The New York "periodic payment" statutes, requiring that future damages in excess of $250,000 be made in annuity‑like payments, presumably were intended as "tort reform" measures designed to reduce burdens on defendants.

In practice, as cases governed by CPLR Articles 50‑A and 50‑B, and CPLR 4111, 4545 and 4546 are reaching trial, what has been reformed seems to be the role of common sense in the courtroom. The statutes call for essentially unrealistic testimony and sometimes defendants incur a hefty surcharge above actual damages.

One of this article's authors recently had to analyze damages in a case involving catastrophic injuries to a child under the new statute. Had the case not settled, the plaintiff would have faced difficult burdens presenting the jury with a realistic estimate of damages, and the defense would have been equally hard put to present a rational damages assessment.

The child required about $450,000 a year, in today's dollars, to provide for the extraordinary amount of medical care she would require, including round‑the‑clock professional attention, a host of living aids, prescription drugs and‑monitoring by specialists. Her remaining life span was assumed to be 70 years.

Under CPLR 4111(d), the jury must render its verdict not reduced to present value. For all practical purposes, that means the expert economist has to present the damages assessment as a huge lump sum. The damages not reduced to present value (and not including any future‑growth factors such as inflation and productivity) would be 70 times $450,000, or $31.5 million.

Over the past 20 years, the nominal growth rate for medical costs has been 8 percent. Projecting this 8 percent annual growth factor over 70 years, the $450,000 annual cost would total $1.2 billion, a sum exceeding the net worth of most major corporations. At the 70th year, the annual medical ­care cost is about $98 million, or $269,000 per day

This sum is, of course, meaningless. It misrepresents the true damages by virtue of not being reduced to present value, so the jury is presented with a staggering sum it may believe to be ridiculous.

The jury cannot help but be confused, and very possibly misled, by such testimony dictated by the new damages statutes. But judges and lawyers are likewise confused when forced to deal with these statutes. As one court wrote in its opinion, applying the provisions of CPLR 5041 is "every judge's nightmare" Rohring v. City of Niagara Falls, 153 Misc. 2d 1001, 584 N.Y.S. 2d 513 (Sup. Ct., Niag­ara Co. 1992).

Currently, there is much debate on the role of the mandatory 4 percent growth factor. A court, under Article 50‑A or 50‑B, is required to factor in a 4 percent growth rate to future damages above $250,000. (Why the initial $250,000 in future damages is payable in a lump sum not reduced to present value is not explained by the Legislature.)

The debate centers on whether this 4 percent growth rate is intended to act as a cap on any growth factor, or whether it simply limits inflationary growth alone, independent of other growth factors affecting the award. Other growth factors can include productivity (rises in income over and above inflation due to increased personal experience and increased efficiency).

Plaintiffs have argued, and some courts have agreed, that the 4 percent growth rate provided by the statute is neither a cap nor a limit on any growth factor. They argue that testimony as to inflation is admissible at trial and should be considered by the jury in calculating future damages. The 4 percent is then factored on top of all other growth rates. See Brown v. State, 184 A.D.2d 126, 592 N.Y.S.2d 533 (4th Dept. 1992) and Rohring v. City of Niagara Falls, 192 A.D.2d 228, 601 N.Y.S.2d 740 (4th Dept. 1993).

Further supporting the assertion that testimony as to inflation on future damages should be admitted at trial, see Judge Bruce McM. Wright's deci­sion in Gambardelli v. Allstate Over­head Garage Doors, Inc., 150 Misc.2d 395, 576 N.Y.S.2d 770.

If the 4 percent growth factor is intended as a cap barring any growth elements beyond 4 percent, or even just the inflation factor, the plaintiff may be penalized in some cases, which, arguably, may have been the intent of the Legislature ‑ the new statutes were intended, presumably, to benefit defendants.

In any event, the statute does not indicate what the 4 percent growth is meant to represent or replace (if anything). Whether the 4 percent represents inflation and is a cap on all growth has not been determined by the Court of Appeals.

However the courts answer this question, the fact remains that you cannot easily give a benefit to one side without taking away from the other side. Indeed, any time a statute is as specific as these, there is a danger that one side will reap a windfall in situations not anticipated.

In some instances the mandatory 4 percent growth factor can work against the defense, even supposing it replaces testimony on inflation or other effects. Suppose it is easily demonstrated that a disabled plaintiff's wages consistently failed to keep pace with inflation and were unlikely to improve (this is not an uncommon situation), or suppose one element of loss is a fixed pension. The 4 percent growth factor then could become a windfall for the plaintiff.

Following the line of reasoning that the 4 percent is an inflation proxy, it may be argued that a plaintiff's expert economist should consequently be precluded from testifying as to inflation, since an inflationary rate is already built into and made part of the new statutory scheme in CPLR 5031(e) and 5041(e).

Such an argument would restrict the expert to simply testifying as to what is the present cost today of each item of damage and the number of years in which the plaintiff will require the service or item of damages and/or any increases or decreases above or below inflation (i.e. productivity, etc.). There would be no testimony as to inflation, just as there is no testimony as to reduction to Present value.

While the Court of Appeals has yet to answer the thorny question on the 4 percent growth rate, other questions are being answered as cases governed by the statutes come through the courts and new questions are arising.

Under 50‑A a nd 50‑B and section 5041 (e) of the CPLR, an award for "pain and suffering" damages is limited to a 10‑year structured payout or the number of years the jury determines "pain and suffering" will persist, whichever is less. Section 5041(e) states:

With respect to awards of future damages in excess of $250,000 in an action to recover damages for personal injury, injury to property or wrongful death, the court shall enter judgment as follows: ... The period of time over which such periodic payments shall be made and the period of time used to calculate the present value of the annuity contract shall be a period of years determined by the trier of fact in arriving at the itemized verdict; provided, however, that the period of time over which such periodic payments shall be made and the period of time used to calculate the present value for damages attributable to pain and suffering shall be 10 years or the period of time determined by the trier of fact, whichever is less.

In Potdevin v. Dorset Hotel Co. , 1991 WL 12312 (SDNY), the court inexplicably and without comment held that "the 10‑year cap on future damages provided for in Section 5041(e) applied to all future damages and not only to future damages for pain and suffering." This is somewhat baffling. Although Section 5041(e) is not a model of clarity, it seems fairly clear that the Legislature wanted to limit only pain and suffering to a 10‑year payout.

Because pain and suffering is limited to 10 years, the present value of the annuity for pain and suffering is likely to be significantly greater than any award for other items of damages. Since plaintiffs counsel's fee is based on the present value of the various future awards, plaintiff's counsel will likely earn more of a fee on each dollar awarded for pain and suffering than for any other item of damages. Therefore, the statute provides plaintiff's counsel with personal incentive to emphasize pain and suffering over other items of damages ‑ a result probably not intended by the Legislature.

One gross problem with the statutes is that their effective dates do not mesh. It is possible that some actions will be controlled by CPLR 4111(d), mandating a jury instruction that awards are not to be reduced to present value, while these actions do not come under Articles 50‑A and 50-B, mandating periodic payments for future damages in excess of $250,000.

It is said that when plaintiffs realized they were in a position to reap such a windfall they restrained themselves and stipulated to remove the charge, knowing it was unfair and would probably result in lengthy appeals. CPLR 4111(d) applies to all cases in which trial has not commenced as of Aug. 1, 1988. Article 50-A is applicable to any action for dental or medical malpractice commenced on or after July 1, 1985. Article 50‑B applies to all personal‑injury, injury-to‑property and wrongful‑death actions commenced on or after July 30, 1986.

This anomaly was discussed in two cases so far, Hudson v. Manhattan & Bronx Surface Transit Operating Authority ,150 Misc.2d 283, 568 NYS2d 503 (Sup.Ct.,N.Y. Co., Gammerman, J. 1990) and Escobar v. Seatrain Lines , 150 Misc.2d 381, 566 NYS2d 813 (Sup. Ct., N.Y. Co., Greenfield, J. 1990).

In Escobar, the plaintiffs economist had already reduced the future damages to present value. Since the numbers the jury received were effectively reduced to present value, the court held that it was not damaging to give the jury an instruction not to reduce to present value.

In Hudson, Judge Ira Gammerman lived up to the letter of the law, instructing the jury not to reduce to present value. Exercising his judicial discretion, he then reduced the verdict on the grounds that it was excessive.

The court must calculate the present value of the future award for the purposes of determining the attorney's fee attributable to future damages. The statute requires that this present value be ". . . determined in accordance with generally accepted actuarial practices by applying the discount rate in effect at the time of the award . . . " CPLR 5031(e). Therefore the court must determine what discount rate should be applied. Some courts have utilized discount rates provided by either party's economist. This could be heard in the form of testimony after the jury has rendered its verdict or could be considered by the court in an affidavit as a part of a post‑trial motion requesting that the judgment be entered pursuant to Article 50‑A or 50-B. Some courts have applied a discount rate based upon the interest rate on loans to depository institutions by the New York Federal Reserve Bank or the interest rate payable on U.S. Treasury Bills. For a discussion see, generally Binghamton Masonic Temple Inc. v. City of Binghamton, 1993 WL 377071 (Sup. Ct. Broome Co., Aug. 25, 1993).

Plaintiff's counsel is severely hampered in arguing what the appropriate discount rate should be. Most courts have understood that "the determination of the appropriate discount rate creates a conflict of interest between plaintiff and his or her attorney inasmuch as the lower the discount rate, the higher the fee and the smaller the future periodic payments to plaintiff" Andrialis v. Snyder, 1993 WL 440619; NYLJ, Jan. 26, 1993, p. 22 col. 3. See also Rohring, supra. In this instance the implementation of a basic aspect of the statute, ie. determination of counsel fees, creates a conflict of interest for plaintiff's counsel.

CPLR 4545 requires that the court deduct from future damages any collateral‑source payments. The court must find, under the statutes, that these payments will be made "with reasonable certainty" and that the plaintiff is "legally entitled to the continued receipt of such collateral source, pursuant to a contract or otherwise enforceable agreement, subject only to continued payment of a premium. . .

The statute lists as collateral sources insurance (except of life insurance), Social Security (except for Medicare) and Workers' Compensation or employee‑benefit programs (except those subject to liens). However, it can be argued that some or all of these payments might not be "reasonably certain." The defendant has a heavy burden of proof.

In Frey v. Chester E. Smith & Sons Inc. , 751 F. Supp. 1052 (NDNY 1990), the court addressed some collateral source issues. The court held that future Social Security benefits are "reasonably certain" and, hence, are to be deducted as collateral‑source payments.

The defendant in Frey also sought to deduct money received by the plaintiff pursuant to various employee‑benefit plans. Proceeds from employee benefit plans are listed in the statute as deductible collateral sources, but the statute does not specify what types of benefits are to be considered collateral sources. The plaintiff in Frey argued that profit sharing and pension benefits were actually earnings the decedent "previously received by the plans and were not in any way to replace or indemnify future earnings." The plaintiff also argued that death benefits from union pension plans were the result of the decedent's contributions into such plans and should not count as money paid to replace future lost earnings.

The Frey court essentially side-stepped this issue, holding that because the defendant hadn't identified which portion of the payments were contributed by the employer, no portion of the amount paid by the benefit plans would be deducted.

The Frey court also summarizes its calculations of the future annuity contract and attorney's fees pursuant to section 5041 (e). These are complex and, indeed, the court notes that "the statute, and particularly sections 5041(c) and (e), is not a model of clarity." The Frey court's method differs from the method used in Ursini v. Sussman , 143 Misc.2d 727, 541 NYS2d 916 (Sup. Ct., N.Y. Co. 1989), the first court to perform this mathematical feat.

The Frey court first divides the sum for each element of damages by the number of years the jury says the element of damages will persist. This is the first‑year payout. To that is added 4 percent to arrive at the second‑year payout, and so on to the final‑year payout.

Then the Frey court reduces these future values to present value, using a discount rate of 7 percent (the interest rate the Federal Reserve charges banks). The Frey court uses the following formula: Present Value of one dollar = 1 divided by (1 + i)ⁿ where i is the discount rate and n, an exponent, is the number of years.

Once the present value of the annual payments is determined, each annual payment is divided into a 1:2 ratio to arrive at attorney's fees (which are one‑third in this wrongful death case). The remainder is the present value of the annuity contract that the defendant must purchase, which will guarantee payment of the "two‑third" remainder portions of the annual payments.

The Ursini court (1) divided the future payments by the number of years' payout, (2) compounded the first‑year payout at 4 percent through the number of years' payout, (3) reduced the future payments to present value by the discount rate (The Ursini court uses 7.5 percent), (4) assigned attorney fees proportionally to each element of damages, (5) then recalculated the initial periodic payments to the plaintiff, deducting from first‑year payment the proportional attorneys fees and compounding the payments to the plaintiff at 4 percent annually.

The Frey court faults the Ursini method, pointing out the 4 percent growth factor is factored into the future damages twice under Ursini . In fairness to the Ursini court, the statutes are confusing in the extreme and it is not clear at all how one should accomplish the calculation. Most courts have resorted to relying on the parties to come up with the calculations, rather than wasting judicial resources on these Byzantine exercises.

All those who have examined the statute seem to agree that it is impossible to implement mathematically. "[T]he statute adopts a procedure that is somewhat circular" Ursini v. Sussman, 143 Misc. 2d at 731. Therefore, certain "leaps of faith" must be made in order to implement the statute. As a result, different courts have come up with slightly different methods of calculation, as for example in Ursini and Frey above.

Instead of clarifying which' of the two methods was the "correct" one, other courts that were forced to face the statute came up with still other method.s of calculation. For example, the courts in Marulli v. Pro Security Service, Inc., 151 Misc. 2d 1077, 583 NYS 2d 870 (A.T. 1992) and Rohring v. City of Niagara Falls, 153. Misc. 2d 1001, 584 NYS 2d 513 (Sup. Ct,. Niagara Co. 1992), did not follow the Ursini method of calculation. Chief among the differences is whether present value numbers are subtracted from present value dollars or from future dollars or whether the 4 percent is factored into the calculations twice. Some use different methods but arrive at the same conclusions.

The court in Singletary v. Three City Center, ___ Misc. 2d ___, 601 NYS 2d 649 (Sup. Ct., Monroe Co. Slander, J.) was critical of the methods used by these three other courts, and went about creating a fourth method. The Singletary court recognized a gross problem with calculations performed by other courts ‑ these courts were guilty of commingling "present value" dollars with "future value" dollars. This, the Singletary court correctly observes, is the equivalent of adding the proverbial apples and oranges. The court then launches into its own interpretation and, indeed, manages to achieve a. result that is arguably more "correct" than those achieved by other courts. Some flaws remain in the Singletary approach, however. Even though the court here attempts to segregate present values and future values, it does not account for the variation of future values ‑- dollars payable in the year 2000, for example, are not equivalent to dollars payable in the year 2005. Without embarking on an epic‑length examination of the problem, suffice it to say that in the form the statutes are written, it is impossible to achieve a mathematically defensible result.

The court in Singletary also notes that some of the other methods require the defendant to pay out more than the jury award, while some require less. But, in fact in a vast majority of cases, because all methods permit the first $250,000 to be paid in lump,sum immediately to the plaintiff, a sum which is never reduced to present value (as were all future damages under the "old" law), the cost‑to the defendant is greater under Articles 50‑A and 50‑B then under the old law. This is a curious anomaly if one accepts that the statutes were intended to lessen the burden on the defendant.

Perhaps at some future time the Court of Appeals will decide which one method of calculation should be used, thereby "mathematically interpreting" this statute. Given the conflicting methods used by the courts such an interpretation is sorely warranted. Until then, we now appear to have at least four suggested methods of accomplishing the mathematics, none of which are ideal.

While the courts attempt to iron out the awesome procedural problems these new laws pose, the larger problem of the faulty premise on which the laws seem to have been based remains.

The Legislature seems to be a victim of faulty reasoning in passing these laws. The reasoning seems to have been: Structured settlements have saved lots of money for defendants. Therefore if we mandate structured payouts in all awards, the defense will benefit, insurance premiums will drop and tort reform will be a reality.

The fatal flaw here is that settlements and awards are not analogous. They are chickens and ducks, apples and oranges. In structured settlements, both sides compromise ‑ the plaintiff may be willing, for whatever reason, to accept slightly less "time" value by accepting a structured settlement, and the defendant may save by being able to purchase an annuity at a discount.

However, there is no magic to a structured payout. There is no inherent saving in substituting periodic future payment for a lump‑sum jury award that has been reduced to present value. Once the yearly amount of damages and the future rate of inflation are agreed upon, all other things being equal, the present value of the future stream of payments will be very close or exactly the same as the cost of an annuity needed to make the future payments. The cost of an annuity is simply one form of reduction to present value. Prior to these new statutes, reduction to present value was an integral part of the calculation of a jury award.

By taking the task out of the hands of the fact finder and the court and imposing rigid strictures on how every award should be calculated, the Legislature has created a situation where a reasonable result is an extremely chancy proposition.

*Jerome M. Staller is president and Brian P. Sullivan is a senior economist at The Center for Forensic Economic Studies, Philadelphia, which provides economic and statistical analysis in litigation matters.