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Economic Losses In Fatal Accident Claims

Posted by Brendan Cape on Dec 11, 2018 2:41:26 PM

Economic loss calculations in fatal and non-fatal accident claims share certain similarities, but as outlined in this article, there are a number of key differences to consider. Economicloss

In a non-fatal accident claim, economic loss calculations are intended to restore the injured person to the financial position they would have enjoyed had the accident not occurred.  In particular, the injured person is normally compensated for both their lost earnings and the additional costs (e.g. medical expenses, housekeeping, caregiving, etc.) they are expected to incur as a result of an accident.

In a fatal accident claim, by contrast, economic loss calculations are intended to restore the deceased person’s surviving dependent family members to the financial position they would have otherwise enjoyed had the fatality not occurred. Accordingly, the losses sustained by the surviving family members following a fatal accident are conceptually different from the losses sustained by an injured person after a non-fatal accident.

Forensic accountants are often retained in both fatal and non-fatal accident claims to quantify both the past losses and the present value of the future losses based on the available information, which may include opinions provided by medical and/or vocational experts.  This article explores four key topics:

1. Loss of Earnings (Non-Fatal Accidents)

2. Dependency on Earnings (Fatal Accidents)

3. Other Economic Losses (Medical costs, household services, etc.)  

4. Lump-Sum Awards for Future Losses

1. LOSS OF EARNINGS (Non-Fatal Accidents)

In a non-fatal accident claim, an injured person is compensated for their loss of pre-tax earnings capacity, which is a comparison between the projected future earnings in the absence of the accident, and the projected future earnings as a consequence of the accident.

Future losses of earnings are discounted to their mortality-adjusted present value, and may be further discounted to consider other risks such as disability and/or unemployment. For example:

 

Projected Annual Pre-Tax Earnings (Without Accident)

Projected Annual Pre-Tax Earnings (Given Accident)

Loss of Pre-Tax Earnings Capacity

Mortality-Adjusted Present Value Factor (Age 54-65) 

Future Loss of Earnings

      $92,000

      27,000

      $65,000

       10.556

    $686,140

 

2. DEPENDENCY ON EARNINGS (Fatal Accidents)

In a fatal accident claim, it is the surviving dependent family members who claim for their losses of dependency on the deceased’s after-tax earnings. The dependents are not compensated for the full value of the deceased’s earnings since a portion those earnings would have been consumed personally by the deceased had the incident not occurred.

There are three major components of a dependency loss calculation:

Projected Annual After-Tax Income

Unlike a personal injury case, appropriate deductions must be made for the income taxes, CPP contributions and EI premiums which the deceased would have otherwise paid.

Dependency Period

In the case of a spouse, the dependency period normally extends to the deceased’s assumed retirement date, while minor children are often considered to be dependent while they are anticipated to live at home or remain in school.

Dependency Rate

A dependency rate is a percentage applied to the deceased’s projected after-tax income throughout the dependency period and is intended to reflect each survivor’s level of dependency on the deceased’s after-tax income.

As household expenditures are affected in different ways by the loss of a contributing family member, it is theoretically possible to calculate dependency rates specific to each individual situation. However, since many households do not maintain detailed accounting records, dependency rates are often derived from the spending patterns of typical households. Based on statistics for Canadian families with one income-earner, it has been estimated that a surviving spouse has a dependency rate of 72% and that each of the first four dependent children adds approximately 4% to the dependency rate.

In the case of a single-income household with no dependent children, the application of a 72% dependency rate implies that the deceased would have spent 28% of his or her income on himself or herself, and this technique is known as the ‘Sole Dependency Approach’.  However, when a second income-earner is introduced to the household, the situation becomes more complex and a lower dependency rate or different methodology may be warranted.

The following table compares the Sole-Dependency Approach for a single-earner household to the Cross-Dependency Approach that calculates a dependency loss based on the combined income of both spouses and then deducts the surviving spouse’s income:

 

Sole-Dependency

Approach

       Cross-Dependency

Approach

Deceased’s Annual After-Tax Income

Survivor’s Annual After-Tax Income 

 

Dependency Rate

 

 Less: Survivor’s Annual After-Tax Income

Projected Annual Dependency Loss 

$70,000

(N/A)

$70,000

72%

$50,400

(N/A)

$50,400

$70,000

30,000

$100,000

72%

$72,000

(30,000)

$42,000

 

However, when the deceased’s income is significantly lower than the surviving spouse’s income, applying the cross-dependency approach can lead to the anomalous conclusion that the surviving spouse has become financially “better off” following the loss of their lower-income spouse:

 

 

Sole-Dependency

Approach

      Cross-Dependency

Approach

Deceased’s Annual After-Tax Income

Survivor’s Annual After-Tax Income

 

 Dependency Rate

 

Less: Survivor’s Annual After-Tax Income

Projected Annual Dependency Loss 

$40,000

(N/A)

$40,000

72%

$28,800

(N/A)

$28,800

$40,000

110,000

$150,000

72%

$108,000

(110,000)

$(2,000)

 

For this reason, when a household has more than one income-earner, the sole-dependency approach is often modified to 50% or 60% to reflect the surviving spouse’s lower of level of dependency on the deceased’s income. This is known as the ‘Modified Sole-Dependency Approach’ and is often used instead of the Cross-Dependency Approach.

Dependency losses are often based on the deceased’s employment and/or self-employment income, without reference to investment income since the underlying investments are often inherited by the surviving dependents. However, there are a number of specific situations which warrant further consideration, such as when the deceased was a member of pension plan or was the owner of a corporation or income-producing property.

3. OTHER ECONOMIC LOSSES (Medical Costs & Household Services)

In non-fatal accident cases, injured individuals sometimes sustain economic losses beyond their loss of earnings, such as medical costs and/or the inability to continue providing household services. While fatal accident cases do not normally involve medical costs, the surviving members of a household may still have lost the household services which the deceased had provided prior to the accident.

When future medical costs are anticipated, they are often projected by medical experts based on the injured person’s impairment, while household services costs are normally projected based on the cost of replacing those services.

4. LUMP-SUM AWARDS FOR FUTURE LOSSES

In both fatal and non-fatal accident claims, once the future loss amounts are determined for both earnings and other losses, the future amounts are then converted to a single lump-sum amount that reflects the discount rates prescribed for future economic losses and the mortality risk of the person who is injured or deceased, and in certain cases may include other risk factors such as disability and/or unemployment.

In fatal accident claims, it is also necessary to consider the mortality risk for each surviving dependent family member throughout their periods of dependency. Accordingly, the future loss multiples applicable to dependency losses in fatal accident claims are typically lower than the multiples applied to income losses in non-fatal accident claims.

SUMMARY

While economic loss calculations in fatal accident claims are similar in certain respects to non-fatal accident claims, it is important to understand the conceptual differences when assessing an economic loss. Contact us if you have questions.

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Topics: Investigative and Forensic Accounting

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