If you're negotiating a settlement then you have enough to
worry about with the legal arguments. Unfortunately, in some cases you also have
to contend with a bewildering array of calculations, and the principles behind
the claim can prove confusing too. If you are dealing with a claim in an area
that is rich in jargon, such as pensions, the problem is even worse.
The unfortunate fact is that it's very easy when working with
numbers to get things wrong. Loss of earnings, in particular, is often the
biggest element of a claim and errors here can be very costly. Evidence is
sometimes incomplete or complicated to understand.
You need to avoid the traps and pitfalls awaiting the unwary -
especially if the claimant is self-employed; a high earner; receiving
substantial benefits in kind; or has fluctuating earnings and/or bonuses.
Some common examples of mistakes are shown on the rest of this
page. If you prefer you can skip straight to the sections on investing the
damages, or structured settlements.
Examples of common errors in claims
Loss of earnings - comparing apples &
pears (amount saved: £450,000)
The claimant projected annual sales based on accounts for the last pre-accident
period, which happened to be for 13 months. This gave a figure for gross profit
of £1.95 million.
Overheads of £1.75 million were then deducted based on
accounts for the first period after the accident, which was a 12-month period.
This produced a claimed pre-tax loss of earnings of £200,000 per annum. The
correct gross profit figure was £1.8 million (the 13 month profit annualised)
and so projected pre-tax profits should have been £50,000 per annum. The profit
was thus overstated by £150,000.
Deducting tax at 40%, the annual overstatement in the claim
was £90,000 - and, with a multiplier of 5, the total claim was overstated by £450,000.
Loss of earnings - common mistakes where
the claimant is self-employed (amount saved: £128,000)
A self-employed electrical contractor was injured as a result of medical
negligence and was unable to return to work for 8 months. The claimant's
accountant valued the loss of earnings at £147,000 but four mistakes were made.
No tax or NIC had been deducted and, as a result of this
alone, the claim was overstated by more than £50,000. The claim was also based
on a totally arbitrary forecast for an increase in sales although there was no
evidence to suggest that any sales increase would have occurred.
In any event, the assumed sales increase could not possibly
have resulted in the profit rises projected as the claimant could not have done
all the work himself and would have needed significant additional subcontract
labour. Furthermore, the claimant's earnings had recovered more quickly than the
calculation of claim assumed.
After correcting these mistakes, the revised loss figure was
around £19,000 - some £128,000 less than claimed.
The pensions minefield (amount lost: £36,000)
Pensions are full of confusing jargon and obscure calculations, so it is not
surprising that mistakes are often made in calculating pension loss.
A defendant's solicitors asked us to look at these
calculations when considering making an offer to settle. The claim was for a
loss of pension of £80,000, from a combination of a final salary pension and
Additional Voluntary Contributions (AVCs). The claimant's solicitor had obtained
illustrations from the pension provider, showing the projected AVC fund at
normal retirement date (assuming contributions had continued, but for the
injury).
On the basis of these illustrations, an annual pension and
lump sum had been calculated. This is a common approach and the claimant's
solicitor had used it successfully on many occasions. In cases such as this,
however, where the claimant made contributions to a "money purchase"
type pension scheme, projections based on future pension fund growth should be
disregarded. In practical terms, the claimant's loss is primarily of tax relief
on the contributions he would have made - the contributions could have been
invested in other financial products but only contributions to an approved
pension scheme attract tax relief.
The loss of pension was actually £30,000 (the loss on final
salary pension and the lost AVC tax relief combined). The defendant had offered
£54,000. In other words, despite offering £26,000 less than the claim, the
defendant had offered £24,000 more for loss of pension than the claimant had
actually lost. Furthermore, the claimant's contributions to the final salary
scheme had not been deducted in the loss of earnings calculation. As a result,
the loss of earnings was overstated by a further £12,000. In total, the
defendant paid £36,000 too much.
Special equipment - aids & appliances
(amount saved: £2,800)
Reports from health professionals, such as occupational therapists, generally
show the initial cost of items together with an annual replacement cost which is
then included in the Schedule of Damages.
As an example, a special bed costs £4,000 and is deemed to
have a life of 10 years. The occupational therapist's report showed this as
being a capital cost of £4,000 and an annual replacement cost of £400. In the
case of a claimant with a life expectancy of 8 years, the future replacement
cost was calculated using a multiplier of 7 times to produce a figure of £2,800.
However, this was incorrect and overstated the claimant's loss - with a life
expectancy of 8 years and a bed lasting 10 years, no replacement bed would be
necessary.
Special equipment - adaptations to vehicle
(amount saved: £28,720)
A claimant was rendered paraplegic and as a result needed a car with an
automatic gearbox, swivel seat and hand controls. The additional cost claimed
was £2,170 with a future loss multiplier of 16 being applied, giving a total
claim of £34,720.
However, automatic transmission adds to the second hand value
of a car and so the additional cost each time the car was changed was about £1,200
rather than £2,170. Also, because the car was replaced every 3-4 years rather
than annually, a multiplier of around 5 was actually appropriate. Taking all
this into account, the damages for this part of the claim were in fact £6,000
ie.£28,720 less than the amount actually claimed.
House purchase and adaptation (amount
saved: £24,000)
Damages based on the need for a larger or adapted property were claimed in two
parts. First, a new property costing £175,000 was purchased and £79,000 spent
on adaptations - giving a total of £254,000. The post-adaptation value was £200,000
which meant that costs of £54,000 were "thrown away" and therefore
claimed legitimately.
Secondly, there was a claim for the additional amount of
capital tied up in the property. With the original house having a value of £80,000
and the new house after adaptation worth £200,000, the additional capital tied
up was £120,000. The correct annual claim would have been for £3,600 a year (£120,000
x 3%). However, the actual claim for the capital tied up was based on a figure
of £170,000. The claimant's solicitor had used the correct value for the new
property of £200,000 but had deducted an amount of £30,000 for the equity in
old property (the value of £80,000 less a £50,000 mortgage). The solicitor had
then calculated an annual loss at £5,100 (3% x £170,000) when the figure
should have been £3,600 (3% x £120,000). The difference of £1,500 when
applied to a multiplier of 16 overstated the claim by £24,000.
Housing improvement (amount saved: £3,000)
A total of £7,500 was claimed for the cost of installing central heating and
bathroom to a claimant's home but without allowing any credit for the extra
value (about £3,000) that this added to the property.
Getting the maths wrong: a 90p error?
(amount saved: £34,679)
A claim for nursing care was based on 30 hours a week, or 1,560 hours a year. In
transferring the hourly rate, two figures were transposed with the rate being
entered as £5.64 instead of £6.54. The difference of 90p appears small but
over 1,560 hours a year, and with a multiplier of 24.7, this error resulted in
the claim being understated by £34,679.
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