Salgado v. County of Los Angeles
80 Cal.Rptr.2d 46 (Cal.1998)

Jabes Salgado was delivered in a county hospital, where the doctors failed to notice his mother's diabetes and other risk factors in her pregnancy. As a result Jabes was born with permanent nerve damage in his right arm. The Delgados sued the hospital for medical malpractice and sought an award to pay for Jabes's future medical treatment and therapy. The jury found negligence and awarded the Salgados the following:

• Future economic damages: $125,000 (which the jury found had a present value of $50,000)
• Past non-economic (pain and suffering) damages: $10,000
• Future non-economic (pain and suffering) damages: $550,000

After the jury's award, the hospital moved the court to reduce the $550,000 award for future pain and suffering pursuant to a statutory cap that limited such damages to $250,000. The trial judge agreed and cut this portion of the award to $240,000 - so that overall non-economic damages totaled $250,000.

The hospital then moved to have each of the awards that compensated for future damages reduced to an annuity - a series of monthly payments over the expected life of Jabes - as allowed under California statute. California Civil Code § 667.7. The parties agreed that Jabes's life expectancy was 66.8 years (802 months), and the trial court restructured the jury award as two annuities, payable during the life of Jabes:

• Annuity 1 - Economic damages: $155.87 per month (802 months)
• Annuity 2 - Non-economic damages for future pain and suffering: $299.26 per month (802 months)

For both annuities, the judge assumed a discount rate of 5.68% - the prevailing rate for annuities available at the time on the private insurance market.

What was wrong with the trial court's judgment? For one, the judge inexplicably forgot about the jury's $10,000 award for past pain and suffering. But the annuities were flawed more fundamentally - why? In what ways did the trial judge confuse present and future value - a common symptom of "innumeracy"?

Answer:

Annuity 1 (for economic damages) has a present value of $32,179, significantly lower than the present value of the $125,000 awarded for future economic damages - which the jury determined had a present value of $50,000. What the judge did was to assume that the hospital was responsible only to ensure that the Salgados would receive $155.87 per month for 802 months - a payment stream that would total $125,000. To do this, the hospital had only to purchase a $32,179 annuity. (You might want to look at how the present value of an annuity is computed - "1.3.4 "Present value of an annuity", and specifically how this annuity was computed.) But a 802-month annuity with a present value of $50,000 (assuming 5.68% interest) would have yielded monthly payments of $242.17. The trial court had improperly disregarded the jury's conclusion that $125,000 in future damages had a present value to the Salgados of $50,000. Either the jury decided that the appropriate discount rate was lower than that used by the insurance industry or that the $125,000 in payments should occur earlier in Jabes' life, rather than later.

Annuity 2 (for non-economic damages) had a present value of $61,785. The court assumed that the $240,000 jury award (as reduced by the statutory cap) would be paid in the future as monthly installments over the expected life of Jabes - $299.26 month. The present value of such a payment stream (assuming a discount rate of 5.68%) is $61,785. Notice that by annuitizing the award for pain and suffering, the trial court effectively imposed an even lower statutory cap than already set by the legislature. Ultimately, the California supreme court decided that the $250,000 cap, which was meant to provide some certainty to malpractice insurers, assumed their exposure would be limited to a lump-sum payment not greater than the cap. Salgado v. County of Los Angeles, 80 Cal.Rptr.2d 46 (Cal.1998). But by subjecting future payments to the cap, and then annuitizing them, the trial court effectively reduced the plaintiff's recovery twice -- to a level below that set by the statute. This, the supreme court said, was not what the jury or the legislature had in mind.

Although these mistakes might seem forgivable - one judge having a "bad math" day - consider their staying power. It took more than five years and the full California judicial system to figure out that annuitizing a damages award (partially capped) payable over time significantly cuts the plaintiff's award, well below that awarded by the jury even after the statutory cap. Neither the trial judge nor the intermediate appeals court (which commented that the result of annuitizing the awards seemed "harsh") noticed that the annuity computations effectively stripped away $196,036 of the present value of the jury award. By confusing future and present value, the trial judge reduced the $290,000 that the jury had properly awarded the Salgados by more than 68%!

For a student comment on the case, see Charlton Owensby, Salgado v. County of Los Angeles -Valuation Error in a Legal Context (1999).