Calculation of future loss of income

Calculation of future loss of income

In the reportable matter of Elizabeth Jemma Sweatman v the Road Accident Fund which was heard on the 15th and 16th October 2013 and judgement granted on the 3rd December 2013, the facts were that the plaintiff was seriously injured in a motor collision which occurred on the Tokai Road, Cape Town on the 13th July 2010 when she was a 15 year old schoolgirl.  Her mother, as her guardian, instituted action on her behalf on 24 August 2011 to recover damages amounting to some R7 million from the Road Accident Fund.  The plaintiff had in the meantime attained the age of majority and had accordingly been substituted for her mother as plaintiff in the matter.

The issue of liability had been settled on the basis that the Fund was liable to pay 50% of the plaintiff’s damages sustained by her arising out of her injuries.

Question for decision:  The method of actuarially calculating the “annual loss” for purposes of the statutory cap in s17 (4) (a)(i) read with s 17 (4A)(b) of the Act, which was introduced by s6 of the Road Accident Fund Amendment Act, 19 of 2005 (the Amendment Act), and which came into operation on 1 August 2008.

The plaintiff claimed payment of an amount of R5 860 833.00, alternatively R6 038 783.00, in respect of her future loss of income and the respective actuaries of the plaintiff and the defendant (the Fund) adopted slightly different methodologies resulting in substantially different awards.

a.         The method adopted by Mr Morris, the plaintiff’s actuary, was that the actual loss for each year (after income tax, general contingencies and mortality) should be calculated and thereafter discounted (using the net capitalisation rate) to present day terms.  The discounted value of each year’s loss is then compared with the cap (either at the date of collision or at the date of calculation as reflected in the last gazetted amount) and subsequent to that the lesser of such cap and the discounted present value of each year’s loss is used.

b.         The method adopted by Mr Munro, the defendant’s actuary, was to project the actual loss for each year (after income tax, general contingencies, but not including mortality).  The amount obtained is then compared with the cap in each year (duly adjusted for inflation for each year in the future) and then the lesser of the actual loss as calculated and the cap value of each year is discounted (with the interest rate and mortality) to present day terms.

Mortality is based on probability of someone surviving according to the life tables.

Discounting a value means calculating a future value and stating it in present terms.

The Court preferred the method used by Mr Morris, plaintiff’s actuary.

In practice this means:

1.         Calculate pre and post-morbid income streams;

2.         Apply discounting and mortality to obtain present value of each year’s loss;

3.         Apply contingencies;

4.         Apply cap as at date of accident;

5.         Subtract the amounts from each other.

The purpose of the cap is to limit merely the sum to be paid, and its purpose is not to interfere in the calculation of the loss.

Thus because the vast majority of people living in the country earn less than the annual cap, the calculation of their claims for loss of income will not be effected by the cap, being calculated in accordance with the traditional method.  In cases of highly paid individuals such as company executives and successful professionals, their actual loss even after mortality, tax and contingencies are taken into account will far exceed the amount of the cap and their claims will accordingly have to be calculated on the basis of the cap limiting their “annual loss” in each year to be equal to the amount of the cap.

Anthony Ostermeyer, Attorney

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