Discount rates are used to calculate the present day value of a loss of future income or cost of future care that is awarded as a lump sum in personal injury cases. The discount rate assumes that the lump sum will be invested and will earn enough income to create a sufficient stream of compensation for the injured party over the appropriate time frame, with the fund being fully exhausted at the end. This is one methodology of calculating and compensating future financial loss endorsed by the so-called 1978 “Trilogy” of catastrophic injury cases decided by the Supreme Court of Canada.
Under s. 56(2) of the Law and Equity Act, RSBC 1996, c. 253, the Chief Justice of the Supreme Court prescribes the discount rates for personal injury cases in BC. The Law and Equity Regulation, BC Reg. 352/81 sets the rates at 2.5% for future income loss and 3.5% for cost of future care. These rates have not been changed since being established in 1981, over 32 years ago.
Three factors determine the “real” rate of return reflected by the discount rate: interest rates, inflation rates and labour productivity. Given that the economy today is much different than 1981, a review is underway by BC’s Chief Justice to reconsider the above figures. The result will almost certainly be that the statutory discount rates will be reduced. This, in turn, will significantly increase damage awards for future losses and will obviously impact liability insurers’ bottom line.
Creation of the discount rate
Before 1978, expert evidence on interest, inflation and labour productivity was required to be presented at trial in order to determine the appropriate discounting to apply to future losses and to arrive at a present value figure (the damages award).
As a result of the “Trilogy” cases at the Supreme Court of Canada in 1978, several provinces legislated discount rates. The purpose of the discount rate was to avoid overcompensation and provide a standardized means for calculating the real rate of return.
In British Columbia, the Law & Equity Act implemented the above legislative discount rate in 1981. Alberta and Newfoundland and Labrador do not have prescribed discount rates, thus, they must be calculated by leading evidence. Only Ontario provides a calculation for assessing discount rates rather than prescribing a fixed rate.
Implications of a decrease in the discount rate
If an injured party is meant to be provided with $1,000 annually for 30 years, a small change in the discount rate can have a significant impact over the long term. For example the present value of $30,000 varies with the applicable discount rate:
Discount RateLump Sum Award
In short, the lower the discount rate, the higher the damages award for future loss. Given the current economy, specifically low interest rates, it is very likely that the discount rate will be lowered. The impact of such a change is that defendants/insurers will be required to pay a higher lump sum for damages for future income loss and cost of care.
A Silver Lining?
In a number of recent British Columbia cases, the Courts recognized that the current discount rate is set higher than anticipated returns. Thus, due to the Court’s inability to adjust the legislatively mandated discount rates, they appear increasingly to be moving toward awarding management fees so that an experienced professional can assist with obtaining a rate of return similar to that under the legislation.
A management fee is part of the personal injury damages award intended to compensate for the cost incurred by an injured party for management and investment of the lump sum damages award. This fee supposedly ensures that the assumed rates of return are realized. A party seeking management fees as damages must provide evidence of the necessity of the services required.
If there is a decrease in the discount rate (and corresponding increase in damages), there may be an argument that management fees should no longer be awarded because the rate of return can be easily achieved without the need for professional paid management services.
Still, the bottom line is that discounts are going down and damages awards are going up…