An economic analysis of damages in fatal accident claims
This article was written for and published by The Litigator, March 2016
The basis of any damages calculation is to restore a plaintiff to the same financial position in which he or she would have been had the wrongful act not occurred. In other words, in the case of a wrongful death claim, the objective is to allow the deceased’s dependents to enjoy the same quality of life, from a financial perspective, as they would have enjoyed had the deceased lived. The award is thus meant to reflect the portion of the deceased’s earnings that would have gone towards the financial support of the dependents.
Dependency rates are used to estimate a person’s financial loss due to the death of his or her spouse or parent. In a two-person household, if the husband dies, then the spouse will no longer benefit from her husband’s income. However, she does not need to be compensated for the loss of all of his income, since some would have benefitted only him.
Sole Dependency, Modified Sole Dependency and Cross-Dependency
In wrongful death actions, Ontario Courts have typically followed the decision of the Ontario Court of Appeal in Nielson v Kauffmann [1986 CanLII 2727 (ON CA)]. In the case of a two-income family, this decision reduced the typical sole dependency ratio in the case of a surviving spouse from 70% to 60%. However, there are instances in Ontario where the courts have preferred a cross-dependency approach, which further reduces the dependency ratio. As will be explained later in this article, this has typically occurred in situations where the application of a cross-dependency approach does not have an extreme impact on either the dependency ratio or financial result.
In Nielson, the Ontario Court of Appeal opined that in a two-income family, the “conventional wisdom” of a 70% sole dependency rate for the surviving spouse should be reconsidered, and instead used a 60% modified sole dependency rate.
Differences Between Modified Sole Dependency and Cross-Dependency Approaches
Explanation As To The Two Approaches
By way of illustration, suppose, for example, a deceased husband and surviving wife both earned a net income of $50,000 per annum at the time of the deceased’s death:
- Under the “modified sole dependency” approach, the surviving spouse’s dependency loss would be: (70% less a 10% 2-income family allowance) 60% X $50,000 = $30,000 per annum.
- The “cross-dependency approach” assumes that the surviving spouse has been made financially better off because funds previously spent on the deceased spouse can now be saved. Losses in this example under the “cross-dependency approach” are: 60% X $50,000 = $30,000 per annum, less savings of $50,000 X 30%= $15,000, = $15,000 per annum.
Assume for example a situation where the surviving spouse earns a net income of $80,000 per annum and the deceased spouse earned a net income of $20,000 per annum. The calculations are thus:
- Under the “modified sole dependency” approach, the surviving spouse’s loss would be: (70% less a 10% 2-income family allowance) 60% X $20,000 = $12,000 per annum
- Under the “cross dependency” approach the surviving spouse’s loss would be: 60% X $20,000 = $12,000 per annum, less savings of $80,000 X 30% = $24,000 per annum = Nil
Which Approach is Preferable?
As illustrated above, criticisms of the “cross-dependency approach” include:
- if the deceased’s income was significantly lower than the surviving spouse’s income then it may result in no award at all, the surviving spouse being assumed to be financially better off than before, and
- the concept that a surviving spouse can be financially better off in situations where he or she is involuntarily prevented from spending on his or her spouse as a consequence of the tortious action of a third party.
Advantages of the “sole dependency” or “modified sole dependency” approach which, as detailed above, only considers the income of the deceased and uses dependency ratios of 70% for a one-income family and 60% for a two income family, include:
- fairness and consistency, in that it avoids the issue where dependency losses consider the comparative income of a surviving spouse,
- it acknowledges the fact that the measurement of gains and losses as a result of the death of a spouse is an inexact enterprise, and the difficulty of tracking expenditures in a household that shares expenses, and
- it cannot produce the outcome that a surviving spouse is financially better off as a consequence of the death of a spouse.
In his article “Fatal Accident Dependency Calculations”, published in the 1999 issue of the Expert Witness, Derek Aldridge argues that the deduction component of the cross-dependency approach is inconsistent with other forms of personal injury damages assessment.
A cross-dependency approach requires that a plaintiff ’s losses due to an accident should be reduced by any “savings” attributable to the accident. Similar savings are seen in other forms of personal injury damage assessments but are not deducted in the computation of losses.
- A catastrophically- injured person may have transportation savings attributable to his inability to work. No deduction is made for these savings in the determination of his income losses.
- A father who was injured in a motor vehicle accident in which his son was killed, will now save the money he may have spent on his son’s education. These savings are not deducted in the calculation of the father’s loss of income award.
Analysis of Court Decisions
In Hechavarria v Reale [2000 CanLII 22711 (ON SC)], Justice Nordheimer held that the fairest approach was a modified MARCH 2016 | The Litigator 61 sole dependency approach. In this instance, at the time of the deceased’s death, her surviving spouse was earning $91,000 per year while the deceased was earning $28,000 per year. Thus, the application of a cross-dependency approach would have resulted in no dependency loss.
In commenting thereon he wrote, “the criticism of the approach taken by Dr. Pesando is that it results, in a case like this where the surviving spouse was earning an income much larger than that of the deceased spouse, in a negative number, i.e., the amount necessary for the surviving spouse to now maintain his same standard of living is less than what that surviving spouse earns on his own. Therefore, according to this approach, there is no loss sustained as a result of the death of the other spouse and the removal of that income from the “family pool”. Indeed, the critics say that this approach finds the surviving spouse, put somewhat crassly, to be “better off” from the death of his spouse. The critics say that this result is a reductio ad absurdum and dismiss its application on that basis.”
Consequently, Mr. Justice Nordheimer rejected the use of the cross-dependency approach, writing, “In my view the cross-dependency approach urged by [the defendant’s expert] would lead to a result that does not accord with the realities of the Hechavarria family.....” Nordheimer ultimately used the modified sole dependency approach “which reflected the reality that there would be some savings because there was one less member in the family unit”, and based the dependency loss on 60% of the deceased’s income, increased by a marginal rate of 4% for each of the three surviving dependent children.
In his decision, he wrote, “This issue was considered by the Court of Appeal in Nielsen v Kaufmann (1986), 54 O.R. (2d) 188, 26 D.L.R. (4th) 21. While the Court of Appeal concluded that the sole dependency approach was to be used, it also concluded that the sole dependency approach had to be adjusted somewhat to account for the presence of two income earners.”
In other words, when there are two breadwinners in a family, it should be assumed that some portion of the surviving spouse’s income was spent exclusively on the deceased spouse. This portion now remains with the survivor.
As discussed, in Nielsen v Kaufmann, the Ontario Court of Appeal adjusted the sole dependency approach by lowering the dependency factor from 70 percent to 60 percent. The Court explained “This was a family where there was obviously a pooling of resources and where the death of one partner would have an impact with some offsetting credit.” Therefore, the court used rates of 60 per cent for the surviving husband plus a marginal 4 percent for each dependent child.
In his decision, Justice Nordheimer wrote, “In other words, whatever approach is eventually adopted should give rise to a result that reflects, to the degree possible, the factual realities of the family whose loss is being determined.” Thus, Justice Nordheimer concluded, “In my view, the cross-dependency approach … would lead to result which does not accord to the realities of the Hechavarria family ….”
In Robb Estate v Canadian Red Cross, [2000 O.J. No 2396 (S. C. J.) the court endorsed the loss of dependency methodology detailed in Nielson v Kauffman when it wrote:
“I accept as correct the approach used by [the defendant’s actuary]... In the traditional two-income family, 60% of earnings go towards the spouse and family expenses, with an additional allocation of 4% of income to each child. The approach has been approved in Nielsen v Kaufmann.”
When is a Cross-Dependency Approach Appropriate?
A cross-dependency approach has been used in situations where its application yields results that are intuitively reasonable. When a cross-dependency approach leads to the nonsensical result of a financial or income gain, then it has almost always been unsuccessful. In our research, we found three reported Ontario cases when a cross-dependency approach was employed.
In Wilson v Beck [2011 CanLII 1789 (ON SC)], Justice Morisette accepted the cross-dependency approach in the case of a two income family. However, this did not have a significant impact on the calculated dependency losses. Use of a cross-dependency approach served to reduce the modified sole dependency ratio by approximately 5% from 60% to 55%.
In Timpano et al v Alexander et al, 2008 [(2008) CanLII 8270 (ON SC)], Mr. Justice Whitten accepted evidence, from both the plaintiff ’s and defendant’s economic experts, that a cross- dependency approach was applicable, and indicated that he would have used a dependency factor of 40% had the action been successful. In this instance, both experts agreed that the surviving spouse now had funds available which would not have been available had the deceased survived.
In Rupert et al v Toth et al [(2006) CanLII 6696 (ON SC)], Justice Low accepted evidence that the cross-dependency approach was appropriate, based on the particular circumstances, and applied a dependency factor of 40%. She wrote “the cross-dependency approach has sometimes been accepted as the starting point in determining an appropriate award (see, for example MacNiel Estate v Gillis (1995), 138 N.S.R. (2d) 1 (N.S.C.A.) and sometimes rejected in favour of what has become known as a modified sole dependency approach (see Nielsen et al v Kauffmann (1986), 54 O.R. (2d) 188 (C.A.) and Hechavarria et al v Reale et al (2000), 51 OR (3d) 364 (S.C.J.)).”
While the cross-dependency approach is much less frequently used compared to the modified sole dependency approach in Ontario, as previously detailed, it has been used in familial income circumstances considered appropriate. However, when employed, although it has reduced the applicable dependency ratio to as low as 40%, to the best of our knowledge it has never been accepted in Ontario in circumstances where it produced an extreme result, such as decreasing the dependency ratio or losses to zero.
The Single Parent Family
What happens in the case of death of a single parent? Any dependent children would obviously have a loss of dependency claim that endures until such time as they are no longer financially dependent. The issue is how this dependency claim should be calculated. The simplest approach is to apply a “modified sole dependency approach” with the standard sole dependency rate reduced as appropriate, based on the circumstances, from, for example, 70% to say 50%.
Why such a high dependency ratio when a marginal 4% is used in the case of additional dependent children in a two parent family? When determining the applicable dependency ratio, to ensure that the surviving children be no worse off, those children should be able to live in the same house, eat the same food, enjoy the same automobile transportation, attend the same school and activities, etc. However, they will not need that portion of family income that would have benefited the deceased alone. Therefore, to determine a minor child’s dependency ratio, allowance should include joint or familial expenses as well as expenditures that would have benefitted the child or children alone.
Remarriage and Divorce
While statistics as to the possibility of marriage and divorce are available, there are no statistics applicable that reflect qualitative factors such as the presence of minor children, physical appearance or financial circumstances of a surviving spouse. In addition, there are differences between the remarriage rates of widowers and divorcees with widowers being less likely to remarry.
Furthermore, divorce and remarriage statistics inherently assume that had the couple divorced, then no matrimonial support would have been payable by the deceased, which may or may not be the case. Remarriage statistics also inherently assume that if the surviving spouse were to remarry, the new spouse will contribute financially as much as the deceased spouse, which also may not be the case. Consequently, contingencies for divorce and remarriage are subjective. No expert can opine on these subjective matters, which are typically based on the evidence and credibility of the surviving spouse.
Thus, in practice, most courts have been extremely reluctant to apply statistical average remarriage rates and the assumption that remarriage would completely mitigate a surviving spouse’s loss of dependency claim. In fact, in most instances the courts have reduced dependency claims by relatively nominal amounts to account for the possibility of remarriage. See, for example, Parsons Estate v. Guymer (1998), 162 D.L.R. (4th) 390 (Ont. C.A.) where Weiler J.A. wrote at para. 14:
“It is well established that the event of remarriage is a factor which is taken into account by courts in assessing damages for loss of care: Larock v. Steele (1983), 20 A.C.W.S. (2d) 203 (Ont.C.A.); Naeth Estate v. Warburton,  S.J. No. 470 (QL) (Sask.C.A.) [reported 59 W.A.C. 11]. Remarriage is not necessarily a benefit: Brown v. Finch, 1997 CanLII 4099 (BC CA),  B.C.J. No. 2601 (QL) (B.C.C.A.) at p. 6 [reported 4 W.W.R. 670]. The extent to which damages will be affected is a question of fact which depends on all the circumstances: Naeth Estate, supra.”
In Naeth Estate v. Warburton, supra, Sherstobitoff J.A. commented:
“The authorities are clear that a remarriage of a spouse who is a plaintiff in a fatal accident action is something which must be taken into account in determining damages. The same applies to a common law relationship such as we have here. The extent to which damages will be affected is a question of fact depending on all of the circumstances and must be dealt with on a case by case basis.”
Term of an Award
Awards for dependency claims are typically based on joint life expectancies of the deceased and survivor. The award for MARCH 2016 | The Litigator 63 loss of dependency for a child is limited to the period during which the child would have been financially dependent on the deceased parent for financial support. Thus, the assumption that a child’s claim for dependency ends at age 18 or 21 may not always be reasonable. For example, in circumstances where the child planned to attend university, he or she should be considered financially dependent until the completion of his or her studies and entering the workforce.
Concept of Loss of Inheritance
Plaintiffs - typically children who either do not have a dependency claim or after their dependency claim expires - may argue that they have lost the possibility of an inheritance or an increased inheritance as a result of a deceased parent’s premature death. This compensation is meant to replace the amount by which a deceased’s estate would have increased had he or she lived, and is typically based on an estimate as to annual savings. In addition, it reflects the fact that a deceased has lost the ability to accumulate wealth on a tax-free basis possibly using a tax-free savings account (TFSA), a registered retirement savings plan (RRSP), and the tax-free appreciation in the value of a primary residence.
A loss of inheritance claim would only apply to persons who are not considered dependent on a deceased’s income. This is because in computing a dependency rate, allowance is already made based on the full amount of the deceased’s income.
Thus, a dependent child could potentially have a loss of dependency claim until they are no longer considered financially dependent and a loss of inheritance claim thereafter. Similar to other heads of damages, this claim is by its nature speculative and involves an attempt to project future circumstances. While somewhat novel in Ontario, awards have been made for this head of damages in jurisdictions outside of Ontario.
In Panghali v. Panghali, 2014 BCSC 647 (CanLII), the plaintiffs claimed that they had lost a potential inheritance as a consequence of the deceased’s premature death, on the basis that the untimely death had stopped the deceased from accumulating assets that would eventually have entered her estate and flowed to her children. This compensation is meant to replace the amount by which the deceased’s estate would have increased had she lived.
In its decision, the court described the circumstances under which such an award might be appropriate as follows: “Courts in British Columbia have given higher awards under this head of damages, but only where there is evidence establishing a pattern of income and savings that would support the potential for a significant estate remaining at the end of the deceased’s natural lifespan…”.
In Stegemann v. Pasemko, 2010 BCCA 151 (CanLII), the BC Court of Appeal held: “The trial judge attempted to take Ms. Collier’s pattern of building assets and her retirement goals into consideration in assessing the present value of the dependents’ losses of inheritance. He awarded $20,000 to Mr. Stegemann and $30,000 each to Arthur and Stephanie Stegemann. In my view, the trial judge made no error in his assessment of loss of inheritance, and it was not affected by his underestimate of Ms. Collier’s future income. I would not interfere with his decision with respect to damages for loss of inheritance.”
Hopefully, the above-noted analysis will contribute to an understanding of some of the more important economic issues involved in wrongful death claims.