The introduction of the earnings cap by section 17(4)(c) of the Road Accident Fund Amendment Act 19 of 2005 (the Amendment Act) has become the source of much litigation in recent years. With the ruling handed down in Sweatman v Road Accident Fund 2013 JDR 2821 (WCC), the method of calculating the plaintiff’s loss, having regard to the cap, may be more complex than initially comprehended.
During the 2002 Satchwell Commission, an investigation was launched into the growing deficit that the Road Accident Fund (the Fund) was incurring on an annual basis. The Commission made many recommendations in an effort to limit the Fund’s liability. When the Amendment Act came into effect on 1 August 2008, the legislature introduced a cap in order to limit a claimant’s loss of earnings or loss of support. Section 17(4) provides:
“Where a claim for compensation under subsection (1)... (c) includes a claim for loss of income or support, the annual loss, irrespective of the actual loss, shall be proportionately calculated to an amount not exceeding–
(i) R160 000 per year in the case of a claim for loss of income; and
(ii) R160 000 per year, in respect of each deceased breadwinner, in the case of a claim for loss of support.
(4A) (a) The Fund shall, by notice in the Gazette, adjust the amounts referred to in subsection (4)(c) quarterly, in order to counter the effect of inflation.
(b) In respect of any claim for loss of income or support the amounts adjusted in terms of paragraph (a) shall be the amounts set out in the last notice issued prior to the date on which the cause of action arose.”
Therefore according to section 17(4A)(a), the cap would be amended each year to make provision for inflation. The cap as at 31 January 2014 was amended to R215 320. Furthermore, a claimant will only be entitled to utilise the cap amount that was in place at the time that the accident occurred.
The legislature’s intent was to limit the annual loss of a claimant, regardless of the claimant’s actual loss. Although the cap has been implemented, no fixed method of calculating a claimant’s annual loss was prescribed. Furthermore, to date, the Supreme Court of Appeal has yet to hear a matter regarding the calculation with the cap and thereby provide legal practitioners and their actuaries with a uniform method of calculating the plaintiff’s loss. Therefore, when the actuaries utilise different methods of calculation it often results in substantially different awards.
The Sweatman judgment, handed down on 3 December 2013, was the most recent case whereby the High Court made a ruling as to the method of calculation that should be utilised by the actuaries. In Sweatman, the plaintiff was 15 years old at the time of the accident. The issue of merits had previously been settled and the parties had agreed that for the purposes of calculating the loss, the parties would use the plaintiff’s industrial psychologist’s report. The parties were in dispute over the narrow issue of the method of calculating the plaintiff’s annual loss in terms of section 17(4)(c)(i) of the Act.
The court remarked that quantifying the putative future loss of income or loss of earning capacity of young people was a notoriously difficult task. In order to quantify the claim, the likely career path of the plaintiff must be obtained. This requires the assessment of elements such as, inter alia, academic qualification, character traits, chosen profession or job and retirement. The task given to the parties is complex due to its speculative nature, and even more so where a minor is involved and there is no chosen career path before the accident occurred. This information, obtained by the experts on brief, is then provided to the actuary. The actuary will then calculate the plaintiff’s income stream had the accident not occurred, by taking into account the capitalisation rate, relevant life tables and income tax. The same process is repeated having regard to the accident and what the plaintiff’s earning ability is once the accident has occurred. Judge Griesel stated that when calculating the loss, the present value of the plaintiff’s future income should the accident have not occurred, should first be calculated and then the relevant contingency deductions must be applied, this is termed as calculation (a). Then the present value of the plaintiff’s estimated future income having regard to the accident should be calculated and then contingency deductions should be applied, this is termed as calculation (b). Thereafter (b) must be subtracted from (a) and that will be the plaintiff’s loss. This method was correctly applied by both actuaries in Sweatman.
The two parties differed in respect of their calculations thereafter. The plaintiff’s calculation, as performed by Mr I Morris and Mr J Schlwab, was as follows:
The actual loss of each year should be calculated, after income tax, contingencies and mortality. Thereafter the actual loss should be discounted using the net capitalisation rate, into present day terms. The discounted value of the loss is thereafter compared against the cap. The lesser of the cap or the discounted present value is then used.
The calculation performed by Mr Munro, for the defendant, was as follows:
The actual loss for each year was calculated, after income tax and contingencies. That amount is then compared to the cap for each year. Thereafter the lesser of the two amounts is discounted (with interest and mortality rate) to present day terms.
Judge Griesel quoted Sutherland J in the matter of Sil v the Road Accident Fund who stated: “The practice of calculating contingencies as it has existed for decades need not be disturbed.” Therefore, Griesel correctly agreed with Sutherland in that the method of applying contingencies should not be disturbed and that contingencies should be applied to the actuarial calculation as they always have been. Griesel ruled that the plaintiff’s method of calculating the loss was correct. Therefore, the judge found that, although the earnings cap will apply to a relatively small percentage of claims, the actual loss must be calculated by using the traditional method, which makes allowances for income tax, mortality and contingencies each year and then must be capitalised to bring the loss to present day values, before it is compared with the cap.
Sweatman is being taken on appeal to the SCA and there is a strong argument in favour of the defendant’s method of calculation. When assessing the plaintiff’s calculation, the actual loss is calculated to ensure that it is in its present day value, and then it is compared to the cap. This calculation lends itself to anomalies in that the calculation indicates that two different values, a discounted and an undiscounted value, are to be compared and that all people are subject to the same cap, regardless of age and gender (as determined by the mortality tables). The plaintiff’s calculation only takes the mortality tables into account when calculating the plaintiff’s actual future loss and not to the cap. Therefore, regardless of the plaintiff’s gender, age and therefore, life expectancy, the cap will apply to each individual in the exact same manner as long as their loss is greater than the capped amount. Furthermore, the plaintiff’s calculation creates a situation wherein you are no longer comparing the same values. The plaintiff’s calculation places the plaintiff’s loss into a present day value by discounting and capitalising the plaintiff’s loss, whereas the cap amount is only subject to inflation. Therefore the discounted loss is compared to the undiscounted cap and the comparison between the two values cannot render the true state of affairs.
It will in all likelihood be argued that the defendant’s calculation is the fairest manner of calculating the plaintiff’s loss. This calculation removes the anomaly of the gender and age and brings the cap into a present day value. The calculation applies the cap after contingencies have been applied but before the mortality tables have been applied. Therefore the cap applied is fairly compared to the individual plaintiff’s projected loss in order to determine the lesser amount. At this stage both amounts have not been discounted and therefore one is comparing the same values. Once the lesser amount has been determined, only then is the lesser amount discounted by applying interest and the mortality tables. This ensures that gender and age are dealt with on a subjective basis relating to the individual plaintiff.
In terms of section 3 of the Road Accident Fund Act, it is clearly shown that the Act is in place as social security legislation. However, with decisions taken by the Satchwell Commission, a balance must be struck between the social security aspect of the legislation and the limit that must be placed on the Fund’s liabilities. The cap is one manner of doing this. Judge Claasen stated, in light of the cap that has been placed on the plaintiff’s loss in Jonosky v Road Accident Fund where the State places a limitation on a claimant’s right, the legislation should thereafter be interpreted in a manner that is beneficial to the claimant. While this point is agreed on by legal practitioners, the right must also be interpreted in a realistic manner. Whether or not the defendant’s calculation, by comparing the calculated loss (before it has been discounted) to the cap and thereafter discounting the lesser of the two amounts, is the correct manner of calculating a plaintiff’s loss will be determined on appeal.