Transcript FUTURE DAMAGES AND STRUCTURED SETTLEMENTS

AN INTRODUCTION TO THE OPERATION
OF ARTICLES 50-A AND 50-B OF THE CPLR
PRESENTED BY
TODD A. KIPNES, JD, MBA
KIPNES CROWLEY GROUP LLC
APRIL 19, 2013
FUTURE DAMAGES
Future damages compensate for future loss. Common
items include medical expenses, lost earnings, and
pain and suffering.
STRUCTURED JUDGMENTS
At common law, and in New York prior to
the enactment of Articles 50-A and 50-B,
all future damages were converted to
present value using a discount rate and
paid in a single lump sum.
Articles 50-A and 50-B provide for
structured judgments, whereby certain
future damages are paid in periodic
installments funded by an annuity
contract purchased by the defendant.
PRESENT VALUE AND DISCOUNT RATE
•
Present value is the current worth of a future payment (or
series of payments) given a specific discount rate.
•
Discount rate is the assumed return on a dollar saved, and
is used to account for the time value of money.
PRESENT VALUE OF $1,000,000 IN 30 YEARS
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
1%
2%
3%
4%
5%
6%
7%
8%
9%
10% 11% 12% 13% 14% 15%
DISCOUNT RATE
BACKGROUND
•
Article 50-A (CPLR 5031–5039), which applies to
medical, dental and podiatric malpractice claims, was
enacted in 1985 with two primary goals:
1. To reduce medical malpractice premiums by lowering
claim costs; and
2. To guarantee to injured parties that compensation for
future needs would be available as expenses arose.
•
In 1986, Article 50-B (CPLR 5041-5049) was enacted for
all other personal injury claims with the same two goals.
•
Prior to 1985, future damages were frequently paid over
time through the use of structured settlements. These
Rules effectively apply the same concept to judgments.
WHY ARE CLAIM COSTS LOWER?
(Two Reasons Are Commonly Given, Only One Is Consistently True)
•
“[P]aying a judgment in periodic installments reduces the overall cost of the judgment by
permitting the insurer to retain and invest the balance of the award before the installments
come due....”
•
However, the defendant must fund the periodic payments through an annuity at the outset.
•
The cost of the funding annuity may be higher or lower than the present value of the
future damages, depending on a variety of factors.
•
“[A]dditional savings [would] result from relieving the defendant from the obligation to make
payments toward the plaintiff's future health care and other non-economic expenses in the
event of the plaintiff's death.”
•
This factor does promote savings. The common law present value approach requires the
finder-of-fact to make a determination regarding life expectancy.
•
On the contrary, an annuity can be purchased from a life insurance company that ends at
death. Given a life insurance company’s expertise and pool of risk, it is likely to be more
efficient in accounting for life expectancy.
* Both quotes are from the Bill Jacket, Governor’s Program Memorandum, 1985 N.Y. Legis. Ann., at 132.
BACKGROUND – PART II
• Articles 50-A and 50-B were heavily criticized from the outset:
• The Court of Appeals called them “circular,” “ambiguous,”
“impossible to apply as written,” “vexing,” and “every
Judge’s nightmare.”
• Defendants complained that they did not save money at all,
but rather resulted in awards significantly higher than under
the prior system.
• Plaintiffs complained that the prior system was significantly
more fair (and less confusing).
• At the direct urging of the Court of Appeals, Article 50-A was
amended in 2003. Inexplicably, Article 50-B was not.
OVERVIEW OF ARTICLE 50-B
STEP 1: The jury must itemize each element of damages into past and
future. For future damages it must also determine the period of years, and
award the full amount without reduction to present value. CPLR 4111(e).
STEP 2: After applying setoffs, credits, comparative negligence, etc., past
damages and the first $250,000 of future damages are paid in a lump sum.
STEP 3: Remaining future damages are reduced to present value and
added to the lump sum damages for the total present value of the verdict.
STEP 4: Litigation expenses and the attorney fee are used to reduce each
element of damages on a pro rata basis.
STEP 5: Defendant pays lump sums in cash and purchases an annuity(ies)
to fund the remaining future damages over the prescribed period of years.
OUR HYPOTHETICAL VERDICT
• Summary of Facts: A 50-year old man suffered a fully disabling
injury. He will require lifetime medical care.
• Summary of Verdict: On April 1, 2013, the jury returned a verdict
of:
– $1,000,000 in Past Damages
– $1,000,000 in Future Pain and Suffering over 25 years
– $1,822,962 in Future Medical Care based on expert testimony of
$50,000 per year for 25 Years
– $1,005,907 in Future Lost Earnings based on expert testimony of
$75,000 per year for 12 years
• Other Key Facts:
– The 10-Year Treasury Rate on the date of the verdict was 1.75%.
– Litigation expenses of $100,000 were incurred.
ARTICLE 50-B CALCULATIONS
• Step One: Determine Cash Payment Due
• $1,000,000 (Past Damages) + $250,000 (Future Damages)
= $1,250,000
• Step Two: Reduce Future Damages By $250,000
Damages
% of Total
Reduction
Remainder
Pain & Suffering
$1,000,000
26.12%
$65,293
$934,707
Medical Care
$1,822,963
47.61%
$119,028
$1,703,936
Lost Earnings
$1,005,907
26.27%
$65,679
$940,228
TOTALS
$3,828,870
100.00%
$250,000
$3,578,870
BUT I BECAME A LAWYER
TO AVOID MATH!
ACTUAL STUDENT EXAM ANSWER
ARTICLE 50-B CALCULATIONS (Cont.)
• Step Three: Determine Present Value of the Verdict
– This is the hard part, and the source of a number of the statute’s flaws.
– In most cases, the calculations cannot be done by hand, and would take
a good deal of time with a financial calculator. The best way is with a
spreadsheet program (e.g., Microsoft Excel).
– The present value of the cash payments equal themselves. The present
value of the future damages are calculated as follows:
• First, divide each item by its period of years to determine the first year
payment. For future pain and suffering, the period of years is the greater
of 10 years or the period in the verdict.
• Second, increase the first year payment by 4% each year for its duration to
establish a payment stream.
• Third, apply a discount rate to that payment stream to determine its present
value.
ARTICLE 50-B CALCULATIONS (Cont.)
1st Year Growth
Payment
Rate
Damages
# of
Years
Discount
Rate
Aggregate
Payments
Present
Value
Pain &
Suffering
$934,707
10
$93,471
4.00%
1.75%
$1,122,219
$1,033,421
Medical
Care
$1,703,936
25
$68,157
4.00%
2.15%
$2,838,478
$2,131,200
Lost
Earnings
$940,228
12
$78,352
4.00%
1.75%
$1,177,307
$1,063,443
• These calculations demonstrate two flaws addressed in Article 50-A:
1. Both first year payments and undiscounted aggregates are higher than determined
by the plaintiff’s expert, due to the “double-counting” of inflation.
• For higher amounts and longer time periods, this effect is significant and
geometric. In the oft-cited Desiderio case, a $40 million award for future
nursing over 55 years became a $140 million total payment stream.
2. Article 50-B does not specify a discount rate, which caused much post-verdict
litigation. Most courts now use the formula from Article 50-A (as does the chart).
• Also note that today’s low interest rates are highly favorable to the plaintiff. Low
discount rates and high growth rates both increase present value.
ARTICLE 50-B CALCULATIONS (Cont.)
• Step Four: Reduce Each Element By Expenses and Fee
Present Value
% of Total
Reduction for
Expenses
Remainder
Adjusted 1st
Year Payment
Lump Sums
$1,250,000
22.8%
$22,800
$1,227,200
NA
Pain & Suffering
$1,033,421
18.9%
$18,900
$1,014,521
$91,764
Medical Care
$2,131,200
38.9%
$38,900
$2,092,300
$66,913
Lost Earnings
$1,063,443
19.4%
$19,400
$1,044,043
$76,922
TOTALS
$5,478,064
100%
$100,000
$5,378,064
Present Value
Reduction for
One-Third Fee
Remainder
Adjusted 1st
Year Payment
1st Month
Payment
Lump Sums
$1,227,200
$409,067
$818,133
NA
NA
Pain & Suffering
$1,014,521
$338,174
$676,347
$61,176
$5,098
Medical Care
$2,092,300
$697,433
$1,394,867
$44,609
$3,717
Lost Earnings
$1,044,043
$348,014
$696,029
$51,281
$4,273
TOTALS
$5,378,064
$1,792,688
$3,585,376
ARTICLE 50-B CALCULATIONS (Cont.)
• Step Five: Determine Defendant’s Obligation
– Defendant owes cash payments as follows:
Lump Sums
Attorney Fee
Expenses
Total Cash Due
=
=
=
=
$818,133
$1,792,688
$100,000
$2,710,821
– Defendant must purchase annuities providing the following:
• Pain and Suffering: $5,098 per month for the shorter of life or 10 years,
increasing by 4% compounding annually
• Medical Expenses: $3,717 per month for the shorter of life or 25 years,
increasing by 4% compounding annually
• Lost Earnings: $4,273 per month for 12 years, increasing by 4%
compounding annually
•
Note that the annuity for medical expenses ends after 25 years even if the claimant
lives longer. This is another flaw addressed in the revised Article 50-A.
KEY CHANGES TO ARTICLE 50-A
• The double-counting of inflation is almost entirely eliminated.
• The discount rate for each payment stream is specified.
– It is calculated as the weighted average of the 10-Year Treasury rate on the
date of verdict for the first twenty years and that rate plus two percentage
points for the remainder of the term. CPLR 5031(d).
• Lump sum payments are higher.
• Damages in wrongful death actions are paid in cash.
• Damages for future loss of services and future loss of consortium
are paid in cash.
• Future damages for “permanent” injuries are paid for life, however
long that is.
• The maximum term for future pain and suffering is shortened to
eight years.
OVERVIEW OF ARTICLE 50-A
STEP 1: The jury must itemize each element of damages into past and future. For
future pain and suffering it must determine a total amount and a period of years. All
damages in wrongful death actions, or for future loss of services or loss of consortium
are expressed simply as a total amount. For future economic and pecuniary damages,
except in wrongful death actions, it must provide: i) annual amount in current dollars;
ii) the period of years and date of commencement; iii) growth rate; and iv) whether it is
permanent. CPLR 4111(d).
STEP 2: All damages exempt from the structured judgment provisions, and the greater
of $500,000 or 35% of damages for future pain and suffering, are paid in a lump sum.
Any remaining damages for future pain and suffering are paid the same as in Article
50-B, except the period is limited to eight years.
STEP 3: Remaining future damages are reduced to present value, 35% of which is
paid in a lump sum.
STEP 4: Setoffs, litigation expenses, attorney fee, and liens are used to reduce each
element of damages on a pro rata basis.
STEP 5: Defendant pays lump sums in cash and purchases an annuity(ies) to fund the
remaining future damages over the prescribed period of years (or life if permanent).
OUR HYPOTHETICAL VERDICT -- REDUX
• Summary of Facts: A 50-year old man suffered a fully disabling
injury. He will require lifetime medical care.
• Summary of Verdict: On April 1, 2013, the jury returned a verdict
of:
– $1,000,000 in Past Damages
– $1,000,000 in Future Pain and Suffering over 25 years
– Future Medical Care of i) $50,000 per year; ii) over 25 Years;
iii) with a 3% growth rate; and iv) damages are permanent
– Future Lost Earnings of i) $75,000 per year; ii) over 12 years;
iii) with a 2% growth rate; and iv) damages are not permanent
• Other Key Facts:
– The 10-Year Treasury Rate on the date of the verdict was 1.75%.
– Litigation expenses of $100,000 were incurred.
ARTICLE 50-A CALCULATIONS
• Step One: Exemptions From Structured Judgment Rules
• $1,000,000 (Past Damages)
• Step Two: Reduce Pain and Suffering By Greater of $500,000
or 35%
• $500,000 paid in cash
• $500,000 paid over 8 years, with $62,500 in the first year
and 4% annual increases
ARTICLE 50-A CALCULATIONS (Cont.)
Step Three: Determine Present Value of the Verdict
1st Year
Payment
# of
Years
Growth
Rate
Discount
Rate
Aggregate
Payments
Present
Value
35% of PV
65% of PV
Adjusted
1st Year
Payment
Pain &
Suffering
$62,500
8
4.00%
1.75%
$575,889
$540,457
NA
NA
Medical
Care
$50,000
25
3.00%
2.15%
$1,822,963
$1,383,157
Lost
Earnings
$75,000
12
2.00%
1.75%
$1,005,907
$912,262
•
Cash Payments:
•
Remaining PV
Past Damages
Future Pain & Suffering
Future Medical Care
Future Lost Earnings
TOTAL LUMP SUMS
Future Pain & Suffering
Future Medical Care
Future Lost Earnings
TOTAL PRESENT VALUE
=
=
=
=
=
=
=
=
=
$484,105
$899,052
$319,292
$592,970
$1,000,000
$500,000
$484,105
$319,292
$2,303,397
$540,457
$899,052
$592,970
$4,335,876
$32,500
$48,750
ARTICLE 50-A CALCULATIONS (Cont.)
• Step Four: Reduce Each Element By Expenses and Fee
Present Value
% of Total
Reduction for
Expenses
Remainder
Adjusted 1st
Year Payment
Lump Sums
$2,303,397
53.1%
$53,100
$2,250,297
NA
Pain & Suffering
$540,457
12.5%
$12,500
$527,957
$61,059
Medical Care
$899,052
20.7%
$20,700
$878,352
$31,750
Lost Earnings
$592,970
13.7%
$13,700
$579,270
$47,626
TOTALS
$4,335,876
100%
$100,000
$4,235,876
ARTICLE 50-A CALCULATIONS (Cont.)
Determine Sliding Scale Attorney Fee (Judiciary Law 474-a)
Total Verdict After Expenses
= $4,235,876
30% of $250,000
= $75,000
25% of $250,000
= $62,500
20% of $500,000
= $100,000
15% of $250,000
= $37,500
10% of $2,985,876
= $298,588
Total Fee
= $573,588
Effective Fee %
= 13.5412%
Present Value
Reduction for
Fee of 13.5412%
Remainder
Adjusted 1st
Year Payment
1st Month
Payment
Lump Sums
$2,250,297
304,717
$1,945,580
NA
NA
Pain & Suffering
$527,957
$71,492
$456,465
$52,791
$4,399
Medical Care
$878,352
$118,939
$759,413
$27,451
$2,288
Lost Earnings
$579,270
$78,440
$500,830
$41,177
$3,431
TOTALS
$4,235,876
$573,588
$3,662,288
ARTICLE 50-B CALCULATIONS (Cont.)
• Step Five: Determine Defendant’s Obligation
– Defendant owes cash payments as follows:
Lump Sums
Attorney Fee
Expenses
Total Cash Due
=
=
=
=
$1,945,580
$573,588
$100,000
$2,619,168
– Defendant must purchase annuities providing the following:
• Pain and Suffering: $4,399 per month for the shorter of life or 8 years,
increasing by 4% compounding annually
• Medical Expenses: $2,288 per month for life, increasing by 3%
compounding annually
• Lost Earnings: $3,431 per month for 12 years, increasing by 2%
compounding annually
•
Note that the annuity for medical expenses pays for life. Annuities for lost earnings
are not life contingent under either Article 50-A or 50-B.
OUR HYPOTHETICAL VERDICT – A COMPARISON
REFERENCE POINT
ARTICLE 50-A
ARTICLE 50-B
Total Present Value
$4,335,876
$5,478,064
Present Value of Immediate Lump Sums
$2,619,168
$2,710,821
Present Value of Structured Damages
$1,716,708
$2,767,243
Attorney Fee
$573,588
$1,792,688
Immediate Cash to Claimant
$1,945,580
$818,133
NOTES
• Because of the double-counting of inflation, the total present value is
significantly higher under 50-B. This is the number on which the attorney
fee and pre- and post-judgment interest are based.
• The attorney fee is significantly higher under 50-B, mostly because the rate
is higher, but also because the present value of the verdict is higher.
• Because a larger portion of damages is exempted from structured
judgment, the cash due under 50-A is roughly equivalent to 50-B, though
far more of it is paid to the claimant.
PRE-JUDGMENT INTEREST*
• Under CPLR 5002, statutory interest of 9% begins to accrue on the
date of the verdict, or the date that liability is determined, even if the
judgment is entered at a significantly later date.
• Interest is calculated on the entire present value of the verdict,
including future damages.
– Though it may be counterintuitive to think of interest accruing
on future payments, the entire verdict is treated as a debt owed
entirely as of the date of the liability determination.
• To be consistent, any interest that accrues as of the verdict date
must also be based on a number as of that date.
– This is most relevant when damages are set significantly after liability
is determined. Those damages must be discounted back to the verdict
date to calculate pre-judgment interest.
* See Pay v. State of NY, 87 N.Y.2d 60, 614 N.Y.S.2d 714 (1994).
ANNUITY PAYMENTS
• Once the future damages to be paid periodically are established, the
defendant must guarantee the purchase and payment of an annuity
contract to make the payments in monthly installments. CPLR
5031(g).
• The annuity contract must be from a “qualified insurer and approved
by the superintendent of insurance … and approved by the court.”
CPLR 5032.
• CPLR 5039 directs the superintendent of insurance to establish rules
for determining which insurers are sufficiently financially sound.
• Sanctions for failure to post security to pay for the future
installments (CPLR 5033), or for failure to make any of the future
periodic payments (CPLR 5044), are extremely harsh, and may
include an order to pay all future periodic payments, plus interest,
without any reduction to present value.
ANNUITY PAYMENTS (Cont.)
• If a judgment creditor can demonstrate that the continued
payment of the judgment in installments imposes a hardship,
the court can order some or all of the remaining payments be
converted to lump sum. CPLR 5036(a).
– The burden of demonstrating this is extremely high. CPLR
5036(a).
– The amount of the lump sum is calculated as the present
value of the payments being converted. CPLR 5036(b).
• The ability of a judgment creditor to assign away his right to
future payments is also extremely limited. CPLR 5038.
• Though not specified in the statute, it is generally accepted
that annuity payments are to begin as of the date of verdict.
See, e.g., Garcia v. NYCHHC, 299 A.D.2d 361, 750 N.Y.S.2d 595 (1st Dept. 2002).
SETTLEMENT
• Nothing in Articles 50-A or 50-B affects the rights of the parties to settle a
claim in any manner they see fit, even after a structured judgment is
entered. CPLR 5037.
• In fact, as a matter of practice, very few verdicts are actually paid in
accordance with the structured judgment statutes.
– “[T]he paucity of reported cases under Articles 50-A and 50-B indicates that settlements
are commonplace, notwithstanding the numerous opportunities these articles present for
disagreement.” Thomas F. Gleason, Practice Commentaries to CPLR Article 50-A &
Article 50-B (McKinney 2007).
– Further, “no Judge will dissuade the parties from stipulating to a judgment, even if it
varies from the statutory provisions.” Ibid.
• Familiarity with Articles 50-A and 50-B is important to any settlement
discussions where future damages are involved, because a verdict is
generally the best or worst case scenario (depending upon which side), and
it is vital to know, at least generally, what winning or losing would entail.