Present Value and Apportionment

Saturday, July 15, 2006 | 0

by David J. DePaolo

In our last article I opined that one of the most pressing issues in the current legal debate on apportionment was the definition of "disability". But the complexity of the "new apportionment" doesn't stop at definitions, because when the Legislature changed the apportionment statutes, they opened up another issue - what I'll refer to as "equitable valuation."

One of the problems with apportioning an old schedule disability against a new schedule disability is that it is an "apples to oranges" comparison. The argument, and a good one in my opinion, is that because the methods for determining disability are so radically different that it is unfair and inappropriate to apportion an old disability against a new disability - old disabilities were worth much more (based on current PD studies commissioned by the Commission on Health Safety and Workers' Compensation) than new disabilities so the "new schedule" injured worker gets unfairly penalized as a consequence.

An inverse argument is also brewing as a product of recent case law defining the math required for valuing disability and apportionment - in order to fairly determine values for purposes of apportionment, it is inappropriate to take the "money table" values, and these must be reduced to present value.

The argument to reduce apportionment values to present value is the same as though one were settling a claim by Compromise and Release based on a given percentage of disability. If, for instance, the parties agreed that a 2006 injury produced a 50% disability then standard financial protocol for a Compromise and Release settlement (as opposed to a Stipulated Award) would require the reduction of the value of the 50% disability to present value, because a dollar tomorrow is not worth the same as it is today.

Thus, a maximum wage earner for a 50% PD 2006 injury would be worth $62,387.50 on the "money table". However, this would be payable over the course of 271.25 weeks (over five years) at the rate of $230 per week. The present value of this annuity, assuming a 3% rate of return (3% is the statutory discount rate for commutations), is the lump sum value of $57,747.67.

The recent cases of E.J. Gallo v. WCAB (Dykes) and Nabors provide us with the Court's present interpretation on how to do the apportionment math. At first the instructions seem simple: "Under present law, taking his prior level of disability into account, as required by section 4664, subdivision (a), the percentage of permanent disability directly caused by' the current industrial injury is the additional percentage of disability that takes him from 20.5 percent to 73 percent disabled. Dykes was therefore entitled to an award reflecting the difference between a 20.5 percent disability and a 73 percent disability on the permanent disability table applicable to the subsequent injury." (Nabors)

Both the Nabors and Dykes cases perform the math directly from the "workers' compensation tables" - thus in Dykes, "the WCAB correctly determined that Dykes's subsequent injury caused him to sustain 73 percent permanent disability, payable at $230 per week for a total of $104,350, less credit for the prior 20.5 percent disability award in the amount of $11,680."

However, an argument exists that to base the end indemnity value on the "workers' compensation tables" without reducing to present value provides the claimant with an inappropriate financial benefit in that, if there was no apportionment, the gross amount of disability indemnity would be reduced to present value. This is the natural effect of the annuity based permanent disability indemnity system. That is why commutations are required by law to be discounted using a 3% rate of return. This is a fundamental financial concept.

However, the net effect is to dramatically reduce the ultimate value of an apportioned award to the claimant - and this presents another can of worms.

I am aware of at least one trial decision where the Nabors math was extended to a Findings and Award. In Ronald Reyes vs. Crown Cork & Seal (SJO 0235129, 6/19/06), the injured worker was found to have sustained a CT injury ending 9/8/00 to left shoulder, wrist, neck and knees. On an AME report, Judge Howard Levin found apportionment to concurrent disability caused by diabetes, and naturally progressing degenerative changes aggravated by weight. His calculations on apportionment were thus:

"Permanent disability totaling 77% ($112,585 regular payment monetary value), less the equivalent monetary value of 52% permanent disability ($47,982.50); entitling Applicant to 280.88043 weeks of disability indemnity at the rate of $230 per week, in the total net sum of $64,602.50, payable beginning 11/21/02; less credit to Defendants for all sums heretofore paid on account thereof; and less $13,615 payable to Butts & Johnson as attorney fee; plus a life pension of $65.71 per week payable to Applicant beginning 4/19/12."

But, if the apportionment in this award were subject to a present value analysis, then $112,585 would be $98,096.04 (489.5 weeks at $230/week at 3%); and $47,982.50 would be $44,277.42 (282.25 weeks at $170/week at 3%). The final award to the claimant would thus be $98,096.04 - $44,277.42 = $53,818.62, or 233.994 weeks at $230/week.

This case assumes a valuation of the pre-existing disability at 2006 rates, but I argue that unless the disability is permanent and stationary in 2006 (in the Ronald Reyes case - the judge found a concurrent disability) then the apportionment rate needs to be calculated at the rate in effect as of the date that the pre-existing disability became permanent and stationary, or had reached maximum medical improvement. Failure to do so would produce an obvious inequity where a 4664 apportionment based on a 1996 injury and a 1999 stipulated award is valued at 2006 rates (This is Dykes, where the court used the value of the Stipulated Award at 1996 rates). We'll cover this scenario in the next installment in this series.

In the meantime, this is one more detail that will need to be sorted out by the courts, and it may be some time before the workers' compensation community has firm rules in place for properly calculating the monetary value of an apportionment case.

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