The remarkable set of statutory amendments created by the New York State Legislature to radically change the way damages are dealt with in medical malpractice, personal injury and wrongful death cases are now more than five years old. As cases affected by these complex statutes begin to reach the trial stage, it is increasingly apparent that practitioners in this state are in for an extended period of confusion as the courts struggle to interpret these new laws.

The new damages rules significantly change how plaintiffs and defendants should present their respective damages cases. Attorneys should expect much testing of the statutory guidelines in the coming years and, unless the Legislature steps in to rectify what many see as a colossal legislative fiasco, many mistakes are certain to be made.

This article will examine some of the obvious problems posed by the statutes and point out some pitfalls that face both defendants and plaintiffs as they operate in uncharted territory. Undoubtedly, as more cases are tried under the statutes, even more perplexing problems will arise.

Briefly, the relevant legislative enactments are as follows:

- CPLR Article 50-A (CPLR 5031-5039), which, inter alia, requires an future damages in excess of $250,000 in medical and dental malpractice actions to be paid periodically over a time period determined by the jury.¹ The court, after making prescribed adjustments,² must then enter a judgment for the amount of the present value of an annuity contract that will provide for payment of future damages in periodic installments.³ Article 50-A is applicable to any action for medical or dental malpractice commenced on or after July 1, 1985.

- CPLR Article 50-B, (CPLR 5041-5049), which, inter alia, requires all future damages in excess of $250,000 in personal injury, property damage and wrongful death actions to be paid periodically over a time period determined by the jury.⁴ The court, after making prescribed adjustments,⁵ must then enter a judgment for the amount of the present value of an annuity contract that will provide for payment of future damages in periodic installments.⁶ Article 50-B is applicable to any action for personal injury, property damage and wrongful death commenced on or after July 30, 1986.

- CPLR 4545, which requires the deduction by the court of collateral sources from personal injury and wrongful death awards. CPLR 4545 is applicable to medical malpractice actions commenced on or after October 1, 1984; dental malpractice actions commenced on or after July 1, 1985; podiatric malpractice actions commenced on or after July 21, 1986; and personal injury, property damage and wrongful death actions commenced on or after June 28, 1986.

- CPLR 4546, which allows for the reduction of lost earnings awards by the amount of income taxes which the court finds that the plaintiff would have been obligated to pay, in medical, dental and podiatric cases (but not other personal injury or wrongful death cases). In wrongful death malpractice actions, tax deductions are addressed in EPTL 5-4.3(c). CPLR 4546 is applicable to medical and dental malpractice actions commenced on or after July 8, 1986, and podiatric malpractice actions commenced on or after July 30, 1987.

- CPLR 4111, which requires that the jury itemize and value separate elements of loss, both past and future, and calculate the amount of time each element will persist (pain and suffering is limited to ten years), without reducing these damages to present value (the court performs the function of reducing the itemized verdict to present value after the verdict is rendered, then assigns a statutory four percent annual growth rate to the periodic payments). CPLR 4111 is applicable to all actions in which trial has not begun as of August 1, 1988.

One of the most glaring problems with the statutes involves the interplay between CPLR Articles 50-A and 50-B and CPLR 4111. Articles 50-A and 50-B mandate structured judgments (i.e., judgments made in periodic payments rather than a lump sum) of any portion of an award for future damages exceeding $250,000. CPLR 4111 requires that the jury itemize each particular element of damages, indicate how many years each element of damages will persist and award the full amount of future damages, not reduced to present value.

The court is required, after the itemized jury verdict is rendered, to (1) make deductions for collateral sources (and income taxes, if warranted under CPLR 4546) from the future damages awarded by the jury, (2), enter judgment ordering the remaining portion of future damages up to $250,000 to be paid in a lump sum to the plaintiff, (3) proportionately deduct this amount from each element of future damages awarded in the jury's original verdict (4) reduce each of these elements to present value using the "discount rate in effect at the time of the award," ⁷ and (5) mold the future damage portions of the verdict in excess of $250,000 into a structured scheme of periodic payments that will grow at four percent per year. In essence, these steps are used to arrive at the amount of the present value of an annuity contract that will provide for installment payments of future damages. However, before judgment can be entered the court must calculate the portion of attorney's fees related to future periodically paid damages, and deduct it from the amount determined under step (3), above. Once the attorney's fees have been deducted, the actual cost of the annuity contract can be determined, and judgment for this amount entered by the court.⁸

One problem with the statutory scheme is that, under CPLR 4111, the jury must render its verdict without reducing to present value. Therefore, any future damages under $250,000 after the court makes deductions under CPLR 4545 and 4546 will be paid in a lump sum and will not have been reduced to present value. Thus, the plaintiff has won a substantial and arguably unjustified bonus on the first $250,000 in future damages, which was unavailable prior to enactment of this new statutory scheme.

The key to the calculation of the present value of future damages is the discount rate. As noted above, the discount rate is not specified in the CPLR. Instead, the court is supposed to apply the discount rate in effect at the time of the award, which leaves the adoption of an appropriate discount rate to the court's discretion.

The discount rate affects the payout to the plaintiff, the fee payable to the plaintiff's attorney, and the cost to the defendant of purchasing an annuity policy sufficient to pay future damages.

The higher the discount rate used to reduce the future damages portion of the award to present value, the less the present value will be. Because plaintiff's attorney's fees are a percentage of the present value of future damages, a higher discount rate will result in a lower fee.⁹ Conversely, a lower discount rate leads to higher attorney's fees, since there is a higher present value. As to the defendant, a higher discount rate will result in a lower present value and reduce the cost of purchasing the required annuity policy.

The question of whether evidence of the probable growth rates of future damages is to be introduced to the jury is also unanswered by the statutes. After the jury renders its verdict the discount rate is decided on by the court and future damages are reduced to present value. The court then calculates the future periodic payments by dividing the total present value for each element of damages by the number of years the jury says the cost will persist, and then increases the periodic payments by four percent per year.

The Legislature did not explain what this four percent growth factor represents -whether it is a "cap" for inflation or simply a limit on the growth of any and all future damages.

This presents plaintiffs and defendants with a confusing problem. Suppose a plaintiff was facing medical costs of $100,000 annually. It is reasonable to argue that each year these costs would increase by at least seven percent. A plaintiff thus could argue that medical care costing $100,000 in 1990 would cost a total of $321,490 through 1992.

The defense, however, could argue that the growth in medical costs should not be presented to the jury since the award will be escalated by four percent automatically after the jury renders its verdict; accordingly, the jury should only be presented with medical costs of $300,000 from 1990 through 1992.

The plaintiff, however, could argue that by not considering the growth of medical costs, the jury is implicitly reducing the future damages to present value, which is not allowed under CPLR 4111.

If the courts decide to allow testimony to the jury on growth factors of future damages and then include the four percent growth rate after the jury renders its verdict the award will in effect be escalated beyond what may be considered reasonable -in the example above, the seven percent medical cost growth rate would be added to the statutory growth rate of four percent

By the same token, if the court decides to exclude testimony to the jury on future cost growth, the plaintiff may not be made whole, since some future damages elements probably would grow at a rate higher than four percent. Wages, for example, grow from normal inflation and also as a result of what is called "productivity" increases-the value of the employee's experience and increasing efficiency of the company. Productivity increases are commonly factored into any lost future wage testimony presented to juries. Disallowing such testimony would result in bias.

CPLR 4545 requires that the judge deduct from the future damages portion of the jury verdict payments that the plaintiff would receive from collateral sources. Under the statute, these sources include: (1) Insurance (except for life insurance); (2) Social Security (except for Medicare payments); and (3) Workers' Compensation or employee-benefit payments (except those subject to liens).

The court must find that collateral source 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 . . .."¹⁰

Plaintiffs should carefully examine each collateral source to be considered by the court. It can be argued that many collateral source benefits, including Workers' Compensation payments, have to be repaid from an eventual court award and thus are effectively subject to liens. Some Social Security benefits stop when a plaintiff receives a personal injury award. Many Blue Cross/Blue Shield policies state that the carrier must be reimbursed where there is a third-party recovery.

The requirement that the court must find that the collateral source payments will be "reasonably certain" places a heavy burden on the defense. The normal civil standard of proof has been "preponderance of the evidence." Depending on how courts construe the "with reasonable certainty" language, this higher standard might mean that very few collateral sources actually will be deducted from awards.

Should collateral sources be reduced to present value before they are deducted from the verdict? The statutes are silent on this point but one court has addressed the issue.

In Barth v. City of New York ,¹¹ the plaintiff argued that the future damages portion of. the verdict should be reduced only by the present value of the plaintiff's pension, not by the total amount of the pension, since the plaintiffs economic expert presented the jury with testimony on the present value of the plaintiff's lost earnings.

The court held that since CPLR 4111 requires the court to instruct the jury not to reduce lost earnings to present value, the pension benefits should not be reduced to present value before being deducted.

Thus, the court held that plaintiff erred by proffering testimony on the present value of future damages-it is the court's function to reduce those damages to present value. No testimony as to present value should be presented to the jury. In fact, plaintiffs should consider making it very clear to the jury that the future damages will be reduced by the court after the jury makes its award.

Another problem arises where collateral sources contain cost-of-living escalators. The Legislature has not addressed how such payments are to be handled when reducing an award, and it is certain that such benefits will complicate an already very complicated process.

CPLR 4546 allows the court to reduce future damages for medical malpractice by the personal income taxes the plaintiff would have had to pay. Again, this statute uses the "reasonable certainty" language.

In one recent case not involving malpractice, however, the New York Court of Appeals held that future tax liability is so speculative that future lost income should not be reduced by possible tax liability.¹²

Whether that court's reasoning will be applied in medical malpractice actions remains to be seen. In any event CPLR 4546 does not require courts to make the income tax deduction in medical malpractice actions. Instead, it permits the court to do so "if warranted by the evidence."¹³

Income tax deductions from wrongful death malpractice awards are covered by EPTL 5-4.3(c). Here, the deductions are made by the jury, or by the court if the action is tried without a jury. Evidence as to probable future tax liability is admissible, and deductions may be made for that liability, based upon the amount of taxes that the court or jury finds, with reasonable certainty, that the decedent would have been legally obligated to pay.

Under CPLR 5032 or 5042, the defendant must purchase an annuity contract from a qualified insurance carrier to satisfy the future damages award obligation. Judicial approval of the choice of insurance company is required.

If the plaintiff dies before the annuity period ends, liability for payment of remaining installments for health care and noneconomic loss terminates, unless the parties agreed otherwise at the time security for payment was posted.¹⁴ Payments for loss of future earnings do not terminate, but shall be paid to persons to whom the plaintiff owed a duty of support at the time of his or her death.¹⁵ Payments to those whom-the plaintiff was supporting continue as long as the duty to support lasts or until the end of the annuity period, whichever is earlier.

If no duty of-support still exists, remaining payments are made to the plaintiff's estate and may, on application to the court, be reduced to a present value lump sum.

This offers the defendant a possible savings on the cost of the annuity. The annuity company may calculate that the plaintiff's life expectancy is significantly less than the jury's determination of life expectancy. In such a case, the annuity company may offer the defendant a "bargain" annuity.

This review of the current New York damages statutes is by no means exhaustive -many other perplexing questions have been presented by the laws. For example, the laws do not discuss how pensions are to be treated. Unanswered questions involving joint and several liability further confuse the picture. The Legislature has dramatically altered New York practice, and while the courts sort the statutes out, trial attorneys will be operating on unfamiliar ground.

It is essential that any attorney now facing trial read all relevant statutes and case law thoroughly before going into court, and prepare damages arguments with great care.

1. CPLR 5031(e).
2. CPLR 5031(b), (c) and (d).
3. CPLR 5031(e).
4. CPLR 5041(e).
5. CPLR 5041(b), (c) and (d).
6. CPLR 5041(e).
7. CPLR 5031(e), CPLR 5041(e).
8. For a detailed explanation of the calculations required to value an award under the statutes, see Ursini v. Sussman, 143 Misc. 2d 727, 541 N.Y.S.2d 916 (Sup. Ct. N.Y. Co. 1989).
9. This principle can be illustrated by a simple example, using a hypothetical malpractice case. Attorneys fees in medical, dental or podiatric malpractice cases are governed by a statutory schedule, as follows: 30 percent of the first $250,000 of the award; 25 percent of the next $250,000; 20 percent of the next $500,000; 15 percent of the next $250,000; and 10 percent of any amount in excess of $1.25 million. Jud. L § 474-a. Suppose the jury awards the plaintiff future damages of $350,000. The first $250,000 is payable to plaintiff in a lump sum, and plaintiffs attorney will receive 30 percent of this portion of the award ($75,000), also in a lump sum. The excess $100,000 must then be reduced to present value before calculating the attorney's fees. Suppose that the present value would be either $80,000 or $70,000, depending on the discount rate adopted by the court At the applicable 25 percent rate for attorney's fees on future damages in excess of $250,000 but not exceeding $500,000, an $80,000 present value yields a fee of $20,000, while the lower $70,000 present value reduces the fee to $17,500.
10. CPLR 4545(a).
11. N.Y.L.J., June 20. 1989, p. 22.
12. Johnson v. Manhattan and Bronx Surface Transit Operating Auth., 71 N.Y.2d 198, 524 N.Y.S.2d 415, 519 N.E.2d 326 (1988). For a further discussion of this case, and of the treatment of Income taxes, see New York Practice Guide: Negligence § 22.06(3).
13. CPLR 4546(3).
14. CPLR 5035(a).
15. CPLR 5035(b).