An income loss report (ILR) aims to calculate the income lost due to injuries from an accident. However, ILRs often contain weaknesses because they require assumptions about future earnings that are uncertain. The key assumptions in an ILR must be reasonable and supported by evidence to maintain the report's credibility. Some common weaknesses seen in ILRs are unsupported assumptions, failure to consider important variables like benefits and pension losses, and overlooking potential contingencies that could impact projected earnings. Providing a range of potential loss scenarios incorporating different assumptions can help address uncertainties inherent in projections.

1. Analyzing Weaknesses
in Income Loss Reports
BY MICHAEL SIGSWORTH AND DARRELL SHERMAN
Insurers and plaintiff lawyers call upon have earned during the damage period, but for the injurious
forensic accountants to provide expert event. Due to the uncertainty that exists in projecting into
reports, which set out the income loss suf- the future, assumptions are used to determine the level of
fered by individuals as a result of injuries earnings that could have been achieved. However, it is these
sustained in an accident. There are many fac- assumptions that are often the weakness of ILRs.
tors involved in preparing these reports and The credibility of a report can quickly be destroyed
as a result many opportunities for the because of weak or incorrect assumptions. Therefore, it is
accountant to misstep. For the careful read- important that the assumptions are identified, that they are
er, these missteps can reveal a report con- reasonable and they are supported by evidence. When such
taining more holes than Swiss cheese. evidence is missing or weak, the assumptions the accountant
Income loss reports (ILR) will continue to used get called into question and this leads to the credibility
be a significant component of the claims set- of the entire report being brought into question.
tlement process, especially in light of the In assessing the strength of assumptions, both economic
expected shift resulting from the recent SABS and medical documentation should be considered. Projected
changes. This article identifies the weaknesses that are com- earnings, whether pre- or post-trial, should take into account
monly found in ILRs, which will enable you to assess your own the plaintiff’s pre-incident earnings as well as their educa-
expert’s report or to critique an opposing expert’s findings. tion, career progression, future goals, industry standards,
First reading economic environment, historical earning patterns and other
A forensic accountant’s report should be easily understood qualitative factors. If the assumptions change over time, an
and absorbed on the first reading. If the report needs to be explanation as to why the assumptions change, backed by
read several times before it is understood, then expect oppos- evidence, should be provided to support the changes.
ing counsel and the trier of fact to have similar difficulties. Another area of assumption typically overlooked, and
This is strike one against the report. The report should be clear often with significant uncertainty in an ILR, is the period
and logical, using layman’s terminology. A straightforward during which a loss will be incurred. It is important that the
approach often examines the most critical aspects of the loss, end date for the damage period is reasonable, especially in
excluding minor variables that will not significantly impact cases where plaintiffs are permanently disabled and there is
the conclusions. However, while a report may appear strong little or no possibility that they will be earning any future
in substance, small errors (even grammatical) may hint at an income. In some cases, the traditional retirement age of 65
underlying problem with the quality of professional effort, will be considered reasonable. However, in some industries
the rigour of the analysis and the report’s actual credibility. or for some individuals this assumption would be anything
Therefore, a report should be thoroughly examined for math- but reasonable.
ematical errors, where even a small error could lead to a sig- For example, if an individual who was almost 65, was in
nificant difference in the quantum of the calculated loss. good physical health prior to the accident, and had intended
to work for another 10 years, using a retirement age of 65
Hazards and pitfalls of assumptions would be unreasonable. Additionally, statistically men and
The most basic factor in valuing an income loss is the women do not retire at the same age. It is important to note
determination of how much the individual or business would that the farther the end date is from the trial date, the small-
36 Claims Canada February/March 2011 www.claimscanada.ca

2. er the impact is on the overall numbers, due to discounting ever, upon closer examination it may be revealed that a
to a present value. component of the loss results from the loss of a significant
Of course, the ILR must not only include a calculation of customer immediately prior to the incident, seasonal varia-
the projected earnings, it must also include a determination tions in sales, changes in accounting policies, changing eco-
of the earnings the plaintiff can expect to attain in the future, nomic conditions or perhaps the injured person was on the
given their compromised state. The assumptions on which verge of being laid off or downsized. These variables, and
this latter calculation is based are no less important, since the many others, can significantly impact the assumptions,
difference between the projected and expected earnings are findings or conclusions and should be kept in mind.
what form the basis of the loss. Serious thought must be given
to whether a person is really permanently unemployable. Uncertainty in findings
From a plaintiff counsel’s perspective, it is becoming ever As previously stated, ILRs are projections into the future.
more important that the assumptions employed by their As a result, some degree of uncertainty will always exist.
expert result in realistic conclusions as well. ILRs which over- Therefore, it is legitimate, and often helpful, to present one
state the loss due to unsupportable or more alternative scenarios of the
assumptions may result in settlements loss of income.
at amounts significantly lower than Presenting a single scenario leaves
indicated in the ILR and perhaps lower all parties with very little room to
than merited, exposing plaintiff coun- negotiate and the trier of fact with no
sel to negligent settlement claims by flexibility. Either that finding present-
their clients. ed is accepted or not. Normally, pro-
viding a range of scenarios permits all
What isn’t considered counts parties to assess potential losses while
too incorporating their view on the
An often overlooked weakness in underlying issues, including medical
ILRs is not what has been included in findings. However, similar to the
the report, but rather what is missing. assumptions supporting projected
As an example, income losses for an earnings, each of the alternative sce-
employed individual should consider narios should be prepared based on
the lost fringe benefits and the loss of supportable assumptions.
pension value, and not just the lost
wages. Where this has not been consid- Final considerations
ered, it is likely that the calculated loss It is common that ILRs are pre-
is understated. pared close to mediation or trial dates
Contingencies are also sometimes
The ILR must not only to ensure that the accountants have
overlooked, and may have either a neg- include a calculation of the most up-to-date information on
ative or positive effect on the calculat- the projected earnings, which to prepare and base their con-
ed loss. Contingencies may include, clusions. Where reports have been
but are not limited to: it must also include a prepared well in advance, it is impor-
• Mortality rate determination of the tant that any new information be pro-
• Labour force changes (ie. unemploy-
earnings the plaintiff can vided to the or to re-crunch the num-
the position,
accountant to re-assess
ment rates in an industry)
• Possibility of earnings increases/ expect to earn in the bers. Without this consideration, it
decreases beyond inflation future, given their may not only be the accountant that
• Disability period loses face.
• Economic or business conditions,
compromised state. The hired gun is something that
bankruptcy of the employer’s com- both sides now have to be aware of,
pany, etc. especially in light of the Rules of Civil Procedure. At a mini-
• Impact of disability on future earnings mum, opposing counsel and the trier of fact may discount
These contingencies are often difficult to determine, and the credibility of the ILRs, when the expert is perceived as
in many cases positive and negative contingencies may be an advocate rather than an objective expert.
considered to cancel each other out. While there may not be any single correct way to esti-
Trending is also a common tool in determining future mate the income lost by an injured individual, we have
losses of a business. By looking at what was happening prior observed that there are a large number of incorrect ways to
to the accident, projections into the future can be created. perform such calculations. Be on the lookout for the weak-
But trending can be affected by many variables, and if these nesses in ILRs described above.
are not explored, the impact can be significant. For exam-
ple, a report may attribute a decline in the post-incident Micheal Sigsworth and Darrell Sherman are founding prin-
sales entirely to the injuries suffered by the plaintiff. How- cipals at ADS Forensics.
www.claimscanada.ca February/March 2011 Claims Canada 37