Court sets aside RAF cap for high earners

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Pretoria - In a groundbreaking but highly technical judgment for Road Accident Fund (RAF) victims, the Western Cape High Court has ruled on how the annual estimated loss of income should be actuarially calculated to benefit higher-income accident victims.

This was prompted by a multimillion-rand claim by Elizabeth Sweatman, who was 15 when she was severely injured in a car accident. While the parties settled most of the disputes, the actuaries of Sweatman and the RAF adopted slightly different methodologies, resulting in substantially different awards.

Actuary Gregory Whittaker, who was involved in the case, explained the judgment, saying: “The court has resolved a dispute concerning the interpretation and application of Section 17(4)(c) of the RAF Act and more specifically the method of actuarially calculating the annual loss for the purposes of applying the statutory cap.

“Since the vast majority of South Africans earn less than the annual cap (R213 675 a year), the calculation of their claims for loss of income will not be affected by the cap.

“Conversely, in the cases of high-income earners, their actual losses may exceed the amount of the cap. Their claims will accordingly have to be calculated on the basis of the cap, in other words their ‘annual loss’ will be limited in each year to the cap.

“Judge BM Griesel found in favour of an approach adopted by actuaries Ian Morris, George Schwalb and myself. In particular it was held that the actual loss must be calculated, using the traditional year-by-year method which makes due allowance for mortality, tax, and contingencies in each year, and discounting to present-day value using a net capitalisation rate. The loss in each year must then be compared with the cap and the lesser of the two amounts claimed.

“As an example, for a 40-year-old male earning R1 million a year and rendered unemployable in an accident on December 1, 2013, the present value of his loss from age 40 to age 65 before the implementation of the RAF Amendment Act would have been about R 9.9m after a 15 percent contingency deduction.”

With the implementation of the statutory cap on losses, the method proposed by Morris, Schwalb and Whittaker would arrive at a loss of R5.3m. The RAF’s approach would arrive at a loss of R3.7m.

“In terms of the judgment, the capped loss of R 5.3m would be favoured over the capped loss of R3.7m.”

Judge Griesel said the transport minister had explained that the amendment act was an attempt to limit the liability of the fund by introducing the cap for amounts paid in compensation for loss of income and support.

The initial limit was R600 000 and based on information that demonstrated that between 2000 and 2004 only 4 percent of victims could substantiate a claim higher than this amount for loss of income.

The judge said some claims had been much higher than this amount. For example, a Swiss man injured in South Africa while on holiday had claimed R4.4bn. The matter was eventually settled for R500m.

“Although the number of mega-claims was small, they consumed a disproportionately large percentage of the fund’s resources,” the judge said.

He said placing a cap on all claims was also criticised as having a negative impact on some.

Because most people in this country earned less than the annual cap, the calculation of their claim for loss of income would not be affected and their claims would continue to be calculated according to the traditional method, Judge Griesel said. His order would affect only highly paid individuals, such as company executives and professionals, he said.

Whittaker said the judgment would be binding on matters heard in the Western Cape High Court, but other high courts could look at it for guidance. Sweatman was awarded R3.3m.

Pretoria News

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