Tag: newsletter (volume 2 issue 4)

Determination of the Hourly Cost of Household Services

Posted on By economica

by Therese Brown and Audrey Hallson

This article first appeared in the winter 1997 issue of the Expert Witness.

Articles in previous issues of The Expert Witness have dealt with the appropriate approach to the valuation of the loss of household services, as well as methods to determine the number of hours lost, and a brief look at the way that the courts have dealt with this issue. The focus of this article is the determination of the hourly rate which should be applied to the replacement cost of those household services which the plaintiff performed prior to the accident but is now unable to undertake.

On the face of it, this would seem to be a fairly straightforward process. The features which make this issue more complex become apparent when we pose certain questions, such as: What activities comprise household services? What type of provider can best replace those services which the plaintiff is now unable to undertake? Are there features which differentiate the services offered by seemingly similar service providers? Is there a standard which should be adhered to in regard to the level of service that a plaintiff should be compensated for? Is there a generalist rate that can be applied to the loss of household services which reflects the replacement cost of household services for the plaintiff?

While some of these queries lack pat answers applicable in all cases, it is our intent to give these issues serious consideration in the discussion which follows.

What are Household Services?

Anyone who has undertaken activities in or around the home is well aware that these chores are many and varied. Certain household duties come quickly to mind in this regard, for example, meal preparation, general cleaning, and laundry. There are other household activities which should also be considered, despite the fact that they may not form a large proportion of total household responsibilities. Examples would include indoor as well as outdoor maintenance.

Of interest here is the rate payable to replacement help for those services which the plaintiff is no longer able to undertake. In many instances a plaintiff continues to undertake selected household activities but his/her injury precludes participation in other activities. It is, therefore, important to compensate the individual fairly by utilising an hourly rate for a provider who actually performs the required services. The following discussion will provide a brief explanation of the services provided by various agencies or individuals who may be contracted to provide replacement help to a plaintiff.

Types of Service Providers

We find it useful to distinguish three primary types of service providers. These we call: homemakers, housecleaners, and handymen.

The primary purpose of a homemaker is to provide services which allow a person, compromised in some way, to remain in his/her own home. Homemakers generally undertake non-labour intensive housekeeping duties including light cleaning, meal preparation, grocery shopping, and laundry. These individuals would not undertake all of the general cleaning tasks required in the household. It is not the norm for homemakers to provide any of the equipment or supplies required in the performance of their duties.

Housecleaners tend to specialise in more labour intensive cleaning duties than do homemakers, and they usually provide necessary equipment and supplies. These individuals may be found either through agencies which are listed in the yellow pages of telephone directories or through classified advertisements in newspapers. The latter are more likely to be owner/operators.

Replacement services which are of a home maintenance nature would generally be provided by a handyman. These service providers may be accessed through the yellow pages or classified advertisements. They would undertake tasks such as the repair of leaky faucets, replacement of a furnace filter, or minor household repairs.

Finally, repair of automobiles and outdoor maintenance, such as lawn maintenance or snow removal, would be accomplished by service providers who specialise in those particular services.

Average Rates Charged by Service Providers

In February and March of 1997 Economica undertook a comprehensive survey of rates charged by various service providers in the Calgary and Edmonton areas. With the exception of those housecleaners who are individual providers, we have relied on prices quoted by businesses who offer their services in the yellow pages of telephone directories. The table below summarises the results of this survey. These rates are shown in terms of the cost per hour to hire the various service providers, other than average costs for lawn maintenance and snow removal services. The latter prefer to provide quotes for the total cost per season of providing the service.

The large rate differential between homemakers and housecleaners is largely explained by the fact that these providers offer services which differ from one another in a number of important ways. As previously noted, homemaker services are limited to lighter cleaning duties. The source of the rate differential between “agency” and “individual” housecleaners is less apparent. The most significant difference between these two providers is that the former are usually bonded, insured, and covered by workers’ compensation, which is generally not the case for the latter.

Household Service Provider Rates
Calgary Edmonton
Homemakers (Agency rates) $13.47/hr $13.39/hr
Housecleaners (Agency rates) $18.49/hr $17.25/hr
Housecleaners (individual providers) $13.54/hr $14.98/hr
Handyman $24.68/hr $23.32/hr
Lawn Maintenance (per season) $613.62 $589.09
Snow Removal (per season) $589.07 $637.12

Generalist Rates for Replacement Household Services

In a previous article (The Expert Witness, Winter 1996), we proposed that the technique of choice in the valuation of household services is the generalist variant of the market replacement method. An alternate valuation method, the specialist method, would base the loss on the cost of hiring various and assorted specialists to replicate the contribution previously made by the plaintiff. The concern with that method derives mainly from its impracticality. To match the rates charged by numerous specialists to innumerable household tasks which are now outside of the plaintiff’s capacity would be an almost impossible task. As such, the generalist variant remains the method of choice.

It is shown in two examples which follow that the use of one all-inclusive generalist rate is usually sufficient to accurately capture the plaintiff’s loss of household services. It is recognised, however, that the generalist rate may be oriented either toward: the homemaking type of service (including meal preparation and lighter cleaning); or the housecleaning type of service (comprising more onerous cleaning duties). Finally, a third example describes a situation in which the use of one all-inclusive generalist rate may be inadequate. In that case, it is shown that the use of the generalist rate may need to be supplemented with the use of another rate.

In the first instance, it is assumed that a severely injured plaintiff who resides in a small condominium, will require the services of an individual who will prepare meals and perform general light cleaning duties, to allow him/her to remain in his/her own home. In this case homemaking services would comprise the largest component of future replacement services, as outdoor maintenance is provided and only minimal general cleaning activities would be required in the smaller residence. It can be assumed then that the loss can be calculated according to a generalist rate based on the average cost of hiring a homemaker.

In a second instance, a plaintiff who is less severely injured is able to continue with meal preparation and light cleaning, precluding him/her only from undertaking more labour intensive cleaning duties. Thus, the relevant generalist rate would be the average hourly rate charged by housecleaners.

Finally, in a third case it may be necessary to supplement the use of a generalist rate with the rate of another service provider. For instance, it may be found that the plaintiff’s previous contribution to household services was in the area of meal preparation and home repair/maintenance, neither of which are possible now given his/her physical limitations. The replacement help required by the plaintiff would then include both a homemaker and handyman. For the former, the use of a homemakers’ rate would be representative of the generalist rate required in the calculation of the loss. This alone would not capture the plaintiff’s loss if it shown that prior to the accident he/she also contributed several hours per week to maintenance duties. In this case, the use of a handyman rate should be applied to the portion of hours which the plaintiff is no longer able to contribute toward those type of activities.

Additional Complications

As can be seen in the table of household provider rates, there is a large differential between the average rates of housecleaners hired through classified ads and those hired from agencies. It appears that this is attributable to the fact that the latter tend to be bonded, insured, and covered by workers’ compensation, which is usually not the case for the former. The implication of this additional proviso is that the customer who hires housecleaners from an agency is afforded additional protection. Protection, in part, is derived from the screening of service providers, due to their bonded status. The consumer who buys cleaning services from an agency would be covered for breakage or theft which might occur while the service provider was in his/her home. In addition, because of workers’ compensation coverage, the plaintiff would not be liable for injury that the housecleaner may incur while in the plaintiff’s home.

To some extent, then, the consumer who purchases cleaning services from an agency is choosing a service which differs from that purchased from an individual provider. Determination of the appropriate replacement rate for the provision of housecleaning services is an important issue, as it can have a significant impact on the award. It is important, therefore, to ascertain which of these rate forms the basis for adequate compensation for the plaintiff who will need to hire housecleaning replacement services.

There is yet another factor, not yet alluded to here, which further complicates the valuation of the loss of household services. This is the loss of the management component of household services. A more complete discussion of the concept of the “management or indirect labour component” of the loss of household services can be found in an earlier article dealing with judgments in the valuation of household services (The Expert Witness, Autumn 1997). Any individual who has managed a household can verify that this is essential to the success of any well-run home. In regard to this important function, however, the determination of an appropriate rate becomes increasingly difficult, as this is not a service which can be readily purchased in the market. Until an alternate approach is determined to deal with the loss of household management capabilities the loss is probably best reflected by the generalist rate for replacement help that is being used in that particular case.

The Courts

A number of recent court judgments have specified hourly rates at which the loss of household services has been valued. In Morris v. Budnarchuk (1997) Action No. 9503 04671, Sanderman J. accepted the hourly rate of $10.75 which had been applied to the pre-accident loss. The rate of $12.00 for the future loss of housekeeping services was rejected, to be replaced by the rate of $10.75 throughout. One of the points raised to support the rejection of the higher rate was that there had been no consideration given to the fact that there are people who will perform household services for minimum wage. Likewise, in Reynolds v. Pohynayko (1997) 202 A.R. 1, a proposed rate of $12.00 per hour was rejected in favour of a rate of $8.50 per hour. The rationale for this decision was that there was no need to pay agency rates for housecleaners, as housecleaning services could be hired directly. In Labbee v. Peters, (1997) 201 A.R. 241, McIntyre J. ruled $10.00 per hour to be an appropriate generalist rate at which replacement help could be hired. Other recent decisions have employed similar rates.

These decisions leave both counsel and economic experts in something of a quandary. Whereas our survey indicates that it would be difficult to find a service provider for less than $13 per hour, even from the classified ads, the courts have consistently imposed their own view that no rate above $11 is permissible. The question is: should the expert substitute a rate which has been derived employing a sound statistical methodology with one which has been chosen by a number of trial courts, but not approved by the Court of Appeal?

Some economists testifying in Alberta have answered “yes” to this question and, in the face of the evidence which they have collected themselves, have begun to recommend a rate of $10.00 to $12.00. It is our view that this approach is an abrogation of the responsibility of the expert to provide the best evidence possible. Of course, should the legislature or the courts mandate a particular rate, as has been done with respect to the discount rate in most provinces, the expert would be obligated to adopt that rate regardless of the evidence.

Summary

This discussion has expanded on the use of the generalist method in the determination of the loss of household services. Assigning an appropriate rate to the loss of household services may have a large impact on an award for the loss of household services. Given this reality, it is important to look closely at the nature of a plaintiff’s loss of household services. In most cases, the loss can be valued at one all-inclusive generalist rate. This necessitates the determination of whether the generalist’s role is to provide access to homemaking services of a non-rigorous nature or housecleaning services which are more labour intensive. In reference to the latter, it must then be determined whether the plaintiff’s needs are met by the services of an individual provider or whether a housecleaner hired through an agency is more appropriate.

It has been noted that the rates applied to the loss of household services in the courts are not consistent with the rates charged by the service providers contacted in our survey. There is considerable discrepancy especially between the rates suggested by recent court decisions and the rates of housekeeping agencies which we surveyed. This would imply that plaintiffs are not being compensated at a rate which would allow them to hire replacement workers who are bonded, under the auspices of a licenced business. It may be argued that the plaintiff should have access to bonded replacement workers from a licenced agency, thus leaving him/her relatively less vulnerable in regard to the increased potential of theft or breakage of personal property, and exposure to a liability claim from an injured worker. If there is validity to that claim, it may be argued that the use of an agency rate in the valuation of a household services claim is necessary to restore the plaintiff to his/her pre-injury status.

Finally, there are instances when the use of one generalist rate may result in inadequate compensation. In those cases, a more complex approach is necessitated, whereby the plaintiff’s loss is valued according to the cost of replacement help for more than one type of service. Given that this would make the calculation of the loss more complex, it would be advisable to pursue this route only if the plaintiff’s loss of capacity in categories outside of basic homemaking/housecleaning services forms a significant portion of the loss.

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

From 1995 through December 1998, Audrey Hallson was the office assistant at Economica. She also assisted with Economica’s newsletter, and conducted research.

The Role of the Occupational Therapist in Personal Injury Litigation – Part 2

Posted on By economica

by Lorian Kennedy

This article first appeared in the winter 1997 issue of the Expert Witness.

In Part I the basic education and role of an occupational therapist and a basic assessment were discussed. This article outlines the specific value of an expert occupational therapist in a litigation setting and when costing future care needs. It explains how this role differs from other experts.

The occupational therapist understands medical conditions and can explain the impact of impairments in terms that are relevant to the individual case and day to day performance abilities. For example, how would loss of sensation in a hand impact employment if motor functions such as muscle strength and coordination have been preserved? A hairdresser, for example, would be able to use her hands only when she could see them directly. She would not be able to sense temperature, wetness, texture, bulk, etc. When her fingers were covered by her client’s hair she would not be able to tell where they were. She would not be able to feel inside a container to pull out hair clips, etc. Her speed and dexterity would be affected. She would be at higher risk of burning herself or her clients on curling irons. An established hairdresser might be able to compensate by focusing on other aspects of the hairdressing business such as administration. A starting hairdresser would be well advised to change careers to one with less emphasis on manual skills. For a typist this type of impairment would significantly reduce typing speed. In terms of housekeeping, more spills or errors and reduced efficiency would be expected.

Various methods of valuation of household services, such as opportunity costs or market replacement costs, have been discussed in past issues of this newsletter (The Expert Witness, Winter 1996). But these methods must rely on an estimate of what capacity the individual had prior to the injury and what loss has occurred. The plaintiff’s statements alone may not provide sufficient evidence to substantiate their claims. In Acheson v. Dory (1993) 8 Alta. L.R. (3d), at 128, Justice Picard cited factors to consider in loss of housekeeping awards: “specific tasks the plaintiff can and cannot do; the plaintiff’s pre-accident standards of housekeeping; modifications the plaintiff can make to achieve that standard; and the number of hours worked before the accident.” Later, in McLaren v. Schwalbe (1994) 16 Alta. L.R. (3d), at 108, she explained the importance of tendering evidence of “lifestyle, duties and responsibilities, standards, nature of the family unit, and perhaps the plaintiff’s goals.” These are the kind of issues addressed in an occupational therapy assessment. It includes detailed information specific to the individual and their impairments, the role they play in the family, the additional roles they may have caring for extended family, the adaptations they have already made, and additional adaptations or modifications that may be possible. This information is considered in the light of the individual’s performance on functional tests and takes into account pain, fatigue and emotional status. Following this assessment the occupational therapist provides an expert opinion on the number of hours of replacement services or other type of modifications or equipment that would be required to restore the plaintiff to their pre-injury status or as close to it as possible.

The sincerity of effort of the client is always a concern and many attempts have been made to quantify this, sometimes with simplistic methods, such as calculations of coefficients of variation of repetitive strength measures. In their study entitled, “Determining claimant effort & maximum voluntary effort testing: A discussion paper” (Work Function Unit, McMaster University, 1996), Strong and Westmorland, found that these methods, particularly those that rely mainly on physical testing, are founded on weak theoretical arguments and lack scientific reliability and validity. A combination of assessments using information from many domains such as medical reports, history, self report, functional testing, work site evaluation, etc. has been recommended rather than physical testing alone. The occupational therapy evaluation has the advantage of a lengthy period of time spent with the individual with a variety of test types and settings.

Distinguishing features of the occupational therapist

There is sometimes confusion about which experts are the most appropriate. There is no single answer as each case may require different expertise or in many cases a combination of experts.

At one time the physician was relied on to answer all questions regarding an individual’s ability to work. The physician is often still placed in this role and asked to comment on an individual’s work limitations or the match between the individual and their work. However physicians have rarely been educated in job analysis and usually have to base their opinions on brief office visits and medical tests rather than functional capacity testing. The Canadian Medical Association in a recent journal article, “CMA Policy Summary: The physician’s role in helping patents return to work after an illness or injury” (Canadian Medical Journal, 1997, 680) encourages physicians to refer their more complex patients for a comprehensive, objective assessment of functional capabilities, limitations and their relation to the demands of the patients’ jobs.

A vocational evaluator or counsellor usually does testing which relies heavily on pencil and paper test batteries and limited physical evaluation. These tests gather information on aptitudes and interests, and educational levels. This expert can provide market research and may assist with job placement. A computerized search can create a list of jobs which match an individual’s scores. However the lack of detailed information regarding physical capacity or psychosocial barriers can limit the value of the results. It is often an advantage to have an occupational therapist evaluate the individual first so that the vocational evaluator can incorporate the additional information into their analysis, ruling out jobs which are beyond the individual’s limits.

Similarly, standardized psychological tests include only minimal light physical demand components, but can provide detailed assessment of cognitive components. This type of assessment is particularly important where there is a possibility of brain injury or where depression may be a factor. On the other hand, the occupational therapist has the opportunity of being able to see the client perform in the “real” world and in some situations can try out various approaches in those settings.

Physical therapists have generally focused their attention on the physical components of assessment and on the various modalities of treatment. While measures of strength, range of movement, etc. are important they have limited usefulness to the court unless the impact on the individual’s ability to perform functional tasks or complex roles is made clear. Physical testing alone is not sufficient to answer the complex questions regarding a person’s ability to be productive or to pursue their goals.

Home economists have also played a role, particularly regarding loss of capacity to provide household services. Their input is valuable in terms of costing methodologies and comparisons of the individual to statistical data. However, occupational therapists are able to analyze task performance, to suggest modifications in light of medical conditions and/or impairments and to comment on functional capacity.

Other individuals such as nurses or people dealing with specific disability groups may also have developed expertise in costing, but have varying expertise in terms of evaluation.

Cases meriting referral to an occupational therapist

An occupational therapist’s background allows them to work with a wide range of clients, however individual therapists have often developed specialized areas of expertise. The OT expert will discuss a referral, at no charge, to determine if it would be appropriate to their expertise.

In the area of personal injury litigation the occupational therapist is usually involved once the individual’s recovery has reached a plateau. However occupational therapists can also provide a valuable role in case management, problem solving and treatment at earlier stages with improved outcomes and reduced delay before return to work or other resolution. Lack of funding for these services has been the major barrier to this role. Occupational therapists could also be of great assistance in cases of wrongful death to clarify the roles the individual played and to provide an opinion on the impact of their absence. To date they have rarely been used in this capacity.

If engaging occupational therapists, new to the role of personal injury litigation, lawyers must ensure that they understand the litigation environment. Assessments and reports that are performed for rehabilitation purposes tend to focus on assets and downplay impairments in keeping with a rehabilitation philosophy. However, in a litigation situation equal attention must be given to both assets and limitations. The future must be viewed based on what is likely and not necessarily what is hoped for. Adequate consideration must be given to the possibility of a less than optimal scenario.

Cost of the Evaluation

Each case must be considered individually and the assessment will vary depending on the complexity and the type of assessment necessary. A typical assessment of the type described below ranges from $1,600 to over $2,000.

Case Study

Mrs. X, 67 year old woman, was a pedestrian hit by a car two years previously. She fractured her left forearm and injured her right knee and back. The injury to her knee resolved but her arm healed with permanent angulation and loss of range of motion. Mrs. X complained of weakness, pain and loss of function in the left hand. Her pre-existing medical conditions included osteoarthritis of her knees and hips with surgery on her right knee with a good result. Right hip replacement surgery was planned in the near future to relieve pain from her osteoarthritic hip. No other treatment was planned.

A review of the background material and a detailed interview in her home revealed that Mrs. X was a homemaker at the time of her injury and lived with her husband. Prior to her injury she baby-sat her grandchildren approximately three hours a week. She knitted projects such as bedspreads. She had mobility difficulties related to her hip and her sleep was disturbed by hip pain.

Subsequent to her injury she was unable to set her hair in rollers, or cut her nails on one hand. She had difficulty bending and doing up her shoes. She had difficulty manipulating objects to do her usual cooking, or lifting, and she had relinquished most of the household chores because of a combination of hip pain and decreased hand function. She could no longer do any knitting or baby-sit her grandchildren. She was frustrated, angry and depressed with her pain and disability.

The laboratory assessment had to be adjusted for her age, hypertension and painful right hip. Evaluation of maximal lifting strength was not deemed appropriate. Comparison of left and right arms revealed limitations in speed, sensation and range of movement in her left shoulder, wrist and hand. Her ability to manipulate objects with her hands was observed in a variety of functional activities (such as picking up small items from the table, peeling potatoes, slicing, wringing out a cloth, and pouring from a pot). Evaluation of her ability to carry a ten pound bag (simulated groceries) revealed marked weakness on the left and pain. Grip and pinch strength testing also revealed marked weakness on the left. She indicated that she had no pain at the beginning of the testing session but pain in her left wrist when exerting force.

The occupational therapist was able to comment on Mrs. X’s functional limitations separating to some degree those impairments related to her hand from her other pre-existing complaints and noting their combined impact.

In the opinion of the occupational therapist Mrs. X was found to be consistent in her complaints and reports with marked impairment to her left hand function. No improvement in her hand impairment was anticipated but it was suggested that she could learn some helpful adaptive techniques. Some of her functional limitations were caused by her hip pain which contributed to her frustration and depression but a significant amount related to her left arm. She was less able to compensate for hip dysfunction by using her arms to work from a seated position. Her hip pain would hopefully be relieved by surgery but she would have to cope with ongoing loss of left hand function and pain. Decreased use of her left arm predisposed her to further loss of shoulder range and because of her lack of sensation in the left hand she was also at greater risk of injuring herself. Her ability to live alone in the future should she be faced with this eventuality was compromised.

Costs of future care were based on the combination of her hip and hand limitations. Costs included the following: adapted equipment ( specialized cutting board, non-slip matting to stabilize items while she manipulated them, a jar opener, grab bars, tub seat, hand shower); four hours of occupational therapy treatment at $75 per hour; weekly hairdressing services for hair care she used to do herself at $14 per week; bimonthly hair coloring at $35 minus the $6 for home purchased colouring; ten hours per week assistance with homemaking, food preparation and cleaning at $13 per hour; seasonal cleaning of eight hours at $16 per hour; five hours per week for five months per year for her share of gardening at $8 per hour; 0.5 hours per week for five months for her share of snow clearing at $8 per hour; and three hours of childcare per week for 48 weeks for five years at $8 per hour.

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Lorian Kennedy has an M.Sc. degree from the University of Alberta, is a registered occupational therapist and the principal of Lorian Kennedy Consulting. She is an adjunct assistant professor in the Occupational Therapy Departments of the University of Alberta.

D’Amato v. Badger – Complications Arising when the Plaintiff is a Business Partner

Posted on By economica

by Christopher Bruce and Scott Beesley

This article first appeared in the winter 1997 issue of the Expert Witness.

Some of the issues arising when an injured party had been a partner in a small business were recently discussed by the Supreme Court of Canada in D’Amato v. Badger, [1996] 8 W.W.R. 390 (S.C.C.). In that case, D’Amato had been one of two partners in an autobody repair shop. As a result of injuries suffered in an automobile accident, D’Amato’s ability to contribute to the operation of the business was severely and permanently restricted. D’Amato continued to provide some managerial services, but his primary services, as a skilled autobody repairman, had to be replaced with hired workers.

Nevertheless, between the time of D’Amato’s injury, in August 1987, and the trial, in March 1993, D’Amato’s partner, Namura, continued to pay D’Amato his pre-accident salary of $55,000 per year. Although the company recouped some of this payment from the services of replacement workers, the court found that the company’s profits were significantly lower during the pre-trial period than they would have been had D’Amato been healthy.

In this article, we wish to add to the analysis of the D’Amato decision by providing an economist’s perspective on the issues which were raised there. We do not, however, represent ourselves as experts on the legal doctrines which were discussed, in some detail, by the court.

Can a Company Claim When a Partner Is Injured?

Although the trial judge in D’Amato, Mr. Justice Vickers, awarded damages to D’Amato’s company, Arbor Auto Body, the Court of Appeal and the Supreme Court, ruled that the claim had to be made on behalf only of the injured partner. There was some suggestion from both of these courts that, as a public policy goal, claims from shareholders resulting from employee injuries should be discouraged (in order to encourage companies to insure themselves against such losses, and prevent frivolous claims). From an economist’s perspective, the critical factor in deciding whether or not a corporation (or partnership) suffers a loss when an employee is injured is simply whether or not that person’s labour can be replaced at constant cost. If the company can easily hire a replacement, or combination of replacements, who can produce identical business results at identical cost, then the company has suffered no loss at all. As this is almost always the case, few shareholder loss claims, for lost market share or profit, would succeed.

In practice, however, the business may incur additional costs associated with hiring and training and either lower quality or reduced productivity of replacement help. The loss claimed by Arbor (in particular the half of it claimed by Mr. D’Amato’s partner) was simply an attempt to recover an overpayment of salary relative to work provided, not an attempt to claim that the business was seriously impaired by Mr. D’Amato’s limitations.

In general, for medium-sized and larger companies, the employer’s loss in this type of case would be small, and the cost of putting forth a claim could be considerable, thereby limiting the number of claims. For a smaller business, however, any potential claim related to a loss of business volume would be greater, in a relative sense. It is quite plausible that the loss of a skilled technician like Mr. D’Amato could result in a loss of business, or that the added costs imposed on the company to find, train, and supervise replacement workers could be significant. As long as courts demand that the company in question provide firm evidence of any loss of business, or additional costs, then there would be no overcompensation. An additional factor which would create a tendency to modest awards is the short-term nature of this loss: Reputations can be re-established, training takes only so long, and hiring costs are a one-time item in most cases.

Should a Business Partner be Altruistic?

A complicating factor in D’Amato, which does not appear to have been considered explicitly by the Supreme Court, was that D’Amato’s partner continued to pay D’Amato his pre-injury salary after the injury, even though D’Amato’s productivity had been reduced significantly. According to Mr. Justice Vickers’ decision, D’Amato’s post-injury value to the company was only 25 percent of the salary which was paid to him. Had D’Amato been paid the actual value of his work, his pre-trial claim would have been roughly 75 percent of $55,000, or $41,250, per year. The business’ only losses, if any existed, would be from loss of volume, since customers would know Mr. D’Amato was not doing the work, or from the additional costs of hiring and training discussed above.

But Namura/Arbor did continue to pay D’Amato his pre-injury income. Hence, although the total loss which was incurred was the same as if Namura/Arbor had paid D’Amato only according to his post-accident productivity, the nexus of the loss was shifted – from D’Amato to Namura and Arbor. In spite of the fact that the total value of the loss was unaffected by this shift, the Court, by refusing to compensate Arbor for its overpayments to D’Amato, allowed the defendants to benefit from an altruistic act on the part of Namura.

From an economist’s perspective, if an injured employee’s compensation exceeds the value of his work in the open market, then restitutio requires that the excess amount paid will be claimable from the person who caused the injury. The difficulty is not in the principle, but in the details: it may not be instantly clear what the amount of the “overpayment” is. Replacement cost is one simple way to address the issue since, if the injured party is receiving his/her full prior salary, the cost of replacements represents the value of the services which the injured can no longer perform. Evaluation of replacement cost generally provides a reliable estimate of the employee’s decline in market value. When this overpayment has occurred, the correct redress is quite clear: the employer receives the amount by which the employee was overpaid, and the employee receives the amount they lost relative to his/her pre-accident level (so he/she receives nothing if the company continued to pay his/her full income).

An alternative view of the situation is that the overpayment provided by a partner (or any well-meaning employer) could be considered to be a gift or charitable donation and, hence, a form of collateral benefit, as receipt of the “gift” would not reduce the injured party’s claim. In that case, the replacement cost method should still be used to estimate the injured person’s true loss of income. Note that if a court judged annual pre-trial losses to be small, because the injured person received such benevolent overpayments, and based a future loss estimate on those artificially low figures, then the plaintiff’s loss could be seriously under-estimated, as the partner or employer is very unlikely to continue to overcompensate the plaintiff indefinitely. (This did not occur in Mr. D’Amato’s case, however, as the Court in that case implicitly assumed that Namura would cease to make overpayments after the trial.).

Furthermore, a finding by the Court that the plaintiff could be denied recovery if he had been “compensated” by his partner would send a strong signal to partners that they should refrain from assisting their colleagues when the latter had been injured. It does not seem likely to us that this is the signal which the Supreme Court intended to send, yet this is undeniably the signal which savvy partners will receive.

Two Examples

Two examples, based on D’Amato, will hopefully clarify these points. In both, we assume that, pre-accident, a partner in a business received compensation of $55,000 from the company for his physical and managerial labour, as full and fair compensation for those services. (The individual was also entitled to 1/2 of any business profit, as his return on capital. However, we ignore this as we assume that it is not affected by the injury.) After the accident, the injured party is able to contribute only the managerial component of the previous position, the market value of which contribution would approximate 25% of the pre-accident salary, or $13,750. In both cases, the total loss, $41,250, is identical. In both cases, as well, it is assumed that the business’ additional costs are limited to the cost of hiring replacement labour. Thus, the potential for a loss to the company, based on additional costs for hiring or training replacement labour, or decreased business volume due to loss of reputation, is not considered. The main point of difference between these cases concerns the post-accident compensation to the injured party, which results in different distributions of the total loss. If we assume that there are no other costs associated with hiring and training, and no loss of business due to loss of reputation, etc., then the financial position of the company is unchanged.

Case 1: Assume that the company pays the injured party only fair market value for his work, and that the balance of pre-accident salary of $41,250 (equivalent to $55,000 – $13,750) is paid to a replacement worker. Since other additional costs are not being considered here, it can be assumed that the financial position of the company remains unchanged. The injured person claims an annual loss of $41,250, from the dependant continuing into the future if the annual loss of income is not expected to change. Both the partner’s income and the injured person’s partnership income are also the same as prior to the injury.

Case 2: Assume the facts are as in Case 1, with one exception: the company continues to pay the full $55,000 per year to the injured employee, and therefore they are paying $41,250 “too much,” in order to assist the injured. The replacement labour must still, of course, be hired. The injured person can claim no loss there, unless, as discussed above, the excess payment is viewed as a collateral benefit. Company profit will fall by $41,250, the additional labour expense which has been incurred. Each of the partners bears half of the total loss of profit of $41,250 per year, and the economic analysis suggests that the business should be able to claim that amount from the defendant. The “overpayment” of salary to the injured party, of $41,250, is mitigating income which, in our analysis, represents a loan which required compensation. Should the court find that this overpayment is not compensable, the company would incur a loss of $41,250 per annum – a loss which it could have avoided by refusing to compensate the injured party.

Some Additional Complications

The above examples only discuss one form of loss, the physical inability to work. The situation is more complex at times. For instance, the injured person’s skills may be unique and, hence, irreplaceable. All business profit earned on the activity in question is now lost, in addition to the person’s own income as an employee. If other revenue is contingent on the presence of the injured party (e.g. painting after autobody work), then losses could in principle occur on all of that revenue also. Yet this would be a rather unrealistic extreme, since few if any of us are virtually irreplaceable. It is more realistic to imagine that the loss of a senior and extremely skilled person, who has a reputation for superior work, would indeed cause some loss of business volume, in addition to a proportional loss in an associated field within the business. In Mr. D’Amato’s case, it is not hard to imagine that most senior technicians who could work at his level already would own their own shops, in partnerships or otherwise. They might not be enticed to work for Arbor by anything less than Mr. D’Amato’s base employee income and a profit share, if they would move at all.

Correct determination of loss in such a case would require accurately estimating the loss of volume and profit which has resulted from the absence of the injured person. This may be uncertain, given that other changes in the operating climate occur at the same time, but if industry statistics suggest the company did indeed lose revenue in relative terms, then the difference between predicted and actual revenue may in turn have caused a loss of profit. We still suggest that the entire loss should be recoverable, by both the injured party and all other shareholders. If the partner’s employee income falls, that should in principle be recoverable as well (though that loss would be much smaller, since it would be mitigated by the fact that the partner can still work at something, even if his/her most lucrative opportunity is foreclosed by the absence of the injured person).

A further difficulty with D’Amato, in all three judgments, is that there was no discussion of the components of the company’s estimated pre-trial loss of $73,299. This figure may be interpreted primarily as replacement costs, in which event the analysis in the two cases discussed above applies, and the loss is really just D’Amato’s loss mitigated by a loan from Namura. Or is a significant part of that figure the result of decreases in business volume? The suggestion, that the loss reflects replacement expenses, is never confirmed. The denial of 50 percent of the pre-trial award to Namura suggests that in either case, the BCCA believed the company could not recover its loss. We disagree, particularly in the first instance, since it seems quite unfair to artificially lower a loss estimate because the partner or employer provided assistance in the form of a loan after the injury. In the loss of profit situation, we would still argue that both loss of labour income (suffered by the partner), and net business profits (suffered by the injured and the partner) should be recoverable.

Finally, we note that the judgments in D’Amato remain puzzling numerically. The trial justice and the Supreme Court each concluded that Mr. D’Amato’s future loss was best valued at 3/4 of $55,000 per year, or $41,250. There was no suggestion of any significant worsening of his condition on or about the time of the initial trial. That suggests that his pre-trial loss was also approximately the same annual amount, yet the plaintiff’s accountant reached a total pre-trial loss of $73,299, or only about $13,000 per year (over roughly 5.5 years). Even assuming that all of the $73,299 is actually Mr. D’Amato’s loss of value of work, the gap between pre-trial and post-trial is very large. Assuming no major changes occurred in Mr. D’Amato’s condition, then either the pre-trial loss was seriously underestimated, the future loss overestimated, or some combination of the two. A more exact determination of the value of Mr. D’Amato’s post-accident labour would be required to reach the correct figures, and similarly an estimate of business volume lost, or other costs imposed, would be needed to deduce the loss suffered by the business, in addition to “losses” which are actually just loans to a partner.

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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).

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