Part of the Job?
Article, Solicitors Journal – June 2009
Insurance / Legal / Disputes
Amanda Fyffe considers the issues involved in determining an accurate reflection of lost earnings in occupational disease claims to effect the timely conclusion of a case
The EL Trigger Litigation judgment (November 2008) and the impending 2009 appeal has brought mesothelioma claims to the forefront of our minds, with the outcome of the appeal also impacting other occupational disease claims where there is a delay between exposure and injury.
Many insurers are refusing to settle mesothelioma claims until the outcome of the appeal is heard. Notwithstanding this, the loss of earnings (or lost years) element of most occupational disease claims constitutes a significant proportion of the total claim - the quantification of which needs careful consideration.
Issues to consider
In every case the elements of a claimant's earnings vary depending on personal circumstances or whether they are employed or self-employed; and a reasonable approach in quantifying loss of earnings is often to look at the claimant's historical earnings and to extrapolate these trends. However, before the review of historical data, the starting point for the forensic accountant is the gathering of information and understanding the claimant's working environment.
Assessing the working environment
Details of the industry in which the claimant operates, the type of goods/services provided, the size/location and whether the business is long established or in its infancy are all essential factors to consider when instructed. Preliminary information can be obtained from a variety of sources, including the internet, local/national press and from the examination of Companies House records. It is this preliminary information that will often dictate the type and level of additional research into industry statistics or trends, and tailor the forensic accountant's additional document request 'wish' list.
Additional documents, including financial documents, are typically obtained from third parties like HM Revenue & Customs, or through formal disclosure requests; the collation of which can be a time-consuming exercise. With early instruction the forensic accountant can assist in speeding up this process by liaising with claimants and third parties directly, which can also help reduce costs.
The recession has dramatically changed the environment in which people work and has altered the parameters of both employed and self-employed earnings. This raises many issues in determining an accurate reflection of lost earnings, which solicitors, now more than ever, need to be aware of and which warrant more careful consideration. These include:
1. The labour market
The possibility of future unemployment for employed claimants is now a significant issue in today's climate. During the first quarter of 2009, the rate of unemployment reached 7.1 per cent (vs. 5.3 per cent in 2008) (the Office of National Statistics), representing the largest quarterly increase in unemployment since the early 80s. This goes hand-in-hand with a 0.4 per cent reduction in the average earnings index for the quarter to March 2009 (vs. 2008) (ibid) - the lowest rate since records began in 1991. These statistics have arisen due to the closure/failure of businesses and a commercial drive to reduce labour costs.
Some industries, such as car manufacturing and banking, have been hit harder, and therefore, the specific nature of a claimant's working environment needs to be evaluated to determine the threat of unemployment on a case-by-case basis. Furthermore, the demand for employees has diminished with job vacancies in short supply. Therefore, the possibility of a claimant gaining alternative employment will also impact on their future earnings.
In addition to evaluating the specific industry a claimant works in, there are further documents (other than financial data) worthy of investigation. An employee's personnel file can provide evidence of their track record, including historic performance, promotions and future prospects. In the alternative, a personnel file could highlight that their continued employment may have been in jeopardy in any event, due to poor performance or disciplinary warnings, regardless of any economic factors influencing their expected continued employment. The earnings records of comparator employees can also provide a useful benchmark for a claimant's expected career path and earnings. However, being a third party, comparator employee information can be more difficult to obtain, requiring an appropriate disclosure request. However, if the employer is involved in the litigation, these records would be more readily available.
Further information can also be obtained from HMRC and/or the National Insurance Contributions Office. These organisations can provide valuable details of the names and number of previous employers as well as differentiating between periods of employment, unemployment and self-employment. However, written authorisation from the claimant is required before any information will be disclosed to solicitors or forensic accountants.
For self-employed individuals, an evaluation of the success or failure of any previous enterprises, the longevity of their business and historical performance can provide insight into their future expected earnings.
A good place to start is a director search on Companies House, which will show the number of company appointments/ resignations as well as details of which entities are continuing to trade.
In many claims, particularly mesothelioma claims, the claimants are often approaching retirement age. Therefore, the possibility of claimants taking early retirement or voluntary redundancy also needs to be considered. However, in the case of self-employed claimants, operating their own businesses, the option of slowing down before retirement or retiring early may no longer be a tangible possibility due to eroded pension funds.
In these claims a range of information should be considered to enable a full assessment of retirement plans. This would typically begin with documents relating to any pension plans such as the scheme rules and annual statements. These would cite an individual's expected retirement age and details of the parameters for early or late retirement. In addition, other documents such as medical reports and witness statements can also provide a valuable insight into a claimant's future retirement plans. For example, there may be reference to a desire to reduce workloads to spend more time with the grandchildren, or perhaps a mention of potential buyers for their business or plans for family members to inherit and/or takeover the business.
2. Profit margins
For claimants managing their own self-employed or limited businesses, their sustainable future profit margins are a key consideration. The recession has led to increased expectations from consumers for lower prices, leaving entrepreneurs under increasing pressure to remain competitive; which has then led to a squeeze on selling prices and profit margins.
In conjunction with competitive selling prices, business owners are also suffering from the pressure of increasing costs, which again contributes to a reduction in profit margins. For example, despite the recession, oil prices and fuel duty continue to rise, with a further 2p increase following the April 2009 Budget. This has had a real effect on everyday fuel costs, with a 5.4 per cent increase in diesel prices since January 2009 (based on AA average UK fuel prices). Such increases in fuel charges will have a significant and detrimental impact on businesses with high delivery or motoring costs.
In assessing future sustainable profit margins, the forensic accountant must first start with an assessment of the historical trends and cost structure of the business to identify factors affecting the profitability of the business. This must then be evaluated in conjunction with the economic conditions and a sensitivity analysis conducted to determine the potential impact on future margins. It is in this area that industry statistics can play a helpful role and provide an indication of the impact on businesses.
As the term suggests, the economic downturn has resulted in a reduction in demand for a range of goods/services, which will have an ensuing impact on the sales income generated by a business.
However, it should be remembered that not all industries are experiencing this downturn. For example, DIY stores appear to have remained impervious to the recession - with house prices falling, home owners are now looking to DIY rather than risking the crystallisation of negative equity on selling. In some industries, despite casualties, surviving businesses are able to absorb surplus demand and have actually experienced an increase in sales. However, the extent of this success will depend on the tenacity of the business and its ability to cater for changing economic conditions.
The forensic accountant should also seek to undertake an evaluation of the customer base of the claimant's business. The identification and research into key customers can prove invaluable in the assessment of the future performance of the business. Any customers in financial difficulties could result in the cessation of a material proportion of a claimant's sales which, unless replaced, could result in cash flow difficulties and the potential failure of the claimant's business.
In occupational disease claims the parties involved are often driven to reach an early settlement and solicitors frequently delay the instruction of forensic accountants. This can result in forensic accountants being instructed very late in the day and, while a delay in instruction can limit costs if settlement is achieved, there is no certainty that all issues pertinent to a claimant's expected earnings will have been considered. This, in light of the issues raised by a recession, could actually result in higher settlement costs.
Experts' costs are often under scrutiny and the added value they provide is often overlooked when a comparison is made between the settlement figures and the expert's fees incurred. The focus by solicitors must necessarily be on liability issues, but claimants sue for money and therefore the timely appointment of a forensic accountant to give a steer on quantum should not be ignored. The role of the forensic accountant is ultimately to assist in the settlement of a case, and they should be adaptable in their methods of reporting to meet the requirements and budget constraints of each case. To facilitate this, forensic accountants need to discuss their instruction with solicitors to establish the most appropriate and cost effective method of reporting to meet solicitors' requirements effectively. In many instances, only a summary of pertinent issues is required without the trimmings of a full CPR report; but with the option for summary comments to be extrapolated into a full CPR report if later required.
Ultimately, solicitors instruct forensic accountants to provide an accurate reflection of a claimant's lost earnings, presented in a concise and understandable format to aid their settlement negotiations. Early instruction provides the timeframe to allow a claimant to collate and provide necessary financial documents and for the forensic accountant to consider these documents in the context of the claimant's working environment. The key issues identified can then be brought to the table early on to facilitate and expedite settlement negotiations, contributing to the early conclusion of a case and avoiding costly trial preparation fees.
As appeared in Solicitors Journal, June 2009.