Determining loss of earning capacity; formula

The law allows recovery of actual damages for loss of earning capacity in consideration of the heirs of the deceased or those who are legally entitled to support from the deceased. The damages do not pertain to the full amount of foregone earnings, "but of the support they received or would have received from [the deceased] had he not died in consequence of the negligence [or fault] of [the tortfeasor or the accused]."[1]This form of actual damages quantifies the loss of the deceased's family in terms of financial support they will receive from the deceased. A widow does not only grieve for the loss of her husband; she also has to worry about finding an additional source of livelihood. The condition is often worsened when the deceased is the sole breadwinner of the family and the family is already experiencing difficulties making ends meet. While this might not always be the case, the law devised the concept of actual damages in the form of loss of earning capacity to ensure that a part of the family's loss is mitigated.

The computation for loss of earning capacity was extensively discussed in the 1970 case of Villa Rey Transit v. Court of Appeals.[2] In Villa Rey Transit, the Supreme Court considered two factors in determining loss of earning capacity, which are: "(1) the number of years on the basis of which the damages shall be computed; and (2) the rate at which the losses sustained by said respondents should be fixed."[3] The number of years is often pegged at life expectancy (instead of work expectancy), while the rate of losses is derived from annual income. The general formula applied is:

Net Earning Capacity = Life Expectancy x [Gross Annual Income - Necessary Expenses]

To approximate the first factor of life expectancy, the Supreme Court has applied the formula in the American Expectancy Table of Mortality or the actuarial of Combined Experience Table of Mortality.[4] Hence:

Life Expectancy = 2/3 x (80 — age of the deceased at time of death)

Later, in People v. Quilaton,[5] the use of the 1980 Commissioner's Standard Ordinary Mortality Table was suggested to take into consideration longer life expectancy in the Philippines.[6] However, the formula used was not shown and the table was not published for easier reference. Hence, succeeding cases reverted back to the formula in Villa Rey Transit.

The problem with both Villa Rey Transit and Quilaton is that these cases relied on American mortality tables. In addition, these tables were antiquated and were devised under conditions prevailing during that time. The American Expectancy Table of Mortality used in Villa Rey Transit was developed in I860.[7] The Commissioner's Standard Ordinary Mortality Table was a slight improvement, considering that the table was developed in 1980. The standard of living and modern medicine has prolonged life expectancy in the past 150 years; hence, it is not reliable to base life expectancy on a formula made in 1860. In addition, living conditions in the Philippines are different from living conditions in the United States. Continued reliance on the Villa Rey Transit doctrine to determine life expectancy might already be incompatible to modern Filipinos.

One author suggested that an alternative to the Villa Rey Transit equation to determine life expectancy is the use of the Philippine Intercompany Mortality Table.[8] The Commission on Population also creates life table estimates for the Philippines, and the data is classified by geography and sex, which can also be used as basis for life expectancy in the Philippines.

With respect to the second factor, or the rate at which the losses sustained by said respondents should be fixed, this court used the general formula of gross annual income less necessary expenses.

Villa Rey Transit explains why necessary expenses should be deducted from annual income. The beneficiaries are only entitled to receive what they would have received if the deceased had stayed alive. Hence:

... it has been consistently held that earning capacity, as an element of damages to one's estate for his death by wrongful act is necessarily his net earning capacity or his capacity to acquire money, "less the necessary expense for his own living." Stated otherwise, the amount recoverable is not the loss of the entire earning, but rather the loss of that portion of the earnings which the beneficiary would have received. In other words, only net earnings, not gross earning, are to be considered, that is, the total of the earnings less expenses necessary in the creation of such earnings or income and less living and other incidental expenses.[9]

In Negros Navigation v. Court of Appeals,[10] the Supreme Court made a general rule that only 50% of gross annual income redounds to the benefit of the beneficiaries, while 50% is considered reasonable and necessary expenses for the support and maintenance of the deceased earner. "To hold that she would have used only a small part of her income for herself, a larger part going to the support of her children would be conjectural and unreasonable."[11] People v. Aringue[12] translated it into formula form:

Net Earning Capacity = Life Expectancy x [Gross Annual Income - Reasonable and Necessary Living Expenses (50% of Gross Annual Income)]

A majority of cases involving loss of earning capacity adopted the life expectancy formula set in Villa Rey and the formula for net annual income set in Aringue.

The Regional Trial Court used a simplified formula to compute for loss of earning capacity citing People v. Reanzares.[13]

Loss of Earning Capacity

= [2/3 x (80 - age of the deceased)] x 1/2 - annual gross income

This is a step-by-step guide to compute an award for loss of earning capacity.

(1) Subtract the age of the deceased from 80.

(2) Multiply the answer in (1) by 2, and divide it by 3 (these operations.are interchangeable).

(3) Multiply 50% to the annual gross income of the deceased.

(4) Multiply the answer in (2) by the answer in (3). This is the loss of earning capacity to be awarded.

When the evidence on record only shows monthly gross income, annual gross income is derived from multiplying the monthly gross income by 12. When the daily wage is the only information provided during trial, such amount may be multiplied by 260, or the number of usual workdays in a year,[14] to arrive at annual gross income.

[1]  Villa Rey Transit v. Court of Appeals, 142 Phil. 494, 500 (1970) [Per C.J. Concepcion, Second Division].
[2] 142 Phil. 494 (1970) [Per C.J. Concepcion, Second Division].
[3] Id. at 500.
[4] Id.
[5] G.R. No. 69666, January 23, 1992, 205 SCRA 279 [Per J. Feliciano, Third Division].
[6]  Id. at 289.
[7] Romeo C. Buenaflor, Estimating Life Expectancy and Earning Capacity: Observations on the Supreme Court's Determination of Compensatory Damages for Death and Injury, 70 Phil. L. J. 99, 116 (1995).
[8] Id. at 119.
[9] 142 Phil. 494, 500 (1970) [Per J. Mendoza, Second Division].
[10] 346 Phil. 551 (1997) [Per J. Puno, Second Division].
[11] Id. at 568.
[12] 347 Phil. 571 (1997) [Per J. Pardo, First Division].
[13] 390 Phil. 115 (2000) [Per J. Bellosillo, En Banc].
[14] This is under the presumption that an,average laborer works 5 days a week and 52 weeks in a year. This value should change if the laborer's work days are different.