Some five years ago, the New York Legislature handed down amendments that radically altered the tort-reparations process in the state. The amendments, intended to lower awards in medical malpractice and personal injury matters, are proving to be a source of consternation to the bench and bar. As cases affected by the statutes reach trial, it is becoming increasingly evident that, whatever their intended effect, the practical result of the complex and ambiguous rules so far is confusion and frustration.

This article will examine the significant problems raised by CPLR 4545, the amended rule on collateral sources; the problems the new statutes pose in terms of pension valuation; and some questions raised by the new rules on the reduction of awards for income taxes. (Problems posed by the new periodic-payment rules were discussed in The Confusion Factor: Conflicts in Future-Damages Formulas, NYLJ, Sept. 21, 1990).

CPLR 4545 applies to all malpractice actions commenced on or after July 1, 1985 and all personal-injury and wrongful-death actions commenced on or after June 28, 1986. Briefly, the statute permits the judge to reduce a verdict by the total payments made to the plaintiff from collateral sources.

The collateral sources include "insurance (except for life insurance), social security (except those benefits provided under Title XVIII of the social security act [Medicare]), workers' compensation or employee benefit programs (except such collateral sources entitled by law to liens against any recovery of the plaintiff)." CPLR 4545(a), (c).

The court must find that the 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 the continued payment of a premium."

Prior to the enactment of this amendment, evidence could be introduced as to the availability of collateral sources, but any reduction of the final verdict in light of such collateral sources was at the discretion of the jury. Now, judges are required to make the reduction.

The first question that arises, given the vague language of the bill, is which collateral-source items are to be deducted and which aren't.

Payments emanating from employer-paid or individually purchased disability policies presumably would be subtracted from the verdict where it could be shown that the payments are riot subject to lien and are "reasonably certain."

However, many benefits must be paid back from any recovery and thus are subject to liens. For example, the Workers Compensation Law states that if compensation is received from a third party as the result of an action, the State Insurance Fund has a lien on the proceedings. Many Blue Cross/ Blue Shield policies contain provisions requiring reimbursement where there is a third-party recovery.

The question of what applies and what doesn't offers fertile ground for argument and, as yet, there is scant judicial guidance on the matter.

To further cloud the issue, all collateral-source reductions now to be considered by the judge after the jury renders its verdict are subject, apparently, to a new legal standard. Presumably, it is the defendant's burden to prove with "reasonable certainty" that the collateral source will be received by the plaintiff. This "reasonable certainty" standard differs from the usual standards of proof in the law. The civil standard has always been proof by a preponderance of the evidence - the fact finder should be able to determine from the evidence that its conclusion is more probable than not. The criminal standard is significantly higher - the jury must determine that the defendant is guilty "beyond a reasonable doubt."

The new standard of "reasonable certainty" is obviously a much higher burden of proof for civil defendants than the normal civil "preponderance" standard. Defendants may have trouble proving that collateral sources would be received by plaintiffs "with reasonable certainty," and courts may construe the new standard as severely restricting their ability to make findings of collateral sources for purposes of verdict reduction. This could render the statute meaningless, although Legislative intent is clearly to provide a benefit to the defendant.

Yet another thorny question is whether these collateral-source offsets, once they are deemed to fall under the guidelines of CPLR 4545, should be reduced to their present value before they are deducted from the verdict. Here, we have some guidance from the bench.

Barth v. City of New York, NYLJ, June 20, 1989, p.22, involved an injured city policeman. The defendant produced evidence out of the jury's hearing that the plaintiff received a fixed pension of $24,501.75 per year and could be expected to receive benefits in the amount of $588,042 over the 24-year period covering the jury's future-loss award.

The plaintiff argued that the future-loss verdict should be reduced only by the present value of the pension, $286,130, since the plaintiff's expert testified as to the present value of the plaintiff's future-earnings loss.

Justice Leland DeGrasse, who presided, noted that CPLR 4545 is silent as to whether a collateral-source offset of a verdict should be reduced to its present value. Justice DeGrasse also noted that CPLR 4111, which governs itemized verdicts, also offers no direction and that Subdivisions (d) and (e) of CPLR 4111 "specifically exclude the present-value reduction from the fact finder's consideration in medical, dental and podiatric malpractice actions as well as for actions for personal injury . . .."

In declining to reduce the pension benefit sum to present value for the purposes of collateral-source offset, the Justice wrote:

"The subject, however, is not addressed in subdivision (e) [of CPLR 4111], which is applicable to actions against public employers such as the City of New York. Nevertheless, the court declines to reduce the collateral-source offset to its present value because no present value instruction was given to the jury or requested on the issue of plaintiff's future earnings.

The trial record also contains evidence of plaintiffs projected loss of future earnings without reduction to present value. The reduction suggested by the plaintiff would, therefore, produce the incongruous result of a reduced offset being applied to an unreduced gross award . . .."

Clearly, the plaintiff in this case made a mistake in testifying as to the present value of the future lost earnings. As a practical matter, the astute plaintiff will offer no evidence at all as to the present value of future damages. Under CPLR 4111 (d), the jury is instructed to award the full amount of future damages without reduction to present value - it is the court's job to make such reductions after the jury renders its verdict.

Also from a purely practical standpoint, another caveat is in order. Nothing in the new statutes bars a jury from reducing its verdict to account for collateral-source benefits. Plaintiffs counsel might consider requesting an instruction that the jury not reduce for collateral sources in the event that the jury happens to hear of such collateral sources. Such an instruction could, conceivably, negate any benefit to the defense from incidental mention at trial of collateral sources. By the same token, the astute defense attorney is well-advised to tread lightly in this area.

The Legislature has also mandated that future damages be made in periodic payments, akin to structured settlements, and has handed down a confusing and all-but-unworkable set of guidelines as to how these periodic payments are to be determined and structured by the courts. These periodic-payment rules cause further confusion when juxtaposed with the new rules on the treatment of collateral sources.

The Legislature has not addressed the question of how collateral-source payments are to be treated in molding the structured verdicts. Many benefits that might be considered sources of deductible collateral payments for the purposes of CPLR 4545 include built in cost-of-living escalator provisions. Typical sources in this category include Social Security payments and federal disability pensions.

The molding of such a source into a periodic payment is made much more difficult by virtue of the fact that testimony would be required as to the rate at which these benefits would be assumed to increase over the term of payment. The court must also distinguish between the dynamic benefit and the fixed benefit, which adds another step to an already complicated process.

Along with the myriad problems presented by the new statutes on collateral-offsets, the bench and bar now face novel problems involving pension benefits. CPLR 4545 lists "employee benefit programs" as possible collateral sources, but it is unlikely that any court would construe pension benefits as being "collateral sources" within the meaning of the statute since pension benefits are earned by the employee and are not intended to replace earnings in. the event of an injury.

The new statutes do, however, raise significant problems involving the valuation of pensions for the purposes of determining lost earnings. CPLR 4111(d), which effectively limits in-court testimony as to present value, produces inequitable results when alternative pension plans are compared.

Suppose two 55-year-old employees each earn $75,000 working for different companies. Mr. Contrib has a typical defined contribution pension plan, which each year adds an amount equal to 10 percent of his annual salary to his accumulated pension benefits. Mr. Benny has a typical defined benefit plan, which promises to pay him some fraction of his final annual salary each year after he retires, depending on the number of years of service.

Suppose that each is suddenly, permanently and totally disabled; would otherwise have retired at age 65; has a life expectancy to age 75; and that the earnings of each would have remained $75,000 a year until retirement.

Mr. Contrib's gross pension loss would be the undiscounted contributions that would have been made for him between age 55 and age 65 - 10 times $7,500, or $75,000. In Mr. Benny's case, since his years of service have been cut short by his disability, his pension benefit has been reduced by say, $10,000 a year. His gross pension loss would be the undiscounted payout that he would have received between age 65 and age 75 -- 10 times $10,000, or $100,000.

CPLR 4111(d) mandates that the jury determine the amount of each element of damages and the number of years each element of damages would persist. For both Mr. Contrib and Mr. Benny, the number of years would be 10. Mr. Contrib's loss would be $75,000 and Mr. Benny's would be $100,000. A judge using this information to reduce the gross losses to present value would conclude that Mr. Benny suffered a greater loss and would, presumably, reduce each by "applying the discount rate in effect at the time of the award" for the ten-year period, as mandated by CPLR 5031(e) or 5041(e).

However, when Mr. Contrib's loss is correctly discounted, even if one chooses the modest rate of interest of 4 percent, his loss in present value terms would be $60,832. When Mr. Benny's loss is similarly discounted, again at the low rate of interest of 4 percent, his loss in present value terms would be only $54,794. Even if the rate of discount were only 3 percent, Mr. Contrib's loss would be $63,977 compared to $63,472 for Mr. Benny. At higher rates, the disparity in favor of Mr. Contrib would grow.

Although Mr. Benny appears to have lost more per year and more in total, his true loss is less than Mr. Contrib's. The reason is that the contractual payment to Mr. Benny by his defined benefit plan is further in the future than the contractual payment to Mr. Contrib by his defined contribution plan -- dollars paid sooner are worth more than dollars paid later. Unfortunately, the amendments to CPLR 4111 (d) would cause this wrinkle to be missed in the litigation process and as a result Mr. Benny would be incorrectly awarded more than Mr. Contrib.

In addition to reduction for collateral sources, jury awards may now be reduced to reflect the federal, state and local taxes the plaintiff would have had to pay on lost earnings. This reduction, allowed under CPLR 4546, applies to medical and dental malpractice actions commenced on or after July 8, 1986 and to podiatric malpractice actions in which the acts, omissions or failures occurred on or after July 30, 1987.

The court, not the jury, calculates this deduction. Evidence as to the taxes the plaintiff would have had to pay is presented out of the jury's presence. Wrongful-death malpractice actions, however, are governed by EPTL 5-4.3, which requires that evidence as to taxes the decedent would have had to pay be admissible to the jury.

Bear in mind that in neither case does the ultimate award have to be reduced by the total of probable taxes. Again, the jury or court must find from the evidence with "reasonable certainty" what taxes the plaintiff or plaintiffs decedent would have been obligated to pay. On the other hand, it would seem obvious that this "reasonable certainty" standard should not be construed as such a high standard as to preclude reductions for income taxes.

This problem is illuminated by case law regarding reductions for income taxes in non-malpractice cases. In Johnson v. Manhattan and Bronx Surface Transit Operating Authority, 71 N.Y. 2d 198 (1988), the New York Court of Appeals was asked to determine whether calculations for decedent's lost-wage damages should be based on net, rather than gross, income.

The court noted that defendant's request to base the calculations on net income was an approach that "abstract logic could favor," but it concluded that such an approach was "unacceptably speculative" and, therefore, not practical.

The court added: "No crystal ball is available to juries to overcome the inevitable speculation concerning future tax status of an individual or future tax law itself."

Has the Court of Appeals already found that tax liability is too speculative? In light of this holding, how can any trial court be asked to make a finding on future tax liabilities with "reasonable certainty"? The Johnson court did cite the Legislature's exception for malpractice actions, but merely noted that the case sub judice was not a malpractice action.

Problems with the periodic-payment statutes, offsets for collateral sources and taxes and the other features of the tort-reparation laws enacted five years ago and now reaching the courts are certainly not limited to tho.-,e outlined here, where we have merely scratched the surface. Questions posed by other issues, such as the treatment of joint and several liability, could fill volumes.

For now, we must watch as the courts and the bar grapple toward an accommodation with the statutes. Whether such an accommodation is possible without substantial alteration of the statutes is, in the view of the present authors, a doubtful prospect.

*Jerome M. Staller, Ph.D., is president of The Center for Forensic Economic Studies in Philadelphia, which provides economic and statistical analysis in matters relating to litigation.