, and we would need to make assumptions regarding their future income and tax situation. However, if the award is paid to the estate, then it seems that the court may not even know who will eventually receive the award, so a gross-up at the time of judgment would be impossible.

In an earlier Expert Witness article (“Implications of Duncan v. Baddeley“, The Expert Witness 2[2]) Christopher Bruce argued that a tax gross-up is not necessary for estate claims if there is no presumption that the estate is expected to invest the award in order to replace a future stream of lost income. However, without a gross-up, the estate will need to spend the entire award almost immediately in order to avoid tax-attracting interest, which would result in under-compensation. And if compensation is not the goal, then what is the purpose of deducting tax at all? Why not base the estate’s claim on gross income?

Fatal accident cases with dependants

In circumstances in which there are surviving dependants after a fatal accident, two additional questions arise. First, “What sort of claim would be more valuable, one under Fatal Accidents or one under Survival of Actions?” The second obvious question is, “Can there be two claims, one under Fatal Accidents and one under Survival of Actions?” The answer to the first question, under most (if not all) circumstances is that a loss of dependency claim under Fatal Accidents would be more valuable (see Christopher Bruce’sImplications of Duncan v. Baddeley“, The Expert Witness 2[2]). The answer to the second question may seem clear, but is not.

Most would probably not expect that the courts will allow surviving dependants to receive compensation for their loss of income and household services dependencies, and at the same time allow the estate to receive compensation for a portion of the income that the deceased would have earned. However, it may be possible for these two claims to co-exist if they do not overlap. That is, the survivors could be compensated for their loss of dependency, and the estate could be compensated for its loss, to the extent that the estate’s loss has not already been claimed by the dependants. For example, under a sole-dependency claim (where, say, there is only a dependant spouse), the spouse receives compensation for approximately 70 percent of the deceased’s after-tax income. The 30 percent that the spouse does not receive is the component of the deceased’s income that benefited the deceased exclusively. However, not all of that 30 percent would have been for necessities and therefore a portion may be claimable by the estate.

Also, if the court decides to apply a divorce (or remarriage) contingency to the dependant spouse’s loss, his or her award may be reduced dramatically. The part of the spouse’s award that is “lost” due to the divorce/remarriage contingency may be claimable by the estate. Taking this a little farther, it is possible that the estate could claim the component of the dependant’s award that is “lost” due to the application of a contingency for the survivor’s probability of survival.

If there is no surviving spouse but there is a surviving child, then under Fatal Accidents, we usually see that the surviving child’s claim only extends to his or her age of financial independence (usually age 18-22). Since the deceased may well have continued to earn income after this point, it seems plausible that for the period after the child’s “independence age”, the estate may be able to make a claim under Survival of Actions. For example, we could observe a case in which a surviving child claims an income and household services dependency loss over the period during which the deceased would have been age 35-45; and then the estate claimed a loss of income from the deceased’s age 46 to retirement.

Despite the difficulties involved in calculating the estate claim under Survival of Actions; from an economic (and, I would hope, logical) standpoint, it seems reasonable that we should be able to incorporate these estate claim “add-backs” after determining an appropriate award for loss of dependency.

Conclusion

The Duncan decision has left us with many questions about how to deal with estate claims. Before these can be answered, it seems that the Court will need to determine whether the goal of these claims is one of compensation or of deterrence. If compensation is the goal, then our task is to determine how to fairly compensate a deceased person’s heirs (the estate), when their financial loss due to the death is (in many cases) minor. If the goal is one of deterrence, then damages should reflect what the deceased’s contribution to society would have been – still a difficult task.

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

The Role of the Expert Witness in Developing “New” Law

by Christopher Bruce

This article was originally published in the spring 1998 issue of the Expert Witness.

One of the most exciting aspects of working in civil litigation is that participants in the legal system have the opportunity to influence the evolution of the law. Although some changes in tort law are imposed by legislatures, most developments are litigation-driven.

This raises a question which I have not seen asked anywhere else: Should arguments about changes in the direction of the common law be left to those trained in the law – judges and lawyers – or is there a role in this process for the testimony of “expert witnesses?”

I raise this issue as a result of my experiences with the evolution of two principles in damage assessment: the calculation of the dependancy rate in fatal accident actions and the calculation of the lost years deduction in serious personal injury claims.

Briefly, the two issues are these: In the case of the calculation of the dependancy rate, it is commonly accepted that the surviving spouse would have benefitted from approximately 70 percent of the (after-tax) incomes of each of the deceased and the survivor – with the remaining 30 percent having benefitted the deceased alone. What is not agreed, however, is whether the 30 percent of the survivor’s income which would previously have benefitted the deceased should now be deducted from the survivor’s loss of dependancy. (When this deduction is made, it is said that a “cross dependancy” approach has been used; whereas when the deduction is not made, it is said that a “sole dependancy” approach has been used.)

In the case of the calculation of the lost years deduction, the argument is that a plaintiff whose life expectancy has been shortened will not need to be compensated for the full value of the income lost during the years which he/she will not now live. Numerous theories have been put forward for the determination of the deduction which should be made – ranging from the deduction of only those components of income absolutely necessary to the maintenance of life to the deduction of the entire value of the plaintiff’s projected expenditure on consumption (i.e. deduction of the entire value of income except savings).

My purpose here is not to argue in favour of one or the other of the approaches to each of these issues. I have done that at length elsewhere*. Rather, my purpose is to ask what the role of economists – and other financial experts, such as accountants and actuaries – should be in the presentation of these issues to the court.

The Role of the Expert: Two Approaches

At least two contrasting approaches to the role of the expert can be defended. The first, which I will call “constructive” (but which others might call “interventionist”), recognises that legal arguments are often informed by developments in other disciplines – notably, philosophy, sociology, accounting, psychology, and economics. Where the arguments being made rely on sophisticated applications of these other disciplines, therefore, there may be a role for experts from those disciplines to testify concerning recent developments in the relevant literatures.

Some proponents of the constructive approach would go so far as to argue that such experts should be allowed to testify concerning what the law “should be.” A more appropriate role, I would argue, is that experts would merely be allowed to explain how the tools of their disciplines could be used to cast light on the issue facing the court.

The second approach, which I will call the “passive” approach, suggests that it is only those with formal training in the law who should be allowed to present arguments concerning potential changes in, or interpretations of, the common law. Hence, the opinions of non-legal experts should not be heard in court. The expert’s only role is to apply the existing law as best as he or she can.

The Constructive Approach

The primary advantage of the constructive approach, as I indicated above, is that theoretical and statistical developments in other disciplines will often be of value to the court in making its decisions. If extensive knowledge of these disciplines is required in order to fully understand the nature of the arguments, it may be preferable to have the presentation made in court by experts.

With respect to the lost years deduction, for example, economists, sociologists, and statisticians have considerable expertise with respect to both the definition and measurement of concepts such as “consumption” and “basic necessities.” And with respect to the measurement of dependancy rates, economists, sociologists, and psychologists have all written extensively about interpersonal relationships between spouses within marriage.

The primary danger associated with the constructive approach is that the expert will be tempted to stray beyond his or her area of expertise and begin to comment on matters requiring legal training. The first step in avoiding this problem is for the lawyer who has retained the expert to recognise that certain types of expert testimony can be construed as legal argument. Much of the testimony of experts in Canada concerning dependancy rates and lost years calculations, for example, has implicitly represented an argument concerning what the law “should be” – not because the expert saw that as his or her role but because the expert (and the retaining lawyers) had not recognised that that was what the expert’s testimony implied.

The Passive Approach

There are two advantages to the passive approach. First, it avoids the problem that the expert will stray outside the boundaries of his or her discipline. Second, if the law is well established, the expert will be able to avoid unnecessary testimony concerning possible alternative scenarios which have previously been ruled to be irrelevant. (For example, no Canadian economist would consider “wasting” the court’s time arguing that a tax gross up should be allowed on a loss of income claim, as the Supreme Court has clearly ruled that such a gross up will not be allowed.)

On the other hand, if the law is still evolving, the passive approach encounters two debilitating problems. First, any attempt to extract a straightforward rule from the decided cases is virtually doomed to failure. This is clear in the cases of both the dependancy and the lost years calculations. In both cases, there have been virtually as many different rulings as there have been judicial decisions. For anyone, lawyer or expert witness, to suggest that they can identify what “the” law is on either issue is presumptuous, if not preposterous. Nor would it be useful simply to adopt a “median” position. In issues like the dependancy rate there is no median position; and in issues like the lost years deduction there is no compelling reason to assume, ex ante, that the median position will prove to be the “correct” one.

Second, as a review of the decided cases on both dependancy rates and lost years deductions will reveal, when litigants first attempt to convince the courts to adopt a new legal principle, they often do not concern themselves with the finer details of those principles.

It is clear in the decided cases with respect to lost years, for example, that litigants and the courts have focussed primarily on the questions of whether such a deduction is required and, if so, whether it is “necessities” or the “costs of living” which should be deducted. Virtually no consideration has been given to the deeper issues of what the terms “necessities” and “costs of living” mean, nor of how one might measure those concepts. In the path-breaking Supreme Court case of Toneguzzo-Norvell v. Burnaby Hospital, the only evidence given by the plaintiff’s expert was as follows:

Q. …But would you agree that your average person … would spend something between 50 to 75 percent of their income on necessities…

A. Surely

No attempt was made to define the word “necessities” for the expert, nor was the expert asked to undertake any statistical research into the issue. Similarly, in another case which is widely quoted, the judge indicated that he had based his decision (concerning the lost years deduction) on the testimony of an expert economist. But when I contacted the economist in question he informed me that his entire testimony on that issue consisted of a brief response to a question put to him in cross-examination – a question to which he had not turned his mind prior to that time.

In the early stages of the development of new legal doctrines, it is common for “loose ends” to be left in this way. It would be inappropriate in my view for subsequent courts to rely too heavily on the “precedents” thereby established. Only when it can be shown that a superior court has turned its mind specifically to an issue, and ruled on it, would it be advisable for lower courts to rely on previously-made decisions in a developing area of law.

Furthermore, until the law has been clearly enunciated, it would seem inadvisable to insist that the expert rely strictly on “precedent” if that expert’s discipline has developed tools which would be of value to the court. Provided the expert testimony is presented as an aid to the court, rather than as an exposition of how the court “should” rule, that testimony may have a legitimate role to play.

Conclusion

It is not uncommon to find areas in the common law in which no clear precedent has yet been established. In some situations, like that of the argument concerning cross versus sole dependancy, this is because very few cases have been taken to court. In others, it is because the issues are so complex that the courts simply have not been able to turn their minds to all of the possible nuances. In these situations, I would argue that it would be irresponsible for an expert to argue that she or he had based a damage assessment on the “decided cases.”

At the same time, the expert must also recognise that his or her role in court is not to identify what the law “should be.” Rather, the expert must restrict her or his role to the presentation of theories or facts drawn from her/his disipline which can be expected to assist the court in making an equitable decision.

Footnotes

*On cross- versus sole-dependency, see Assessment of Personal Injury Damages, 2nd Edition (Butterworths, 1992); “Calculation of the Dependancy Rate in Fatal Accident ActionsExpert Witness, Winter 1996; and “Determination of Personal Consumption Expenditures in Fatal Accident Actions: A Note” Journal of Forensic Economics, 10[3], 1998.

On the lost years deduction, see “Shortened Life Expectancy: The ‘Lost Years’ Calculation“, Expert Witness, Spring 1996; “The ‘Lost Years’ DeductionThe Barrister, December 1996 issue (number 42); and “The ‘Lost Years’ Decuction” Lawyers Weekly, March 28,1997. [back to text of article]

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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).