What is Future Loss of Earning Capacity?
Future loss of earning capacity is determined by comparing the likely future of your working life if the accident had not happened against your likely future working life after the accident. There are two methods for valuing loss of future earning capacity:
- the “earnings approach”: which uses your pre-accident earnings to determine your likely future earnings if the accident had not occurred
- the “capital asset approach”: where the court treats your earning potential as an asset, and then tries to determine how much the accident depreciated that ‘asset’.
The earnings approach will be preferred if you have an established earnings history at the time of the accident, otherwise, the capital asset approach tends to be more useful.
The earnings approach projects your expected future earnings had the accident not occurred, and then subtracts any income that you can still earn taking account of your injuries and the prognosis of your condition. The court will often reduce this award still further by a contingency amount, to account for all the possibilities of negative events: e.g. sickness, disability (unrelated to the accident), being laid off or demotions. Finally, the court is required to apply a discount rate of 2.5%/year for all future income losses.
Capital Asset Approach
If you do not have an established earnings history, or your past earnings do not fully capture your future earning capacity, the capital asset approach applies. Under this approach, the court looks at you as an income-producing ‘asset’. Someone who just graduated from medical school and has been accepted to a neurosurgery program is considered to be a very valuable asset, on the assumption that he or she will earn a significant salary as a neurosurgeon over a period of decades. To the extent that the accident prevents that person from meeting his or her full potential as a neurosurgeon, the ‘asset’ has lost value.
The court will consider general employment trends and salary data, but it will also incorporate the specific evidence about you as an individual. If you were an above average student, or if you exceeded expectations at previous jobs, those will increase the valuation. Likewise, a history of poor performance or inability to keep a job will decrease the valuation. Finally, the court can also reduce the award for contingencies when applying the capital asset approach.
When projecting future income, it is often necessary to address hypothetical events. You may have had a chance of obtaining a very lucrative job, or you may have been pursuing a very valuable contract that was awarded to a competitor. In this case the court will consider the likelihood of that outcome, and multiply that by the amount lost. So if you had a 10% chance of winning a contract that would pay you $100,000, your loss is $10,000. However, you must show that this was a real possibility.
If your business lost opportunities due to your injuries, you may be able to claim those losses. However, you must show that the loss is your own – a pure business loss may not be recoverable.