The parents of a baby boy who was brain damaged at birth retained you to be their son’s lawyer. It’s been four years of long hours, hard work, and sleepless nights. Finally, after overcoming the multitude of obstacles facing a medical malpractice plaintiff, the day of reckoning is near. Your life care planner has evaluated the financial needs to care for the child for the rest of his life: $85 million. Your economist has reduced that figure to present cash value: $17 million. On the eve of trial, expert disclosures are exchanged. In reviewing the defendant doctor’s disclosure, you see that she has disclosed an “annuitist” who will testify concerning the cost of an annuity to fund the plaintiff’s lifetime care. A few calls to colleagues and a review of this “expert’s” prior testimony lead you to believe that the annuist will opine that an annuity can be purchased for $4 million to fund the life care plan. Suddenly, the potential value of your case has suffered a fourfold decline. Now what do you do?
“Annuitists” are often disclosed as expert witnesses by defendants in personal injury cases. These experts, who are often no more than salespeople for a particular insurance company, attempt to offer testimony concerning the cost of an annuity to provide injured plaintiffs with an income stream to compensate them for lost earnings or support or to provide a source of income to fund future medical care. The admissibility of this type of expert testimony has not been directly ruled on by California courts1, but it would appear unlikely that the appellate courts would find such testimony admissible for the reasons discussed below. This article reviews cases, from California as well as other jurisdictions, which have addressed the issue, and suggests a strategy for crafting a motion in limine to preclude the expert testimony of annuitists.
Attack Annuitist Testimony as Irrelevant to the Issue Before the Trier of Fact
All future damages must be reduced to “present cash value” by the trier of fact.2 “The present value of a gross award of future damages is that sum of money prudently invested at the time of judgment which will return, over the period the future damages are incurred, the gross amount of the award.”3 One potential argument for the exclusion of annuitist testimony is that the cost of an annuity is not relevant to a determination of the operative issue-the present cash value of the gross amount of future damages.
The only California case that even touches on this subject is Emery v. Southern Cal. Gas Co. (1946) 72 Cal.App.2d 821, 826. In Emery, the trial court had excluded plaintiff’s proffer of an actuary to present annuity tables in evidence as indicia of the present value of the heirs’ future loss of support in a wrongful death case. The Court of Appeal reversed, stating that the tables should have been admitted subject to an instruction that such evidence was “not conclusive as to the amount to be awarded as damages, but is only one of several elements to be considered in determining the amount to be awarded.”
Plaintiff’s counsel should point out Emery involves annuity tables, which are admissible as some evidence of present cash value, but says nothing concerning the admissibility of an annuitist’s testimony as to the cost of an annuity to fund a particular plaintiff’s future damages. Later California decisions which discuss annuity evidence in other contexts reinforce this distinction.
These cases suggest that the presentation of annuity evidence would serve no purpose other than to confuse the jury concerning its role in personal injury cases. The jury is to determine the amount of money that if paid immediately to plaintiff would compensate him for his future losses. The California Supreme Court has stated in connection with future noneconomic damages:
To avoid confusion regarding the jury’s task in future cases, we conclude that when future noneconomic damages are sought, the jury should be instructed expressly that they are to assume that an award of future damages is a present value sum, i.e., they are to determine the amount in current dollars paid at the time of judgment that will compensate a plaintiff for future pain and suffering.4
Similarly, future economic damages are reduced to present cash value by the jury. (CACI No. 3904.) The Comment to former BAJI No. 16.01 is also instructive:
[T]he Salgado court concluded that when an award for future economic damages is made by the jury is a present value sum, the plaintiff is entitled (if the payments are made over time) to a schedule based upon the present value determined by the jury. In other words, even if defendant can obtain an annuity that over time matches the total economic damages determined by the jury, at a lesser cost, the plaintiff is entitled to the benefit of the jury’s determination of the present value, and what that amount will produce as an annuity.5
Thus, the California Supreme Court has recognized that present cash value, and the cost to fund an award, are two separate and distinct concepts. California juries are only required to make findings with regard to the former.
Language in some California cases which suggests that the cost of an annuity is evidence of the “total value” of periodic payments is inapposite. Those case are referencing separate determinations concerning certain Civil Code provisions which are made by the trial court only after the jury has made a present cash value determination.6 Further, California courts have repeatedly endorsed the “investment” approach for the jury’s determination of present cash value.7
Holt v. Regents of the Univ. of California (1999) 73 Cal.App.4th 871 is instructive. In Holt, the First District Court of Appeal specifically warned of the danger of confusing the cost of an annuity to fund payment of a judgment with the underlying present value of the judgment itself:
In their concern over the use of an annuity, the parties tend to confuse two separate concepts: (1) the manner in which the defendant complies with a judgment for periodic payments, and (2) the present value of the gross award. As a rule, the manner in which the defendant complies with a judgment ordering periodic payments of economic damages in a MICRA case is the defendant’s decision, regardless of any finding of present value. For example, the defendant can fund the judgment itself simply by writing a check to the plaintiff each payment period, or it can purchase an annuity to fund the stream of payments ordered by the court. Of course, both these alternatives leave the defendant liable for the balance of the judgment until it is fully satisfied. Assuming the plaintiff has not exercised his or her statutory right to periodic payments, the defendant can also pay the present cash value of the gross award in a lump sum and obtain a satisfaction of judgment.
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Therefore, appellant is not foreclosed from purchasing an annuity to fund the periodic payments for which it is liable, but it cannot obtain an immediate satisfaction of judgment by doing so. Appellant can obtain an immediate satisfaction of judgment only by paying the present cash value as found by the jury, assuming respondent has not exercised her right under section 667.7 to periodic payments.8
Because annuities and present cash value represent two different concept, plaintiff’s counsel should argue that annuitist testimony will have no relevance to the jury issue: present cash value. Plaintiff’s counsel can buttress this argument with federal case law and decisions from other states that support this position.
One federal court to address this precise issue made the distinction between the cost to defendant to fund an annuity and value of future damages reduced to present value as follows:
The cost of an annuity for the remainder of the injured person’s life is not the measure of recovery for lost or diminished earning power. The measure is, as we have stated, the gross amount of the lost earnings reduced to their present cash value. Plaintiff’s method of proof here sought to hold defendant to the cost of this particular insurance company’s annuity, which of course included a profit to the company, whose interest or discount rate was undisclosed and which was based upon a special annuity life expectancy table indicating an increased life expectancy existing solely because of the annuity itself. An additional reason for inadmissibility of the cost of an annuity is the fact that it does not take into consideration that earning capacity, at least to its fullest extent, does not endure to the end of life expectancy but diminishes with age. We conclude that the trial court erred in admitting the evidence as to the cost of an annuity.9
Similarly, in Herman v. Milwaukee Children’s Hospital (1984) 121 Wis.2d 531, 361 N.W.2d 297, a ten-year-old plaintiff suffered neurological impairment caused by the negligence of the defendant. At trial, defendant Wisconsin Patient’s Compensation Fund offered the testimony of an economist as to the fixed cost of an annuity, arguing that his “testimony would have been relevant to show that a much lower award than that requested, if invested in an annuity, would give the equivalent of the economist’s projected figures for loss of earning capacity.”
The Wisconsin Court of Appeals affirmed the decision of the trial court to exclude this testimony. It first noted that “[u]sing the cost of an annuity contract to measure the present value of future losses [had] never been approved in Wisconsin,” and quoted with approval the Eight Circuit’s recitation of this principle in Farmer’s Union, supra. It further distinguished the concepts and defined the jury’s role:
There is a difference between using a mathematical annuity table to determine life expectancy and using a table showing the cost of annuity contracts paying various amounts for various life expectancies to establish the present value of future losses. [¶] Wis J I–Civil 1796 instructs that future losses must be reduced to present value [analogous to CACI No. 3904; Wis J I--Civil 1797 permits consideration of inflation. Once a jury has discounted a future loss to present value, considering inflation, its task has been accomplished. The jury is not instructed to take into account how much can then be earned with the discounted sum. Admission of annuity evidence could have misled the jury into believing it must award a lesser sum than the present value of the future losses.10
Gusky v. Candler General Hospital (1989) 192 Ga.App. 521, 385 S.E.2d 698 was yet another medical malpractice action in which the plaintiff was rendered totally disabled. In this case, however, the trial court permitted testimony concerning how the proceeds of a pre-trial settlement with a co-defendant could be invested in an annuity to finance the plaintiff’s medical care. Following a judgment for the defense, the Georgia Court of Appeals reversed, stating: “Expert testimony as to annuities which could be purchased with the settlement proceeds is irrelevant as it is antithetical to the requirement . . . that future pecuniary damages are to be reduced by the jury to the present value.”11
Defense counsel will counter this authority with citations to the contrary. One Ninth Circuit case, Scott v. United States (9th Cir. 1989) 884 F.2d 1280, 1288, held that “testimony regarding the cost of purchasing a single premium annuity as a measure of the present value of [the plaintiff’s] economic losses” was relevant and improperly excluded by the trial court. A subsequent unpublished Ninth Circuit opinion followed Scott, noting that “[t]his court has explicitly upheld the use of annuity testimony for the determination of the present value of a damage award.”12
Some state courts have also recognized that testimony concerning annuities is relevant to a determination of the present value of future damages. In Southlake Limousine and Coach, Inc. v. Brock (Ind.App. 1991) 578 N.E.2d 677, the Indiana Court of Appeals opined: “Annuities are another way of calculating present value of damages…. Questioning regarding annuities and the cost of annuities is relevant to determining present value of damages.”13 Similarly, the Washington Court of Appeals has stated: “The cost of an annuity, which carries interest at a known rate, and which . . . may provide for yearly increases to account for expected inflation, is relevant evidence of the present value of future losses. The cost of an annuity thus is not a different, lesser amount [than present value], but is evidence to be considered by the jury in determining present value.”14
- Given the lack of California authority directly on point, and the split of authority in the federal courts and other jurisdictions, counsel preparing a motion in limine to exclude annuitist testimony should focus on the following points:
- No California authority directly addresses the issue of whether annuitist testimony is relevant on the issue of the present cash value of future damages. Emery only stands for proposition that annuity tables may be admissible. In contrast, the MICRA decisions discussed above draw a distinction between the cost of an annuity and present cash value.
- The cost of annuity is affected by a number of factors that are irrelevant to a determination of present cash value, such as insurance company overhead and profit, and the insurance company’s determination of the risk associated with the plaintiff’s life expectancy.
- The cost of an annuity is irrelevant because the plaintiff is not required to accept an annuity in satisfaction of judgment.
- The balance of persuasive authority militates against the inclusion of annuitist testimony.
- Counsel should couple the motion in limine with a request for a jury instruction on present cash value, and be prepared to offer expert economist testimony on discounts rates and inflation factors.
Attack Annuitist Testimony as Improper Expert Testimony
In addition to a theoretical attack on the relevance of annuitist testimony, counsel should be alert to possible objections to the particular annuitist and his proffered testimony. Several courts have excluded annuitist testimony because the expert was unqualified, or the anticipated testimony was otherwise inadmissible.
Unqualified Expert Testimony
In Taylor v. Burlington Northern Ry. Co. (9th Cir. 1986) 787 F.2d 1309, the defendant offered an “insurance broker specializing in structured settlement annuities” to testify on the issue of damages. The district court excluded the testimony on two principal grounds. First, because the broker was not qualified to testify on the plaintiff’s economic loss, his opinion on the cost of various annuity plans was irrelevant. Second, the court feared that the jury might conclude that the plaintiff had to purchase an annuity, and the jury might therefore be misled. The Ninth Circuit affirmed the exclusion of the testimony.15
Similarly, in Adams v. Children’s Mercy Hospital (Mo. App 1993) 848 S.W.2d 535, a tragic mishap in the operating room rendered the eight-year-old plaintiff severely brain damaged, blind, and neurologically impaired. At trial, defendant hospital sought to introduce an annuitist as an expert witness, arguing that an annuity was a “valid and alternative means of proving the present value of plaintiff’s future damages.”16 Plaintiffs filed a motion limine to exclude this testimony, which the trial court granted.
In reviewing this ruling, the Missouri Court of Appeals noted that this was a case of first impression for its state, but that “[o]ther states have addressed this issue and found testimony from an annuitist to be irrelevant and misleading.”17 The court concluded that the trial court’s decision to exclude the proffered testimony was correct in the case before it:
In granting plaintiffs’ motion in limine and denying appellant’s offer of proof, the trial court concluded that the proposed expert was not an economist, but was actually a salesperson. Mr. Pavlini admitted in his deposition testimony that he was neither a tax expert, an economist or a rehabilitation counselor. He labeled himself as a “structured settlement specialist.”
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The trial court found that Mr. Pavlini’s testimony would not be helpful to the jury and, in fact, had the potential of confusing and misleading the jury regarding their award of damages for Nicole Adams’ injuries. This court finds no abuse of discretion on the trial court’s part in prohibiting Mr. Pavlini from testifying about annuity contracts.18
Counsel may also attack the annuitist testimony as hearsay. Proffered annuitist testimony often takes the form of a “quote” provided by an insurance company. At least one court has found this to be impermissible hearsay.
In Gregory v. Carey (1990) 246 Kan. 504, 791 P.2d 1329, the Kansas Supreme Court held that the trial court had properly excluded the testimony of an annuitist. “Even if the witness was an expert in annuity contracts, his testimony regarding [an insurance company’s] quote for the annuity was not based on fact or data perceived or personally known or made known to him and was outside the knowledge, skill, experience, and training possessed by the witness. Under the facts of this case, the trial court properly excluded the hearsay testimony of the witness.”19
A final possible approach to be considered is to argue that the proffered annuitist testimony is pure speculation. First, annuity quotes are limited in time and dependant upon circumstances which can change drastically between the time the testimony is offered and the time any annuity may be purchased, which may be perhaps years later depending upon the appeals process. An annuity quote is a moving target; there is no assurance that an annuity as quoted will be available at the time the plaintiff needs it to satisfy an award of future damages. Further, counsel can direct the trial court’s attention to the fact annuities are inherently speculative, given the high rate of insolvency in the insurance business.20 An annuity is at heart no more than an promise to pay future damages, founded on a potentially speculative investment. Finally, since an annuitant’s testimony is based solely on evidence provided by defendants. It is especially pernicious when an age-rated annuity is offered. Allowing an annuitant to testify to such an annuity in effect permits the annuitant to testify on an ultimate issue on which he is not qualified to opine-the life expectancy of the plaintiff.
In cases involving significant future damages, plaintiffs can expect defendants to offer annuitist to offer testimony concerning the cost of an annuity as a measure of the present cash value of plaintiff’s damages. Plaintiff’s counsel should anticipate and vigorously oppose this tactic. Preemptively, plaintiffs should retain and disclose an economist to testify as to present cash value using the tradition “investment” method. If an annuitist is disclosed, plaintiffs must file a motion in limine to exclude this testimony on the grounds that it is irrelevant, hearsay, and speculative, and/or the “annuitist” is unqualified to offer the proffered testimony.
4 Salgado v. County of Los Angeles (1998) 19 Cal.4th 646-647 (emphasis in original).
5 Comment, BAJI No. 16.01(4) (emphasis added); see Salgado, supra at 651.
6 Nguyen v. Los Angeles County Harbor/UCLA Med. Cntr. (1996) 40 Cal.App.4th 1433, 1454 [§ 6146 (MICRA attorney’s fees)]; Hrimnak v. Watkins (1995) 38 Cal.App.4th 946, 979-980 [§§ 3291, 6146 (prejudgment interest, MICRA attorney’s fees); Schneider v. Kaiser Foundation Hospitals(1989) 215 Cal.App.3d 1311, 1314 [§ 6146 (MICRA attorney’s fees)].
7 See, e.g., Salgado, supra at 636; Hrimnak v. Watkins (1995) 38 Cal.App.4th 964, 979 [referring to the investment approach as the “traditional manner”]; Atkins v. Strayhorn (1990) 223 Cal.App.3d 1380, 1398-99; Canavin v. Pacific Southwest Airlines (1983) 148 Cal.App.3d 512, 521.
8 Holt, supra at 879-880 (citations and footnote omitted, emphasis added).
9 Farmers Union Federated Co-op. Shipping Ass’n v. McChesney (8th Cir. 1958) 251 F.2d 441, 444.
10 Id. at 306.
11 Id. at 701.
12 Bennett v. Hospital Corp. of America No. 89-35059, 1990 WL 119096, at *1 (9th Cir., Aug 14, 1990).
13 d. at 682, 684.
14 Cornejo v. State (Wash.App. 1990) 57 Wash.App. 314, 328, 788 P.2d 554, 562.
15 d. at 1315-1316.
16 Id. at 545.
17 Id. (footnote discussing Farmer’s Union, Herman, and Gusky, discussed supra, and Gregory, discussed infra, omitted).
18 d. at 544-545.
19 Id. at 1333.
20 As of this wring, there are 50 insurance companies in conservation or liquidation, and 216 insurance companies in closed liquidation in California. See http://www.caclo.org for listings of these companies posted by the Conservation & Liquidation Office of the California Insurance Commissioner.