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The Confusion Factor: Conflicts In Future-Damages Formulas
By Kenneth Mauro & Jerome M. Staller* In amending statutes governing damage awards in personal-injury and wrongful-death matters, the New York state legislature has introduced new element into the calculation of damages: confusion. The state's new periodic payment rule and its rules governing the treatment of collateral sources in litigation raise a host of questions. Whatever the legislature's intention in passing these laws, the most notable has been a significant escalation of the level of difficulty and uncertainty in the assessment of damages. To compound the problem, the New York rule also applies in the federal courts. Alisandrelli v. Kenwood , 724 F.Supp. 235 (S.D.N.Y. 1989). It is hoped that the courts will clarify the process in the coming years. While this evolution is in progress, however, attorneys now face several significant problems, not the least of which the apparent conflict between CPLR 4111(d), governing the jury's treatment of future damages, and CPLR 5031(e) and 5041(e), mandating the use of periodic payments for future damages in excess of $250,000. Under CPLR 4111(d) and (f), juries are instructed to assign a dollar amount to various separate elements of damages, including medical expenses, lost earnings, and pain and suffering. The jury must also segregate past loss from loss to be incurred in the future. In itemizing future lost damages, the jury must decide how many years each element of damages will persist - future lost wages might end at age 65, while medical care might be needed until age 73 or beyond. In the computation, the jury must award the full amount of future damages without reducing that amount to present value. However, under 5031(e) and 5041(e), all future damages in excess of $250,000 are to be awarded in a stream of periodic payments. The size of the annual payments is determined by dividing the amount. for each element of damages by the number of years the award will be given. The annual payments are to be increased by 4 percent per year. (This calculation is performed by the court - the jury has no role in factoring in the 4 percent growth rate.) Taking a literal reading of CPLR 4111, the plaintiff would, for example, argue to the jury that ongoing medical care costing $100,000 in 1990 could reasonably be expected to escalate each year by a factor of 7 percent, for a "full" cost through 1992 of $344,000. The defense could then argue that the sum should be reduced to present value - $300,000 - since the legislative intent in "growing" periodic-payment awards by 4 percent under CPLR 5041 was, arguably, to take inflationary growth into account. The plaintiffs inclusion of the 7 percent increase in calculating the "full" amount of medical cost effectively constitutes double counting of inflationary growth when the mandatory 4 percent growth is factored into the calculation. The plaintiff could then counter with the argument that by not including the 7 percent growth factor at trial, a portion of the award is implicitly reduced to present value, which is expressly forbidden under CPLR 4111. Additional Questions Beyond this conflict, the legislature's vagueness as to the rules of discounting raises several other significant questions. Why did the legislature choose 4 percent as the growth rate for structured periodic payments? If, indeed, the 4 percent is intended to adjust for inflation, another significant growth factor is ignored. Wage growth - commonly known as productivity or longevity increase - is left unaccounted for. This is an element above and beyond inflation that is commonly included in damages projections. Other problems include the fact that medical costs have significantly outpaced inflation - they increase at rates well above 4 percent. Inflation itself can vary greatly from year to year. Finally, a significant questions is posed by the annuitization of future damages in excess of $250,000. Annuitization, or structuring, is in essence the reduction to present value. The price or cost of the annuity reflects the present value of the stream of- future payments. By excluding the first $250,000 from such a reduction, the legislature has apparently given the plaintiff a clear advantage. Was that intentional? The amendments were obviously intended to limit the cost of large verdicts, yet their effect on. smaller verdicts seems anomalous. In cases where future damages are less than $250,000 (perhaps the majority of cases), neither CPLR.5031(e) nor 5041(e) applies -- structuring of the verdict is not mandatory. CPLR 4111 does apply, though -- the verdict cannot be reduced to present value. It would be impossible to amend CPLR 4111 to apply only in cases where future damages are in excess of $250,000, since litigants cannot know the amount of future damages until after the verdict is rendered and, of course, after the jury has been instructed not to reduce the award to present value. Even in cases where future damages exceed $250,000, what justifies the no-reduction boon to plaintiffs on the first $250,000? As currently written, CPLR 4111, 5031 and 5041 could well result in bias. If the courts allow testimony regarding growth factors in the initial damage presentation by plaintiffs and then include the 4 percent growth rate when calculating the annuity, the result is an upward bias favorable to the plaintiff. On the other hand, the exclusion of the growth factor in testimony and the inclusion of the 4 percent annuity factor alone would, in most instances, result in a downward bias favorable to the defense. It is apparent that the legislature, attempting to maintain equity, has created a host of inequities and great deal of confusion. In his opinion in Lieberman v. Perez-Verdiano , 142 Misc. 2d 223, 536 N.Y.S.2d. 388 (Sup 1988), Justice Joseph S. Levine bemoans the problems and confusion presented by the amendments: "Article 50-A of the CPLR is entitled, 'Periodic Payments of Judgments in Medical Malpractice Actions'. . .. As will become evident in the following paragraphs, the complexity of the statute is exceeded only by the complexity of its application . . .. "Reviewing this judgment is an honor the court would rather have avoided" Busy Work A good example of the. complexity and the busy-work involved in incorporating the periodic-payment amendments into a judgment is found in Ursini a Sussman, 143 Misc. 2d 727, 541 NYS 2d 916 (1989) Gammerman, J. We show here the myriad steps and calculations required in order to comply with the periodic-payment statutes.
Step 1 - Judgment for a lump sum of past damages and
Step 2 - Deduction of $250,000 future-damages portion from initial future-damages figure on a proportional basis:
Total: $250,000 The remaining future damages are, therefore:
(Justice Gammerman notes that off-sets for collateral sources, if any had been available, would have been deducted prior to the deduction of the $250,000 future lump sum..) Step 3 - Determination of (tentative) first-year payout:
Step 4 - Calculation of the present value of the annuity to increase at 4 percent per year, the initial payments of which match the above figures. (Here, Justice Gammerman chose a 7.5 percent discount rate, based on testimony he has heard "over the years." The reduction to present value is a complex calculation and is usually performed using a calculator.)
The $3.98 million then becomes the basis for the determination of attorneys fees and delay damages (currently 9 percent, compounded annually). Step 5 - Calculation of attorney fees. An attorney retained after July 1, 1985 in a medical-malpractice case is entitled to 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 an amount in excess of $1.25 million. First, fees attributable to the initial $750,000 lump-sum portion of the award representing past damages ($500,000) and the lump-sum future damages payout allowed by statute ($250,000) are calculated. That portion of the fee is $187,500 (30 percent of $250,000 is $75,000); 25 percent of the next $250,000 is $62,5000; and 20 percent of the next $250,000 is $50,000). Next, the fees attributable to the "present value of future damages" portion of the award are calculated:
Total attorney fees are:
Step 6 - Calculation of attorney-fee offset to future-damage payments. The future-damage periodic payouts are to be reduced by the attorney the fees which are allocated proportionally to total the present-value amount ($3,230,263). First, the proportion. of each separate item of damages to the total present-value amount is calculated, using the allocations arrived at in Step 4: Lost earnings: 30.97 percent ($1,000,477 divided by $3,230,263) Therapy: 11.77 percent ($380,125 divided by $3,230,263) Attendant care: 7.19 percent ($232,154 divided by $3,230,263) Pain, suffering: 50.07 percent ($1,617,480 divided by $3,230,263) Attorney fees ($360,253) are then allocated: Lost earnings: 30.97% $111,662 Therapy: 11.77% $42,425 Attendant care: 7.19 % $25,911 Pain, suffering 50.07 % $180,525
Step 7 - Calculation of interest. Interest is calculated on net present value (Step 4), which is $3,980,263. The attorney fee ($548,023) represents 13.77 percent of that amount. Thus, 13.77 percent of the interest from. the day of verdict will be added to the attorney fee. Savings Offset Whatever savings the legislature contemplated when enacting the periodic-payment amendments are, as is obvious from the above, more than somewhat offset by the enormous added expenditure of judicial resources the amendments call for. In addition to the increase in busy work for the courts, the extra calculations called for by the new statutes reveal certain anomalies unintended (one would hope) by the legislature. On first glance, it appears as though the new periodic-payment statute reduced what would have been a $5.5 million jury award in Ursini to a mere $3.9 million. However, the original $5.5 million award was based on testimony as to total future damages not reduced to present value. It is unlikely that the defense would have allowed such a bottom-line figure to be presented to the jury without objection. Thus, the savings to defendants represented by the reduced award are somewhat illusory. The defendant could, however, realize great savings if the annuity company's estimate of the plaintiff's life is shorter than the jury's estimation. In that case, the annuity company might offer the defendant a deep discount on the cost of the instrument since, under CPLR 5035, the plaintiff's death cancels the defendant's obligation to make outstanding payments on all elements of damages except lost future earnings. The calculations shown above also reveal an inequity involving attorney fees. It is clear that the higher the discount rate used by the court to reduce future damages to present value, the lower the attorney fees will be and the more money the client will receive. This creates a conflict of interest between the plaintiff and the plaintiff's attorney. It also should be noted that the plaintiff receives a significant benefit at the expense of the defendant by virtue of the fact that the plaintiff "pays" the attorney fee over time, yet the defendant must deliver the attorney fee to the plaintiff's attorney in a lump sum. As they now stand, the periodic-payment statutes have added unnecessary complications to the tort reparation process without adding any significant benefits. The collateral-source aspects of the new statutes are similarly confusing and represent, potentially, the possibility of gross inequity. *Jerome M. Staller is president of The Center for Forensic Economic Studies in Philadelphia, which provides economic and statistical analysis in matters relating to litigation. (New York Law Journal, September 21, 1990, Outside Counsel, p. 1, col. 1)
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