Written By: Michael Parker
But what is ‘present value’ and how do we use it?
In accounting terms, Present Value is the current worth of a future sum of money given at a specified rate of return (this is why I went to law school and did not become a CPA). In our world, we use the present-day value of our exposure, typically supplemental earnings benefits, to know how much we should pay today so that if the injured employee invests that money at a specific interest rate then at the end of the time for which SEBs are owed he has that much money. Of course, this is a fiction as the attorney takes his fee out of the settlement, or the claimant spends the money and doesn’t invest it, so the true payout value is never reached.
For example, if you owe another 400 weeks of SEB’s and you are paying $500 a week and you want to settle the case, how much should you pay? The actual payout of SEBs over the course of 400 weeks would be $200,000 ($500 x 400) but it makes no sense to pay the full value of the SEBs today since at the end of 400 weeks the claimant would have more than $200,000 if the money was wisely invested. Thus, as a way to establish what we should pay in today’s dollars we discount the $200,000 total exposure to today’s dollars. Typically, you will see me and most other attorneys use a discount rate of 8%. This DOES NOT mean that you deduct 8% of the $200,000 and pay $184,000 as I have seen some attorneys argue in the past. This means that if the injured employee invests his money with an 8% rate of return over 400 weeks the value of the investment would be $200,000.
Why do we use 8% as the discount rate in our evaluations? If there is a ‘lump sum’ settlement, where you are paying the full amount due a widow or someone who is permanently and totally disabled, R.S. 23:1274 provides a penalty if the ‘lump sum’ is discounted by more than 8%. While this rule does not apply to settlement of SEB or TTD claims, the 8% rule has become the standard discount rate that is used in our settlement discussions, though it is not required and some plaintiff’s lawyers won’t agree to using the 8% discount rate.
Back to our settlement of our SEB exposure of 400 weeks at $500 a week. Inserting these figures into the present value calculator on our website, you see that if the claimant receives $149,276.20 today and invests it at 8% that in 400 weeks the claimant will have $200,000. So, when you see a settlement evaluation that shows the payout value of the SEB exposure and then the present-day value as a lower number, know that we are actually paying the full value of our SEB exposure if the claimant takes the money and invests it at 8%.
Hopefully, the present-day calculator on the website will become a valuable resource for your settlement evaluations in the future.