Calculating Future Loss of Income

In a catastrophic injury claim or even in a moderate injury claim where there will be an ongoing future wage loss, it is necessary to hire an economist to calculate the future loss of income. This is also necessary in a fatal accident claim to calculate the loss of dependency of the surviving spouse and children on the deceased’s income.

In order to do this it is not simply a matter of multiplying the victim’s annual income multiplied by the number of years of the expected loss and then subtracting income taxes. There are a number of calculations the economist performs which are based upon assumptions. These assumptions lead to the disparity in the final number between the victim’s economist and the defendant auto insurance company’s economist – and thus litigation.

In addition to calculating the annual loss and subtracting income taxes, there are numerous positive contingencies which must be calculated. One of the most important is a “positive” contingency for non-cash benefits in the form of contributions paid by the employer, on behalf of the employee/victim, to a group health insurance plan (medical and dental benefits, disability, short-term disability and long-term disability benefits, and life insurance) and/or group savings or registered pension plan. The economist we use utilizes the Statistic Canada’s publication Workplace and Employee Survey Compendium 2005 (WES 2005) which found that over 70 percent of employees participate in at least one non-wage benefit plan (group insurance, retirement or stock purchase plan).

Thus, obviously it is extremely important for the victim’s lawyer to hire an economist who is familiar with this positive contingency or who is aware of this positive contingency since over 70% of employee/victims of motor-vehicle collisions will have this non-wage benefit which must be calculated into the future annual income. Interestingly the Statistics Canada publication found that whereas about one in two workers in small workplaces (one to nineteen employees) did not have non-wage benefits, around 94 percent of workers had access to these benefits in large workplaces (500 employees or more). Thus, if the victim worked in a large workplace (500 employees or more), then to not have this positive contingency for non-wage benefits will result in undercompensation to the victim and/or his or her survivors in a fatal accident case. In addition, there are numerous negative contingencies which the defendant auto insurance company’s economist emphasize as they reduce the future loss of income or loss of dependency in a fatal accident case. There are five main negative contingencies that are routinely considered and may be applied in motor-vehicle litigation:

Participation: this is the choice of whether to work and how much to work. Data from the statistics indicate 7.4% of all men did not work and 8.9% of all women did not work in 2010.
Work Activity: the decision to work on a full-time, full-year basis or part-time basis. This is usually referred to as a “part-time contingency.” 27% of all women and 12% of all men in Canada in 2014 worked part time.

Employment/Unemployment: this is known as the “unemployment” contingency. The unemployment rate for Canada in 2014 was 6.9%; the average from 1987 to 2014 was 8.1%. Thus an economist must calculate– or applies this negative contingency to the long-term future to account for the fact that the victim, absent the accident, may not have worked in any event for a time period due to unemployment.
Disability: this is the negative contingency for the chance of a long-term permanent disability preventing a worker from returning to the labour force. This is applied, again, to long-term incomes, absent the accident, the victim may have suffered a disability from something else in any event. The annual disability rate between ages 25 and 65 for males ranges from 1% to 6.7—4% and the rate for females is .45% to 7.37%.

The final negative contingency is mortality which is the chance the worker will die prior to retirement. This must be factored in as, absent the accident, the victim may have died earlier in life than a long-term loss of income to age of retirement would predict. Thus, the annual mortality rates in Canada between ages 25 and 65 range from -.01% to -12% for males, and -0.1% to -7.7% for females.

Thus these five negative contingencies reduce the victim’s expected future loss of income. What is interesting to note about the five negative contingencies is that three of the five contingencies listed above are “involuntary” in that they happen to the plaintiff/victim whether he or she desires it or not. Thus mortality, disability, and unemployment are outside the victim’s future control. Thus, for these contingencies, the personal injury lawyer’s economist can safely rely upon statistics for these negative contingencies. The other two negative contingencies, participation (the choice of whether to work and how much to work) and work activity (the decision to work on a full-time, full-year basis or a part-time basis) is obviously a choice and thus depending on the victim’s personal circumstances prior to the motor-vehicle collision, this negative contingency should be increased or decreased from the statistics obtained by the economist.

To fail to apply this subtle distinction will under compensate or overcompensate the victim as the case may be, depending upon what the economist chooses to do.

In summary, the personal injury lawyer must be aware of these important economic issues, not so much for reviewing the economist report prepared for the plaintiff’s lawyer (as presumably the plaintiff’s lawyer has selected a well-qualified economist), but more importantly for reviewing the defendant auto insurance company’s economist report and preparing an appropriate critique, both for use in negotiation and mediation and an even more detailed critique and preparation for cross-examination of the defendant auto insurance economist in the event the matter cannot be settled and goes to trial. This cross-examination will show to the court the inappropriate assumptions/contingencies the defendant auto insurance company’s economist has made in his report and thus the fallacy of the final low number provided by the defendant auto insurance company’s economist.

Handel Law Firm is Alberta’s serious personal injury and fatal accident law firm serving the cities and areas of Calgary, Edmonton, and Red Deer. Contact our lawyers today for your personal injury and fatal accident cases in Alberta.