Recovering Loss of Earning Capacity Damages When the Plaintiff Is Self-Employed
The plaintiff in Keiser-Long v. Owens, 2015 IL App (4th) 140612, a self-employed cattle buyer, sued for injuries she suffered in a car accident with the defendant. The defendant admitted negligence and the parties went to trial on damages.
The defendant successfully moved for a directed verdict on plaintiff’s attempt to recover for lost earning capacity at trial and the Plaintiff appealed.
Reversing, the Fourth District appeals court expanded on the potential damages a personal injury claimant can recover where the plaintiff is self-employed and doesn’t draw a formal salary from the business she operates.
Illinois allows a plaintiff in a negligence suit to recover all damages that naturally flow from the commission of a tort. Impaired earning capacity is a proper element of damages in a personal injury suit. However, recovery is limited to loss that is reasonably certain to occur. Lost earning capacity damages are measured by the difference between (a) the amount a plaintiff was capable of earning before her injury; and (b) the amount she is able to earn post-accident.
Lost earning capacity damages focus on an injured person’s ability to earn money instead of what she actually earned before an injury. That said, a plaintiff pre- and post-accident earnings are relevant to a plaintiff’s damages computation. ¶ 37.
Where a plaintiff is self-employed, a court can consider the plaintiff’s company’s diminution of profits as evidence of a plaintiff’s monetary damages where the plaintiff’s services are the dominant factor in producing profits. By contrast, where a self-employed plaintiff’s involvement is passive and she relies on the work of others to make the company profitable, a profits reduction is not a proper damage element in a personal injury action.
The trial court granted the defendant’s motion for directed verdict since the plaintiff failed to present evidence that she lost income in the form of a salary or bonus from her cattle-buying business.
The appeals court reversed. It noted that the plaintiff was solely responsible for her company’s profits and was the only one who travelled around the State visiting various cattle auctions and meeting with cattle sellers. Plaintiff also offered expert testimony that she missed out on the chance to earn some $200,000/year in the years following the accident and that any company profits were labeled “retained earnings” and treated as the plaintiff’s personal retirement plan ¶¶ 41-43.
The court held that since the plaintiff was the only one whose efforts dictated whether her cattle buying business was profitable or not, her business’s post-accident balance sheet was relevant to her recoverable damages.
The court also rejected the defendant’s argument that since plaintiff’s company was a C corporation (and not an S corp.1), profits and losses did not flow through to the plaintiff, the court should not have considered lost business income as an element of plaintiff’s damages. The court found that any tax differences between C and S corporations were irrelevant since plaintiff was the cattle company for all intents and purposes. As a result, any loss suffered by the company was tantamount to monetary loss suffered by the plaintiff. ¶¶ 45-46.
The court’s final reason for reversing the trial court was a policy one. Since the plaintiff’s corporation couldn’t sue the defendant, there was no potential for double recovery. In addition, if the court prevented the plaintiff from recovering just because she didn’t earn a formal salary, this would operate as an unfair windfall for the defendant. The end result is now the parties must have a retrial on the issue of plaintiff’s lost earning capacity. ¶¶ 46-47.
Owens provides a useful synopsis of when impaired earning capacity can be recovered in a personal injury suit. In the context of a self-employed plaintiff, a plaintiff’s failure to draw a salary per se will not foreclose her from recovering damages; especially where the plaintiff – and not someone working for her – is the one mainly responsible for company profits. In cases where the plaintiff is self-employed and is singularly responsible for a company’s profits, a loss in business income can be imputed to the defendant and awarded to the business-owner plaintiff.
1 A C corporation is taxed at both the corporate level and at the shareholder level. By contrast, an S corporation is not taxed at the corporate level; it’s only taxed at the shareholder individually. (This is colloquially termed “flow-through taxation.”)