Speaker's Corner: Changes to statutory discount rate favour defendants, insurance companies

The Rule 53.09 and 53.10 subcommittee recently changed the formula for the calculation of the statutory discount rate under the Rules of Civil Procedure associated with trials commencing after Dec. 31, 2013.

The changes are significant. The revised formula appears to be more favourable to defendants and insurance companies as it will likely result in a lower current-value lump-sum amount of future losses.

By way of background, under the new Rule 53.09 the discount rate used for present-value future losses will be higher as the average yield on government of Canada long-term real bonds is reduced by 0.5 per cent as opposed to one per cent under the former rule. All other things being equal, a higher discount rate results in a lower present-value lump-sum amount.

The discount rate cannot be lower than zero per cent. Accordingly, negative discount rates are no longer possible under the new Rule 53.09.

The discount rate as calculated under the new Rule 53.09 is rounded to the nearest tenth of a per cent rather than the nearest quarter of a per cent under the former Rule 53.09.

Under the new Rule 53.09, a six-month average bond yield rather than the 12-month period under the former Rule 53.09 will apply.

In addition, a change in the wording of the new Rule 53.09 may end the debate over the discounting of payments expected for periods 15 years after the trial date. By way of background, some experts in discounting future losses associated with periods 15 years from the trial date choose to ignore the discount rate applicable in the first 15 years for payments. That is, certain experts utilize the 2.5-per-cent rate throughout the entire period rather than an effective blended rate of the discount rate for the first 15-year period and the 2.5-per-cent rate. The new rule states: “For any later period (i.e. after 15-years) covered by the award, 2.5 per cent per year for each year in that period.”

Under the new Rule 53.09, the statutory discount rate for trials commencing in 2014 is estimated to be 0.3 per cent for the initial 15-year future loss period and then 2.5 per cent thereafter.

Under the former Rule 53.09, the discount rate would have been negative 0.5 per cent for the initial 15-year future loss period and then 2.5 per cent thereafter for trials commencing in 2014.

To illustrate the impact of the rule change, consider a personal injury case where the injured plaintiff has the following characteristics: The plaintiff is a male that will be 40 years old in 2014; The injuries have resulted in the plaintiff being totally and permanently disabled from competitive employment; for simplicity, there are no negative contingencies for unemployment or labour force participation; the plaintiff had an earning capacity of $60,000 per year absent the injuries; and the plaintiff likely would have retired at age 65.

Based on the above, the loss of income for this individual over his working lifetime would decrease by approximately $110,000 or approximately 7.5 per cent using the estimated discount rate of 0.3 per cent compared to negative 0.5 per cent under the former Rule 53.09.

What does this mean for counsel and their clients? In light of higher statutory discount rates under the revised Rule 53.09, there is an incentive for plaintiffs and their counsel in personal injury actions as well as in other matters to settle cases or bring them to trial in 2013 if possible.

For insurance companies and other defendants, there is an incentive to delay settlement until 2014.

Perhaps Ontario should consider revising Rule 53.09, however, because a simple mathematical rule to calculate a statutory discount rate for an initial 15-year period may not provide the flexibility necessary to estimate an appropriate discount for a number of reasons. First, central bank manipulation may significantly affect interest rates and bond yields in unusual times and using a short-period average during a time of significant monetary policy intervention may not be representative of real interest rates for a 15-year period.

Second, using a six-month average (under the new Rule 53.09) or a 12-month average (under the former Rule 53.09) may not fully consider current events or trends in interest rates. For example, real long-term government of Canada bond yields were below 0.4 per cent at the beginning of February 2012. Current real long-term bond yields are 1.24 per cent. Accordingly, a simple review of recent long-term bond yields would suggest that the 0.3-per-cent statutory discount rate for trials commencing in 2014 is likely not representative of short- or long-term real interest rates for the 15-year period from 2014 to 2029.

In addition, the discount rate in the calendar year 2000 for the initial 15-year period in accordance with the rule was three per cent. The real discount rate from that time to now has been less than 50 per cent of that amount. The adoption of this rule appears to result in unduly low compensation to plaintiffs who brought an action to trial in 2000. For trials commencing from 2012 to 2014, it appears that the adoption of a very low discount rate may have the opposite impact.

Perhaps an independent committee of senior economists should determine the statutory discount rate to apply in each trial year associated with the initial loss period rather than a rigid formula.

Stephen Kertzman is a Partner at ap Valuations Ltd., a boutique firm specializing in business and securities valuation and forensic accounting. He has provided expert testimony at court and in arbitrations. To discuss this topic further, he is available at 416-484-4467.

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