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Calculating future losses

Losses from an injury can extend many years into the future. It is always a challenge to gaze into the crystal ball and predict what those losses will be. Another challenge, the subject of this column, is calculating them. 

You cannot just add them up. Because of inflation, a dollar paid today is worth something more than a dollar paid in the future.

Paying $1,000.00 today would overcompensate you for a $1,000.00 loss anticipated to occur 20 years from now.

Future losses must be discounted to account for inflation.

But at what interest rate?  And how do you calculate it??

I’m a bit of a math lover, so this kind of thing warms my soul. Before we get to the fun calculations, I will share the law.

There is a piece of legislation called the Law and Equity Act, R.S.B.C. 1996, chapter 253. Section 56 requires the application of prescribed discount (interest) rates when calculating the present value of future losses in a lawsuit.

The prescribed rates are set out in the Law and Equity Regulation, BC Reg 352/81.

Future income losses (and loss of dependency in a wrongful death claim) must be discounted at 1.5% per year. All other future losses must be discounted at 2% per year.

Those rates must be compounded annually, complicating the calculation.

Courts often have the benefit of economists to perform the calculations. But a recent court decision, MacGregor v. Bergen, 2019 BCSC 315, has reaffirmed previous decisions holding that an economist is not required.

The judge in that case used a table of calculations provided within a copyright protected publication called Civil Jury Instructions.

The table itself is copyright protected. But the calculations are not.

I am going to walk you through the simplest calculation: the present value of a loss anticipated to occur one year from now.

Let’s assume it is income loss in the amount of $1,000.00.

Future income loss requires application of the 1.5% discount rate.

What number, when you add the required annual rate of 1.5%, will give you $1,000.00 at the end of the year?

Algebra states that question as follows: $NUMBER x (1 + 1.5%) = $1,000.00. The result is $985.22.

In other words, payment of $985.22 today would compensate you for an income loss of $1,000.00, one year from now, applying the required 1.5% discount rate.

Did that make your brain hurt?

What if that same loss of $1,000.00 was to continue, year after year, for 20 years?  That requires 20 calculations, each with a slightly different formula.

If you crunch the numbers, correctly, you will finally arrive at $17,168.64.

The table in the Civil Jury Instructions publication allows you to come to these same answers without any Algebra. It has a table with “multipliers” to calculate the present value of a consistent, annual, loss. You can pick a multiplier for 1, 2, 3, 4, all the way up to 50 years. You simply multiply your annual loss by the applicable multiplier.

But the table works only for consistent, annual losses. It does not accommodate increasing income losses that might occur as you become less and less able to tolerate your symptoms.

Nor does it accommodate fluctuating future care needs.

And of course using the table at all requires getting your hands on the publication.

The same basic table can be generated with the magic of an Excel spreadsheet. And if you’re a geek like me, you can create a much more robust tool, programmed to automatically calculate the present value of any scenario of future losses.

But if math doesn’t warm your heart like it does mine and you would like access to the spreadsheet tool I have created to calculate the present value of your future losses, just give me a call.

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  • Hi I think in calculating future income losses discount multiplier should be added not subtracted as we all know purchasing power of dollar does down with inflation, it seems totally unfair how its calculated in above example because what you can buy for $1000 today will need more dollars to buy next year and onwards. Yours comments on this please.

    • Surinder,

      It’s complicated stuff.

      You are referring to inflation, which drives prices up year over year over year. And yes, on the face of it, something you buy for $1,000.00 today might cost $1,050.00 in a year (5% inflation).

      But that $1,000.00 is working for you over that year – unless you stuff it under your bed. On an overall basis, investments earn a rate of return that exceeds inflation.

      So while it costs $1,050.00 a year from now to buy that same thing, that $1,000.00 has earned income of $100.00 over the same time period, so you end up with an extra $50.00 in your pocket.

      Hope that makes sense….

      • The rate of inflation is projected to be higher than the rate of savings during this time. And in current economic times, 93% of the stock market has lost money in the last year +.

        Investment is not exceeding inflation right now, not even close 🙂 how do you accommodate for this during a time where you could have inflation for 5+ years higher than savings?

      • Hi Paul
        Thanks for reply. So you are saying that what ever the money someone gets today from there claim will be put into investment which will earn more then inflation and that’s why they deduct 1.5% as in the example you referring too.
        If this is the case then only guarantee investment returns is GIC which we all know is a loosing investment due to inflation and there is no other guaranteed investment or opportunities which can be provided to someone on consistent terms for the rest of life span.
        The only slight positive thing is you don’t pay taxes on the money received from claims .
        I will agree to your opinion as you are expert in this regard and for general public lot of the things don’t makes sense and this I think is one of them .