Claims for loss of earnings - a different approach

In this article, Ed Duckworth reviews a recent development on quantum, and why awards for loss of earnings can now be much higher than you might expect. Whilst this may seem a little bit dull, the figures at the end make it worthwhile reading about!

04/03/2011

In this article, Ed Duckworth reviews a recent development on quantum, and why awards for loss of earnings can now be much higher than you might expect. Whilst this may seem a little bit dull, the figures at the end make it worthwhile reading about!

Loss of earnings

A claim for past or future lost earnings can be a valid part of any personal injury or clinical negligence claim.  Traditionally, there have been two basic approaches:

  • If a Claimant can prove an inability to do any form of work following an injury, a claim for full lost earnings (net of tax and other deductions) until assumed retirement age is hard to resist.  If the injury means a Claimant cannot return to their previous occupation but can still work in a lower paid role, a claim for the difference in pay will be made.
  • If a Claimant has recovered from an injury and returned to work, but has a lasting disability, a claim for being disadvantaged on the labour market may be made (known as a “Smith -v- Manchester” award).  This is usually relatively small – a nominal recognition that if the Claimant were to lose their job, it may be more difficult to obtain new employment.  The award would typically be a lump sum equivalent of anywhere between 6m to 3 years of their net current salary.

When working out loss of earnings for life, there are two key figures:

  • The “Multiplicand” – this is net earnings figure being lost per year, e.g. £30,000.
  • The “Multiplier” – if a 30 year old Claimant can no longer work and planned to retire at age 65, he has lost 35 years of earning.  At first sight, his future loss of earnings is £30,000pa x 35 = £1,050,000.  However, the Claimant receives that £1,050,000 as a lump payment now – and if invested over 35 years it will end up being worth much more.  To avoid any such over-compensation, there are statistical tables (the Ogden tables) used in calculating such losses that adjust that figure of 35 years downwards, which aim to take into account the likely return from investing awards of damages now.  It also takes into account that the Claimant is getting a lifetime of earnings now which he might not have got for some other reason – e.g. dying from a currently unknown health condition in a year’s time.  In our example, 35 years is reduced to 22.78 – this is the “multiplier”.  This means that instead of receiving £1,050,000 now for the earnings lost over his lifetime, the Claimant would be awarded £683,400 (£30,000 x 22.78).

The research

The latest version of the Ogden tables has suggested a major change to how claims for loss of earnings are calculated.  This followed the emergence of research on what factors determine the overall time you are likely to spend in employment.   The researchers found there are three key factors:

  • Educational attainment
  • Disability
  • Employment (i.e. whether a Claimant was employed at the time of the injury and at the time damages are assessed).

An example

  • Bill was a concert pianist taking home £30,000pa.  He was injured by the Defendant, leading to the loss of a few fingers.  As he can no longer be a pianist, he is planning to retrain as a tele-sales worker but is currently unemployed – he aims to take home £20,000pa.  Bill is now 30 and wants to retire at age 65.  Using the traditional approach to an annual partial loss of earnings, the claim would be £10,000pa x 22.78 (our multiplier above) = £227,800.
  • Using the new approach the claim would be assessed in three steps:
    • His previous salary of £30,000pa x 22.78 = £683,400
    • Minus his likely salary now of £20,000 x 7.75 (that multiplier of 22.78 now adjusted greatly downwards to reflect the fact he is now “disabled” and unemployed) = £155,000
    • Loss of earnings claim is now…………… £528,400
  • If Bill had managed to work as a pianist, you might expect he would only receive a small Smith -v- Manchester award – perhaps £30,000.  However, this new approach can be claimed even where a Claimant has returned to the same job they were doing before.  Here, that would still result in a claim for £450,000.

How does a Claimant qualify for this new approach?

A Claimant must satisfy three tests:

  • He must have an illness (physical or psychiatric) that will last for more than a year.  Bill has lost his fingers permanently.
  • The condition must affect the kind or amount of paid work he can do.
    In our examples, either Bill had to give up being a pianist (his type of work) or even if he could return to this, he says the aches in his hand mean he has to take a lot of days off sick – so the amount of work he can do is affected.
  • The impact of the disability must substantially limit the ability to carry out normal day to day activities.  This test is taken from the Disability Discrimination Act which gives many examples.
    Bill says he is a keen model aircraft builder and can no longer do this – that is not a day to day activity so he fails this test and cannot use the new loss of earnings approach.  Bill redrafts his schedule of loss and says he is now a bit slower at e-mailing on the computer – that’s a day to day activity but is not a significant limitation and he again fails the test.  Bill redrafts his schedule of loss again and says he cannot do up buttons – the reserve on the case needs to increase!

Conclusion

The limited case law on this area suggests Judges will take a cautious approach to this new method for claiming loss of earnings and even if a Claimant satisfies the three stage test, the formula may be adjusted to “reflect the reality of the situation”.  Whilst that may offer some comfort to Defendants, if you see a surprisingly high claim for loss of earnings in a schedule, it must be reviewed carefully.


 

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