There will soon be some significant changes to the way that BI damages are assessed in MVA cases. In this edition of our Update, we will try to assist you in applying these new principles.
New Discount Rate
As you likely know, plaintiffs who are entitled to damages for losses to be incurred in the future receive awards that reflect the “present value” of those losses. The expression, “present value”, means the amount paid today that would compensate a plaintiff for a loss that will be suffered in the future. A calculation of present value must take into account the opposing effects of inflation (which will erode the value of a dollar paid today) and interest income, which will increase it.
Rule 53.09 of the Rules of Civil Procedure establishes the “discount rate” that is used to calculate present value. This term refers to the difference between expected inflation and expected earnings on investments. Historically, the latter has been about 2.5% more than the former. This is why our courts have, for most of the last several years, used a discount rate of 2.5% for damages representing future losses. (It did drop to 2.25% last year.)
(The actual calculation of a figure for present value requires a spreadsheet, a handheld financial calculator or a brain bigger than ours. The variables are: (a) period of the loss (usually the plaintiff’s working life expectancy); (b) the discount rate; and (c) the annual (or monthly, or weekly) loss. The latter is usually the salary that the plaintiff will lose in the future. If you are interested in seeing how the calculation is performed in Microsoft Excel, we would be happy to assist you.)
Starting with trials held in 2005 however, the discount rate is going to go down to 1.5% for the 15 year period that follows the beginning of the trial. The rate continues to be 2.5% for losses that will be incurred more than 15 years from the commencement of the trial. A lower discount rate reflects a lower anticipated income earned on the award of damages. Hence, a lower discount rate produces a higher damages award in order to compensate the plaintiff for his or her full loss.
Let’s take an example. Assume that a 52 year old plaintiff earned $30,000 a year but can no longer work at all as a result of injuries suffered in an MVA. We will also assume that the plaintiff has a working life expectancy of 11 years. (Determining this figure is a separate issue that we’re not going to get into here.)
Using the assumptions set out in the previous paragraph, if the present value were calculated using a discount rate of 2.5%, the figure would be $285,426. Using a discount rate of 1.5% instead, the correct figure becomes $302,133, a difference of almost six percent. (The difference will be greater, the longer the period of loss. So, in this example, an assumed 15 year working life expectancy would produce a difference of 7.77 percent.)
So, whether you’re using a spreadsheet or one of the “slide rules” that various actuarial and structured settlement firms give out to assist in calculating present value, be sure that in 2005, you start doing the calculation using 1.5% as the discount rate for the first 15 years after the expected date of trial.
Bill 198 and Other Changes
We are starting to see claims that involve car accidents under both the old Bill 59 and under the Bill 198 reforms that became effective on October 1, 2003. The assessment of damages can become quite complicated when there are two Insurance Act regimes involved. In addition, the recent decision of Madam Justice Toscano Roccamo in Hartwick v. Simser has added another variable in cases where the plaintiff has a pre-existing condition that would likely have affected him or her in the future. In this part of the Update, we are going to walk you through the steps of such an assessment.
To make this as painless as possible, we’re going to use another example. At the annual Civil Litigation Conference held at Chateau Montebello this past weekend, a panel of four Superior Court justices and Master Robert Beaudoin were asked to comment on a fact situation involving one pre-Bill 198 accident and two accidents that post-dated the effective date of October 1, 2003. Our office was involved in drafting that fact situation and we’re going to use it again here. A copy is attached as a Word document. In the sample problem, all defendants were assumed to be “protected defendants”.
We have also attached an Excel spreadsheet in which the calculations are shown. The spreadsheet will allow you to change the figures (other than those in which calculations are made from assumed values) and observe the effect that different assumptions have on the “bottom line”.
Step 1: Threshold Determination
Before there can be an award of general non-pecuniary damages (or at least, one that can form part of a judgment), a judge would have to determine that each of the three injuries met the “verbal threshold” in the Insurance Act. This is the familiar “permanent serious impairment of an important physical, mental or psychological function”. (See s. 267.5(5) of the Act.)
For the two accidents that took place after the effective date of Bill 198, a regulation to the Act has clarified the meaning of the threshold. The explanatory language can be found in Regulation 381/03, which can be viewed here.
Although, on these facts, there is some doubt as to whether all three injuries would meet the threshold (and there was a difference of opinion about this among the panelists at Montebello), we will assume that all three claims would do so.
Step 2: Apportionment Among the Three Accidents
It will be important to segregate, as much as possible, the damages attributable to each accident. How is this done?
In a case called Hicks v. Cooper, a 1973 decision of the Ontario Court of Appeal, the “devaluation approach” was endorsed. That case involved only two accidents, but applying the devaluation method to our case would work something like this:
(a) assess damages as of the day before the second accident occurred;
(b) assess damages as of the day before the third accident occurred;
(c) globally assess damages as of the date of trial.
The defendant in the first accident is liable for the damages in (a). The defendant in the second accident is responsible for the damages in (b) minus the damages in (a), while the third defendant is responsible for (c) minus ((a) + (b)).
The “devalution approach” has been consistently applied in Ontario since Hicks v. Cooper, although some commentators have expressed preference for another theory, referred to as the “percentage approach”. (Interestingly, at the Montebello Conference, some of the damages panelists expressed the view that Hicks v. Cooper was no longer a valid apportionment method because of the legislative changes that have taken place since it was decided.)
For purposes of our illustration, we are going to assume that damages for each of the three accidents has been assessed at $50,000, before applying any deductibles or adjusting the figure in any way.
Step 3: “Crumbling Skull” Adjustment
As noted above, in Hartwick v. Simser, a decision of the Ontario Superior Court that was released in October, the trial judge reduced the two plaintiffs’ damages to take into account their pre-existing conditions. The reductions were 25% and 15% respectively. This was the first Ontario case to make such an adjustment. Based on what we heard at Montebello, it seems that other judges of the Superior Court are prepared to follow the reasoning of Justice Toscano Roccamo.
According to the decision in Hartwick v. Simser, what we have shown as Step 4 (application of deductibles) is to be performed before Step 3 (crumbling skull adjustment): see paragraph 290 of the decision.
However, in our view, this approach is not correct. Section 267.5(7)1 of the Insurance Act says that before applying deductibles, the court is to “determine the amount of damages for non-pecuniary loss for which the protected defendant would be liable without regard to this Part” (in other words, without applying the deductible). That would, we feel, require that the “crumbling skull” adjustment be made first because it is simply one more part of the analysis that leads to a monetary value being established for non-pecuniary general damages.
(It is our understanding that some minor revisions and corrections are being made to the decision in Hartwick and that the order of applying deductibles and crumbling skull adjustments may be one of them.)
Using the Hartwick approach would produce a somewhat higher figure for non-pecuniary general damages than would the methodology that we feel is the correct one. The amount of the discrepancy will vary, depending on what adjustment is made for the “crumbling skull”; the bigger the adjustment, the greater the variation will be between the two figures.
To illustrate, we will assume that the adjustments in our case will be 60% for the first MVA (one judge suggested an adjustment of 75% at Montebello), 20% for the second MVA and no adjustment for the last MVA.
If our approach is followed, net damages from the first accident will be $5,000. If the Hartwick approach is used, the damages attributable to that accident would be $14,000.
Bear in mind though, that Justice Toscano Roccamo is a judge. No one at our office is. So, for the time being, unless a correction is made to the reasons, other courts might very well follow the same approach, of applying the deductible first.
In anticipation of a correction being issued though, you will see that in the attached Excel spreadsheet, after the crumbling skull adjustment, the general damages figure for each of the three accidents become, respectively, $20,000, $40,000 and $50,000.
Step 4: Deductibles
As we have said, we feel that section 267.5(7) of the Insurance Act dictates that the next step is to subtract the statutory deductibles. In the case of MVA1, that amount is $15,000. For both of MVAs 2 and 3, it is $30,000. Note that if the damages for either MVA 2 or 3 had been assessed at $100,000 or more, s. 267.5(8) provides that no deductible would apply. (This is referred to as “the vanishing deductible”.) The attached spreadsheet will automatically change the deductible for the second two accidents to $0.00 if the gross damages are assumed to be $100,000 or more.
So, with our adjusted assessments, as shown in the last section, applying the deductibles produces a net figure of $5,000 for the first accident, $10,000 for the second accident and $20,000 for the third one.
Step 5: Contributory Negligence
This step too is dealt with by the Insurance Act. Section 267.5(7)4 provides that “If fault or negligence on the part of the person entitled to damages for non-pecuniary loss contributed to those damages, the award for damages shall be reduced under paragraph 3 before the damages are apportioned under section 3 of the Negligence Act”.
We have assumed that there will be findings of 25%, 0% and 35% for contributory negligence in the three accidents.
This reduces the plaintiff’s recovery to $3,750, $10,000 and $13,000 respectively for each of the three accidents.
In the spreadsheet, prejudgment interest to the current date is added, calculated at 5% from the date of the accident (although interest would actually only run from the date on which notice of the claim was given).
The end result is damages of $26,750 before PJI and $28,108 after interest is added.
We hope that these comments will be helpful to you as you begin to deal with Bill 198 cases, particularly those involving both Bill 198 and Bill 59 accidents. Please feel free to contact us if we can assist you.