How loss of income is calculated in a personal-injury claim

Loss of income is the difference between what the plaintiff would have earned but for the incident and what they can still earn, valued across two periods: the past, from incident to the valuation date, and the future, from the valuation date to retirement.

The past shortfall is a historical figure indexed for inflation. The future shortfall is projected, brought to present value, and weighted for the chance the plaintiff is alive to earn it. Contingencies and collateral benefits can reduce either period. What follows is background on the method, not legal or actuarial advice for a specific file.

The starting point: without-incident income

Every income-loss calculation begins with the without-incident income: what the plaintiff would have earned each year had the incident never happened. It can be a single annual figure, or an average of what the plaintiff actually earned in the years before the incident.

Where there is no established earnings history, as for a child or a student, it can instead be built from Statistics Canada census data: average earnings by age, selected by education or occupation, province and sex. Those averages come in several bases, and the difference between them matters later. An all earners average includes people who worked only part of the year, or only part-time hours, as long as they earned something. A full-year full-time average includes only those who worked the whole year at full-time hours.

From whichever baseline, the calculation subtracts what the plaintiff actually earned in the past, or can still earn in the future, and what remains is the shortfall it values.

Past loss: incident to valuation date

The past period runs from the incident to the valuation date, which is a date you choose, often a mediation or trial date. It is a historical shortfall, so it is not discounted for survival. Instead the without-incident income is typically indexed for inflation, and the plaintiff's actual earnings over that time are netted off.

What remains is the past income loss. Collateral benefits received during the period, covered below, can reduce it further.

Future loss: valuation date to retirement

The future period runs from the valuation date to the assumed retirement age. This is the part brought to present value and weighted for survival, because future earnings are only received while the plaintiff is alive and working. For the mechanics of discounting and survival weighting, see How present-value damages are calculated in Canada, and for the prescribed rate, Ontario Rule 53.09 and the prescribed discount rate for future damages.

Residual earning capacity is netted off first: if the plaintiff can still earn something after the incident, that amount is subtracted from the without-incident income and the net future shortfall is what is valued. Like the without-incident income itself, it is a figure resting on evidence, usually a vocational assessment, rather than one the calculation supplies. A deferred start age applies where those earnings would begin later, as for a student not yet working.

Contingencies on a working life

Survival is the contingency that always applies, because nobody collects a wage they are not alive for. Most people do survive to retirement, so over a working life it usually takes off less than it does on a stream running for life. How much it and the others take off on a given file depends on the plaintiff's age, the years left to retirement, and the tables and rates applied.

A projection that says the plaintiff would have earned $70,000 a year to 65 describes a working life without a single gap in it. Real ones have gaps that owe nothing to the injury.

Disability. The plaintiff might have left the workforce anyway. A disability incidence table gives, for each age and sex, the chance of that happening in a given year before retirement. One published source is the Chief Actuary of Canada's actuarial report on the Canada Pension Plan, which sets out the incidence rates behind CPP disability benefits and is reissued every few years. A file records which table and edition it used, and the exported report names it.

These tables measure entry onto a long-term disability benefit rather than short absences from work, and the decrement is applied as a permanent one: once it takes effect, the projection does not bring the plaintiff back to work. Shorter interruptions are a different question, closer to the one a termination allowance addresses.

Termination and unemployment. Few careers run twenty years without a gap between jobs. This is either a single flat rate or a table that varies by age, applied to each future year.

Both are off unless you turn them on. Which of them applies, and at what rate, follows from the evidence on the file rather than from a default.

Where the inputs overlap

A contingency is an adjustment for a risk: the chance the plaintiff would not have been earning in a given year anyway. It can end up reducing the stream for a risk the earnings figure has already allowed for, and that overlap is with the data behind the income, not with another contingency.

Census averages are where that happens, and both sides of the calculation can rest on them. The without-incident income does where a plaintiff has no established earnings history. The residual does where a vocational assessment identifies work the plaintiff can still do.

Those averages cover people who earned something that year, and only them. So whether a risk is already inside the figure comes down to one question: were the people it affected still earning?

Only the first is already in the number. An unemployment contingency applied on top of an all-earners or part-year without-incident income therefore counts it twice, which is why the app flags that combination. The full-year full-time basis is the exception, because it covers only people who worked the whole year.

A long-term disability contingency and survival weighting are measuring something no basis counted.

The contingencies only run one way

Every contingency here is a decrement. Survival, disability and unemployment all lower the stream, and there is no contingency that raises it.

What can raise a projection is the income it starts from, which is a different part of the calculation. A career usually pays more at 55 than at 25, and a projection built from a census age-earnings profile carries that rise rather than holding one figure flat to retirement. That is the shape of the earnings data, not an adjustment applied on top of it.

Reduced life expectancy and lost years

Where the injury shortens the plaintiff's life expectancy, the future stream would normally stop earlier and the loss would fall. Lost years addresses that: the earnings of the working years the plaintiff would otherwise have had. Whether such a claim is available, and how the deduction is measured, is a legal question for the file.

Where the claim is made, the stream is valued on two survival bases: the before-incident (but-for) life expectancy, and the after-incident reduced one. The plaintiff recovers the but-for value less a deduction on the difference, a personal-consumption allowance for the years they will not live. The result sits above valuing on the reduced life expectancy alone, and below ignoring the shortened life expectancy entirely.

DamageIQ applies that deduction at a fixed 50% of the difference, and the exported report states the rate alongside both valuations. The rate is not adjustable on a file. Where a different one is supported, the calculation has to be done outside the tool. The deduction is taken on the net future stream, after any residual earning capacity has been netted off, so where the plaintiff has a residual the division between the two bases is an approximation rather than an exact split.

Collateral benefits

Payments the plaintiff receives because of the injury, such as EI, CPP-D, or long-term disability, may fall to be deducted so the same loss is not compensated twice. Whether a given benefit is deductible is a legal question, and it is settled before any of the arithmetic below applies.

Where a benefit is deducted, it is handled per period. Past benefits are netted against the past loss. For the future, the figure entered is a present value and is subtracted from the future loss, so the discounting and any survival weighting behind that number come from outside the calculation rather than from it.

Kept separate from future cost of care

Loss of income values lost earnings. It is calculated separately from future cost of care, which values future care needs. Some further heads of damages, such as management fees, sit outside this figure and depend on the file.

A calculation, not an opinion

DamageIQ is a calculator. It applies the mechanics above to the income, dates, and assumptions you enter, and every input is traceable in the figure it returns. It is not an expert opinion. The inputs and assumptions are yours to set and to verify. A signed report comes from a retained actuary, and so does the work of defending the actuarial assumptions behind it.

Try it

The free PV Multiplier calculator generates the actuarial present-value multipliers future income loss rests on, for any age, gender, supported jurisdiction, and discount rate. The full DamageIQ platform builds a complete past-and-future income-loss file end to end.

By Mike Austin, FCIA, FSA. Fellow of the Canadian Institute of Actuaries and the Society of Actuaries.