Economic Loss Calculations – The Basics
When someone is injured in an accident, we are often asked to calculate that person’s past and future economic loss. The majority of times this involves a motor vehicle accident (MVA). (Hopefully with the advent of self-driving cars, the number of MVA’s will go down in the future, but I’m afraid that is still some time away.) But the cause could be for any number of other reasons, such as a slip/trip and fall, product malfunction, falling objects, snowmobile or boating accidents, dog bites, medical malpractice, sexual abuse, etc.
Whatever the reason, the basic calculations and information required to calculate the loss are basically the same, except that there are specific rules regarding MVA’s. (Losses suffered in an MVA in Ontario are covered under the Insurance Act of Ontario. There are a number of differences in the loss calculations involving an MVA in Ontario, but the main differences are that the claim for loss prior to trial is limited to 70% of the actual loss suffered and there is no claim allowed for the first seven days following the accident. There is also a potential difference regarding the deductibility of collateral benefits, but this is a complex subject for another time.)
Essentially, we need to calculate the difference between what the person would have earned had the accident not occurred (their potential earnings), and what the person will now be able to earn given their injuries (their actual earnings). We also want to consider the future care costs the person will now need to incur due to their injuries, such as medical aids and devices, professional services, housekeeping, etc.
When considering a person’s potential and actual earnings, it is important to remember that a person’s earnings consists of more than just their base salary and overtime. It also includes the benefits that they would have had (or will have) that are paid for by the employer. These can include health and dental, short and long-term disability insurance, life insurance, stock options, savings plans, future pension benefits, etc. The cost of these items paid for by the employer can often form a significant part of a person’s compensation from their employment. Unfortunately, it is generally difficult (or impossible) to obtain the employer’s actual cost of these benefits (other than for savings and pension plans, which are often available), and so we often need to rely on statistical data.
There is no “one size fits all” answer to determining a person’s potential or actual earnings. Each case needs to be analyzed separately, based on its own specific set of facts and assumptions.
When considering a person’s potential earnings, we often base those earnings on the person’s actual past earnings. If someone had been working in a job, or running a business, for a number of years, it is often reasonable to assume the person’s future earnings would be comparable to their past earnings (plus inflationary increases). However, this is not always the case. There are many reasons that a person’s past earnings may not be indicative of their future earnings. Examples include (but are not limited to):
- They may have recently started a new job, or business
- They may have been just about to start a new job, or business
- They may have been expecting a promotion
- They may have just re-entered the workforce, for example, after having raised their children
- They may be young, and not yet in the workforce
In these cases, we often refer to various sources of current and historical statistical information to assist in determining a person’s potential earnings.
Estimating the person’s future actual earnings can be just as challenging. Often the person has not yet been able to return to work and/or it has not yet been determined what work the person will, or may, be able to do in the future. Assuming the person is expected to be able to do some work in the future, questions to consider include:
- What job will they be able to do?
- How many hours per week will they be able to work (full-time, part-time)?
- Will they be forced to retire earlier than they otherwise would have but for the accident?
- If self-employed, will they incur additional costs, including replacement labour, to continue to operate their business?
The answers to these questions are generally provided to us from medical reports, discussions with the individual, and/or assumptions provided by their lawyer.
Once we have estimated the person’s potential and actual earning capacity, the calculation of the annual loss is essentially the difference between the two.
When calculating future losses, there are various other issues that should generally be considered, including:
- Present value discounting – Our calculations are intended to determine how much money should be awarded to a person today, to replace lost earnings that they will suffer in the future. Since the person will be able to invest the money awarded, and earn investment income on that money, the person need not be awarded the full amount of the future loss calculated. Present value discounting determines the amount of money needed today, that can be invested, such that there will be sufficient money in the future to replace the lost earnings.
- Survival – Our calculations determine the amount of economic loss that will be suffered to some point in time in the future (e.g. to age 65). However, not everybody will live to that age. Therefore, the future loss should be reduced to account for the probability of survival.
- Labour force contingencies – Without consideration of labour force contingencies, the calculation of a future loss of income to a certain date (e.g. age 65 or 70) would assume that the person would continue to work throughout the period, to that age. However, people leave the workforce for a number of reasons, including normal retirement, early retirement (for any number of reasons), disability (for causes other than the accident in question), etc. People who are working, or want to be working, are considered to be “participating” in the workforce. Therefore, we generally reduce the future earnings for the probability of participation in the workforce (obtained from statistical data). However, of the people who are participating, not all are employed. Some are unemployed. Therefore, we generally further reduce the future earnings for the probability of unemployment.
Future Care Costs
As noted earlier, in addition to lost earnings, we also want to consider the future care costs the person will now need to incur due to their injuries. These costs include a number of things, including medicine/drugs, medical aids and devices, professional (psychological, physiotherapy, etc.) services, housekeeping, attendant care, etc.
The expected timing and cost of these items are generally obtained from a rehabilitation report prepared by a trained assessor. We then use these reports to calculate the present value of the future costs required.
The calculation of the lost earnings and future care costs can be a complicated process. Our Financial Services Advisory Team (FSAT) has significant experience preparing these calculations. If you have any questions or require assistance with such calculations, please contact a member of our team.