Lump Sum Award Research Articles

Legislatively Imposed Net Discount Rates: Minnesota's Tort Reform

Abstract No abstract available.

Lump-Sum Awards in Workers' Compensation: Reply

Shows, Power and Johnson (SPJ) make a valuable contribution through their comment on my paper Lump-Sum Awards in Workers' Compensation. Their discussion of the Florida system is particularly interesting. They also demonstrate well that lump summing in workers' compensation, like most decisions, is a complex process. SPJ focus on my statement, One wonders why lump-sum payments are employed as frequently as they are and at such low interest rates. They provide several good arguments for the desirability of lump sums to workers and employers (and their insurers). My wonderment, however, was not so much that any or all of these parties would prefer certain aspects of lump sums over periodic payment. Rather, it was that legislators and industrial commissions would permit (even encourage) so many lump sums when the social good appears hurt by such action. In fact, SPJ's quote of Larson in Footnote 5 states my concern perfectly. The major change suggested by SPJ that I would like to include in my paper were it not yet published, is to discuss the administrative desirability to insurers of lump summing. There may be a willingness by insurers to accept higher awards (through use of inappropriately low interest rates, for instance) in order to close out the claims and reduce costs of monitoring claims. However, there are some indications that lump sums result in higher initial administrative expenses than do findings and awards.' Thus, overall, administrative expenses are not necessarily reduced through lump summing. SPJ correctly identify the use of low interest rates in calculating commutations as a concern of mine. They also point out, correctly I believe, that settlements result from a long process of negotiations. The negotiations make the permissible interest rate less important . . where the magnitude of lump-sum awards is seen as the outcome of a complex adversary process involving a number of important participants. Yet, this complexity makes me

Lump-Sum Awards in Workers' Compensation: Comment

In a recent article in this Journal [12], Joan T. Schmit considered some potential consequences of increased state leniency in allowing lump-sum awards in workers' compensation. In her conclusion she states: One wonders why lump-sum payments are employed as frequently as they are and at such low interest Schmit considers lump-summing as a discounting problem, e.g. estimating the present value of future medical and compensation costs of an injured worker. We believe her treatment of the problem is overly simplistic and leads her to place undue emphasis on the level of state mandated discount rates. She has ignored a key dimension of the phenomenon of lump-summing, namely, the litigious character of workers' compensation. Consideration of the basic interests of the principal parties to workers' compensation cases (employers, insurers and employees) and especially the role of attorneys and the courts in resolving conflicts will provide a substantial part of the answer to her question. Moreover, one important consequence of leniency, increased costs of private attorney involvement, has been overlooked. Recent experience in Florida is utilized to help establish our argument.

The Effect of Compensation Awards upon Consumption and Savings

Abstract No abstract available.

THE DETERMINATION OF COMPENSATORY DAMAGES: A VALUATION FRAMEWORK

In cases of personal Injury resulting in death or the permanent disability of an individual to produce income, there is a need to assess the damages claimed by the plaintiff. Since 1916,' the estimate of the victim's lost earnings has been reduced to present value and the proceeds usually distributed as a lump sum award.' The lump sum approach has been favored over the periodic payment approaches. By awarding a single lump sum to the plaintiff, there has been a significant savings of the expenses of administration which would be incurred if the judiciary monitored periodic payments made by defendants to plaintiffs. Ideally, with an appropriate investment strategy' for the lump sum, withdrawals could be made over the lost work life period.

Inflation Risk as Determinant of the Discount Rate in Tort Settlements

The vield on long-term bonds has been cited as the most frequently used discount rate in tort settlements. Returns from long-term bonds do not change as interest rates rise in response to unanticipated inflation. Investors (plaintiffs) are thereby exposed to inflation risk the possibility that future investment returns may not keep pace with future increases in prices and wages. Future returns from short-term instruments will likely rise as a result of unanticipated inflation. Since short-term instruments reduce exposure to inflation risk, the yield on short-term financial instruments is the appropriate rate to use when discounting to present value. In injury cases a lump sum may be awarded plaintiffs to restore them to the position that would have existed had there been no injury. The determination of a lump sum award is importantly affected by inflation and by the discount rate. The plaintiff's exposure to inflation risk is reduced when lower return short-term interest rates are used to calculate a lump sum award. Unanticipated inflation implies that borrowers and lenders determine interest rates using estimates about the future that later prove to be incorrect. The result is that price level increases outstrip earned interest on fixed return financial instruments such as bonds. Thus, inflation risk refers to the possibility that future investment returns may not keep pace with future increases in prices and earnings.'

Taxes and Compensation for Lost Earnings

THIS paper analyzes several problems associated with evaluating lifetime income streams within the context of a rising marginal tax structure. Our analysis was prompted by a recent U.S. Supreme Court decision in which the court held that evidence concerning the effects of federal income taxes on a decedent's future earnings is admissable in assessing damages in cases brought under the Federal Employer's Liability Act.' Income taxes have an impact at two points in the determination of a proper award: (a) they influence the disposable income which would have been available to the decedent had he lived; and (b) they influence the amount of the award required to reproduce this disposable income. Although the award proper is not taxable, the future interest earnings from the award are taxable, and the Court recognized that the amount of the award should be adjusted to reflect the tax on these interest earnings. The typical procedure for determining an award has been to calculate a present value by discounting future gross earnings of the decedent at some appropriate discount rate and using the present value of future earnings as the basis for an appropriate lump-sum award. It turns out, however, that adjusting for taxes makes it difficult to determine the appropriate award by applying standard discounting procedures. Our approach, therefore, is from the point of view of consumption alternatives rather than present values.2 This means that we ask first what consumption patterns (through time) would have been available had the decedent lived. For a given lifetime earnings pattern, the alternative consumption pat-

Taxes and Compensation for Lost Earnings: A Comment

PROFESSORS Bell, Bodenhorn, and Taub's recent article raises a number of questions regarding the issue of taxation of lost future earnings.' It is the purpose of this paper to elaborate further for a more complete analysis and understanding of the problems involved in the issue of taxation. Specifically, three questions in which taxation has implications for personal injury or wrongful death awards are addressed below: (a) whether lump sum awards overcompensate the plaintiff; (b) whether Bell et al.'s solution to calculating Liepelt awards is the most efficient; and (c) what party benefits from taxing the awarded transfer payment.2

United States v. Germany (Nationality of Claims).

Claims — State Control over Private Claims — Effect of Espousal — Distinction between Lump-Sum Awards to Government as Such and Awards on Specific Claim of Designated National.