Loss of future income and cost of future care are often awarded in one lump sum in personal injury cases. A $5.85 million medical malpractice settlement has tested the court rationale behind the discount rate on future losses.
The Court of Appeal has reduced the award of
$997,060 for investment management fees to $50,000.00. Defendant’s are not required to pay the cost of investment services that would achieve a higher than 2% rate of return(Pestano v. Wong, 2019 BCCA 141). This case concerns the legal principles and methods of calculation to be applied in assessing trustee and investment management fees and tax gross-up awards.
The lump sum is determined by discounting projected lost income to their present day value. Understanding the legislated discount rate will assist the with calculating the future loss claims in personal injury matters.
The purpose of applying a discount to an award for future loss is to provide full and fair compensation by restoring the injury claimant to the status quo ante without requiring the defendant to overpay.
The Discount Factor
Adjustments to future loss of earnings awards are made for inflation on the assumption that the amount paid will be invested in low-risk long-term investments and will earn interest before being used in the contemplated time frame.
… the dependants receive immediately a capital sum roughly approximating the present value of the income they would have received had the deceased survived. They are able to invest this capital sum and earn interest thereon. A proportion of the interest received may be offset by the effect of inflation. To the extent that the interest payments exceed the rate of inflation, there is conferred on the dependants, through payment today of a stream of future income, a benefit which can be expressed as the “real rate of return”. There would clearly be enrichment of the plaintiff at the expense of the defendant if the court did not take this benefit into account in making an award. Accordingly, the court applies a so-called “discount factor”, i.e. the real rate of return which the plaintiff can expect to receive on the damage award…( Lewis v. Todd, [1980] 2 S.C.R. 694 )
Legislated Discount Rate
Complex expert economic and actuarial evidence would be needed to establish the appropriate discount rate without the Law and Equity Act . Section 56 of the Law and Equity Act empowers the Chief Justice of the British Columbia Supreme Court to prescribe mandatory discount rates to be used in calculating the present value of future income loss.
Under s. 56(2)(a), the prescribed discount rate is the deemed future difference between the investment rate of interest and the rate of increase of earnings due to inflation and general increases in productivity. Under section 56(2)(b), it is the deemed future difference between the investment rate of interest and the rate of general price inflation.
These statutory discount rates are predicated on the assumption that awards for income loss and other future losses will be invested in low risk fixed-income securities which will produce the required annual payments from a fund that is self-liquidating in nature. The statutory discount rate must be assumed to reflect reality as a matter of law.
On April 30, 2014, the statutory discount rate was reduced to reflect investment and economic reality. In particular, he reduced the discount rate under s. 56(2)(a) from 2.5% to 1.5% for loss of future earnings or dependency under the Family Compensation Act, R.S.B.C. 1996, c. 126 and the discount rate under s. 56(2)(b) from 3.5% to 2.0% for all other future damages, including future care costs: B.C. Reg. 74/2014. The previous rates had been in place since 1981, when the provisions were first added to the Law and Equity Act. The effect of the recent reduction in the statutory discount rate is to increase the size of pecuniary damages awards to ensure that plaintiffs have sufficient funds to provide the requisite future income stream through investment in low risk fixed-income securities.
Investment Services Above Discount Rate
The Court will not however award an amount for investment services if the goal is the achieve a rate of return greater than 2%. Unless the services are needed to achieve rates of return equal to the 2% statutory discount rate, it would violate the compensatory principle to require defendants to pay for them. As the Court of Appeal stated in West v. Cotton (1995), 10 B.C.L.R. (3d) 73 at para. 30 :
…if [the respondent or his trustee] wishes to secure a greater return than that contemplated in establishing the modest statutory discount rates, this involves the operation of an investment business for the profit of [the respondent or his trustee], and the costs of any investment advice required for that purpose cannot properly be charged to [the appellants] …