Case Background
In 1998 an 80,000 pound Dick Simon tractor trailer went too fast around a downhill curve and rolled over into the path of a sedan, instantly killing the driver, Patricia and her six year old son, Angelo. Patricia's eight-year-old son, Anthony Rynes, survived, but his skull was severely fractured, as was his arm, leg and thoracic spine. Significantly, Anthony's frontal and temporal lobes were severely damaged, permanently crippling his executive functioning, intelligence and behavior control. Dick Simon Trucking admitted liability, and it conceded that Anthony needed life long care in a brain injury facility that cost $16,000 per month. The parties hotly disputed how to pay for that care.

Six months before trial, Dick Simon Trucking filed a motion in limine seeking to admit annuity evidence as it relates to the present value of future care damages. Dick Simon Trucking contended that the premium cost of a single premium annuity that would pay $16,000 per month for the rest of Anthony's life was equal to the present value of the stream of income the annuity would pay. Over Gallegos' strenuous objection, the court granted the motion, subject to the parties submitting a jury instruction about annuities.

Battle lines were drawn. Gallegos would try to prove present value the traditional way using discount rates, inflation rates and a disputed term of years over which the payments would extend. Gallegos contended that Anthony would live a normal life expectancy of an additional 66 years. They also contended that his care cost would inflate at 8% to 11% annually, a far greater rate than that which could be earned by the corpus invested in Treasury Bills. By this approach, they concluded that the present value of Anthony's future care cost would be 14 to 52 million dollars.

On the other hand, Dick Simon Trucking planned to introduce the much lower annuity costs of 4.1 to 5.7 million dollars, depending on inflation rates of 4% to 6%. The wide gap in the parties' amounts was attributable to the inflation rates expected for this type of care, and how the annuity issuer sets the premium. To set a premium annuity issuers make an underwriting judgment about how long the beneficiary will likely live. In Anthony's case, underwriters studied his medical history, and, based on his preexisting condition and injuries, determined that he would likely not live a full life, but would likely live 27 fewer years than a healthy 11 year old. The company "rates" his expectancy as the same as someone in the population of 38-year-old men, giving Anthony a "rated age" of 38. The population of 38 year olds have a life expectancy of another 38 years, to age 76. As Anthony was in this group for underwriting purposes, the annuity issuer projected it would likely pay for 38 years, as opposed to plaintiff's 66 years. By issuing the lifetime annuity, the company guarantees to pay for the life of the beneficiary, no matter how long he lives, so it takes the risk that he will outlive its underwriter's projections.

Trial
In its opening statement, Dick Simon Trucking promised to introduce evidence of a new way to pay for Anthony's care: with a single premium annuity guaranteed to pay for his entire life. Dick Simon Trucking promised that the annuity evidence would simplify the complex and confusing old way of computing the present value of the long term care cost: the premium is the present value of the payments guaranteed under the annuity. Dick Simon Trucking promised to show that the proposed annuity would be from a large reliable company that had never missed an annuity payment in 80 years.

Throughout the Gallegos case, Dick Simon Trucking laid the groundwork for its annuity evidence. It asked Anthony's guardian whether he had considered buying an annuity for Anthony's benefit. He was asked how much a financial advisor would charge to manage millions of dollars if the entire corpus was not invested in an annuity. If a financial manager charged just 2% of $15,000,000, it would cost Anthony $300,000 a year or $25,000 a month. On the other hand if an annuity was bought, no financial management would be needed, and this high annual cost would be avoided. Further, Gallegos' economist was asked whether annuities were a sensible investment vehicle and why. Finally, Dick Simon Trucking put Anthony's life expectancy into issue through his treating doctors, so it could later argue that no matter how long he lived, the lifetime annuity would pay.

Gallegos rested. Dick Simon Trucking's first witness was a physician who discussed Anthony's life expectancy, again to dovetail with the annuity's lifetime care feature. Then the court unexpectedly granted Gallegos' motion to reconsider the order permitting annuity evidence. It excluded all evidence of annuities on the ground that "the testimony asked the jury to decide how to invest the damage award." Dick Simon Trucking's annuity expert, an executive from an international life insurance company that issues annuities, did not take the stand. Gallegos did not, therefore, voir dire the expert on his qualifications or foundation for his opinion. Nor was Dick Simon Trucking's economist permitted to testify about annuities, so his qualifications and bases for his opinions regarding annuities were not elicited.

The ruling disallowing annuity evidence prompted Dick Simon Trucking to move for a mistrial, because it would not be able to fulfill the promises it had made to the jury. The motion was denied, so Dick Simon Trucking had no choice but to prove present value using the traditional method of projecting inflation rates, investment return rates, Anthony's likely life span, and so on. A verdict was returned for $16.4 million. An even $12 million was awarded for future long term care costs. Interviews with jurors revealed that they found the present value evidence and calculations too confusing, so they simply multiplied the yearly cost by the number of years a healthy 11 year old would live and rounded the result to $12 million.

Dick Simon Trucking posted a $20 million bond and appealed. Michael D. Zimmerman and Tawni J. Sherman of Snell & Wilmer, submitted the briefs on behalf of Dick Simon Trucking, Inc. The judgment accrued post judgment interest at 7.34%, approximately $100,000 per month. Dick Simon Trucking appealed only the $12 million long term care cost award. It satisfied all other amounts of the judgment. It abandoned all other errors on appeal for three reasons. First, this would allow the briefing to focus solely on the annuity issue, avoiding the risk that this critical issue would be diluted by other assignments of error. Second, if the case were reversed and remanded for a new trial, Dick Simon Trucking did not want to retry the other issues, such as general damages, and other special damage numbers, because the jury had awarded reasonable amounts for these damage categories. Moreover, at re-trial, Dick Simon Trucking would avoid damaging evidence about the accident, Anthony's long recovery, and other evidence that could inflate a second verdict. Dick Simon Trucking wanted the second trial to focus solely on long term care costs and the present value of those costs. Third, if Dick Simon Trucking lost the appeal, at least it would have saved a portion of post judgment interest by satisfying the uncontested portions of the judgment.

The Decision
Without a hearing, the Court of Appeals reversed. In an opinion by Judge Norman H. Jackson, the court held that it was harmful error to exclude all evidence of annuities. It remanded for a new trial, and ordered that the annuity evidence be admitted if proper foundation were laid for the evidence. Trial will be held in September 2006. Three issues controlled the decision: the standard of review, the meaning of Utah Rule of Evidence 702, and harmful error analysis.

Judge Jackson first noted that the trial court did not consider whether Dick Simon Trucking's annuitist was qualified as an expert, observing that there had been no voir dire of the witness about his knowledge of the basis for the annuity quote. Nor was there any consideration by the trial court of Dick Simon Trucking's economist's knowledge of annuities, or whether Dick Simon Trucking could lay a foundation for the economist's knowledge of the basis of the annuity costs. Judge Jackson differentiated between the clearly erroneous standard of review, which would apply to a trial court's decisions about an expert's qualifications and the foundation for an opinion, and the correctness standard that would apply to legal determinations, such as the application of a privilege or the admissibility of evidence. Given that the trial court's decision was not based on Dick Simon Trucking's experts' qualifications or foundations for their opinions, the clearly erroneous standard of review did not apply. Rather, Judge Jackson noted that the trial court had made a legal determination that all annuity evidence was inadmissible, and hence the correctness standard of review would apply.

The legal issue was the following: May a party introduce evidence of annuity cost? The Model Utah Jury Instructions require the jury to reduce awards of future damages to present value, an "almost impossible" job for the jury to tackle without expert help, noted the Court. Courts in Illinois and Wisconsin had rejected annuity evidence, but for reasons the court found to be unpersuasive,1 while courts in two federal circuits and ten states allow it because it is helpful to the jury.2 Judge Jackson acknowledged that more information, not less, about present value would help the jury determine the cost today of income for the future, under Utah Rule of Evidence 702.

Finally, the court found that the trial court's legal error was harmful. The mistake undermined the Court of Appeals' confidence in the outcome, such that the error probably affected the outcome of the trial. Gallegos' present value ranged from $14 million to $52 million. Dick Simon Trucking's rejected proffered present value, based on the annuity premium, was $4.1 million to $5.7 million. Left with using the traditional discount rate method of calculating present value, Dick Simon Trucking set a floor of $4.9 million to $6.6 million. The jury awarded $12 million. In finding the error was harmful, the court implicitly found that the annuity evidence of present value was straightforward and convincing, and that had it been heard, it probably would have been believed, so the verdict would have probably been lower.

Juror interviews revealed that some jurors were so confused by the present value labyrinth, that the jury did not reduce the amount to present value. It simply multiplied the annual cost of Anthony's care by the number of years left in a normal life expectancy. The verdict could not be impeached via juror affidavits, but the fact that Dick Simon Trucking was denied the reduction to present value to which it was entitled, may have contributed to the harmful error found by the court. After all, a hallmark of the annuity evidence is that it is more understandable and less complex than the traditional approach to calculating present value. The court likely reasoned that had the jury heard the evidence, it likely would have applied it to reduce the future award to present value.

Implications
Gallegos changes the way cases with long term future damages will be tried. From now on defendants will likely devise ways to persuade the jury to use annuity premium evidence to determine present value. Defendants should consider using a three expert team comprised of an economist, an annuity broker, and an expert from the annuity industry, such as a company executive, or actuary. Through this team the jury would learn about present value and the problems with the traditional, more complex approach. It would then learn about annuities and that the premium cost is the present value of the payments promised under the single premium annuity. Finally, it would learn how large, stable insurance companies manage annuities to be sure that payments are made, and that annuities are a reasonably prudent and safe investment tool. The three expert approach is detailed next.

The economist would testify first, setting the stage for the team's evidence. It is critical that the jury understand that present value is the amount needed today for a payment in the future. The economist will simplify and teach the basics of present value, and will explain that the plaintiff's present value analysis contains too many assumptions and risky speculative forecasts to be reliable. In addition, plaintiff's economist will use life expectancy tables to calculate how may years funds will be needed. Yet few people live the exact expected lifetime, so plaintiff's assumption that plaintiff will live a certain number of years nearly always provides either too much or too little money for the projected needs.

To set the groundwork for the annuity evidence, the economist will then explain how different investment vehicles work and their comparative risks and rewards. Annuities will be introduced as another investment option, with emphasis on single premium life annuities with a guaranteed payout. Through the economist, the jury will know that in exchange for a single upfront premium, the annuity company will contract to pay a stream of monthly payments for the rest of plaintiff's life. From this foundation, the economist will then explain that the premium amount, the amount that is presently paid, represents the present value of the future payments expected under the annuity contract. Stated another way, the premium is the present value of the future annuity payments. Finally, the proposed annuity would include annual upward adjustments to anticipate inflation.

The features and costs of an annuity would then be contrasted by the economist with the risks and unreliability of the plaintiff's approach. With the annuity there are few assumptions and forecasts to be made by the jury about length of life, inflation fluctuations, rates of return and risks of various investments. Instead, the annuity market sets the present value through setting a premium. It is a market driven present value, not one derived by courtroom experts. Relying on the annuity premium as the present value also allows the jury to avoid the confusing and intimidating present value formulas and calculations. The economist would also explain that life annuities pay for as long as the plaintiff lives, guaranteed. It will never pay too little, or too much, eliminating the inherent risks of the current approach. A life annuity is the perfect compensatory tool.

Finally, the economist will address the annuity feature that plaintiffs frequently attack: If the plaintiff dies prematurely, the annuity company keeps the premium, enjoying a windfall at the plaintiff's expense. To forestall a windfall, the economist will explain that the proposed annuity will pay for a certain number of years, even if the plaintiff dies prematurely to ensure that plaintiff's estate over time will receive the premium originally invested.

Next, an annuity broker would explain how to pick a reliable safe company by using the ratings available on each company. Then the broker would present quotes for the same annuity from half a dozen well-rated, large and stable companies, giving the jury a good overview of the market price for the annuity. There will likely be disputes about the monthly amount and likely future inflation necessary to meet plaintiffs future economic needs, so the broker will present quotes for annuities at various monthly payment amounts at different inflation rates. Annuity tax advantages would then be reviewed, specifically that the annuity payments, including earnings, are not taxed when the annuity is purchased through a defendant. This is a tremendous advantage when compared to the capital gain taxes that plaintiff would have to pay if she invested judgment proceeds in stocks and bonds.3

Next the broker would explain the spendthrift features of life annuities. That is, by allowing the annuity carrier to manage her funds, plaintiff avoids the real risk that she or her advisors would manage a lump sum poorly, perhaps dissipating the funds completely. Purchasing an annuity also avoids costly financial management fees. Moreover, it allows plaintiff to focus on rehabilitation instead of money management. Finally, the broker would state that she would not place any annuity that the plaintiff might buy, but would leave that to plaintiff's broker. This will obviate any bias by the broker.

The third expert would be an actuary or an executive with substantial experience in the life annuity industry. This expert would explain how large highly rated companies manage money for long term stability, as they are world wide experts in long term financial management. Through explaining how many annuities the highlighted companies have issued, and that they have never missed a payment, this expert should convince the jury that an annuity with a highly rated company is a reasonably prudent investment.

Some small poorly capitalized companies in the annuity business have gone out of business. Plaintiffs rely on this fact to argue that the defendant's proposed investment method is fraught with risk. This expert would easily counter the argument by showing that the companies that have quoted the subject annuities have not failed, nor are they at risk to fail. He or she will also explain that the companies that did fail were new, small and poorly capitalized.

By following this general presentation of evidence, a defendant stands a good chance of convincing the jury that annuity evidence is a helpful tool by which to calculate present value. This will likely lower the potential verdict range in cases involving long term future damages. In turn, the effects of the Gallegos decision will likely lower settlement value of cases like this, because the exposure to an excessive verdict will be lower.

1. See Wingo v. Rockford Memorial Hosp., 686 N. E. 2d 722 (Ill. Ct. App. 1997); Herman v. Milwaukee Children's Hosp., 361 N. W. 2d 297 (Wisc. Ct. App. 1984).

2. See, e.g., Scott v. United States, 884 F.2d 1280 (9th Cir. 1989); Thomas v. Whiteside, 421 P.2d 449 (Mont. 1966); Rayner v. Lindsay, 138 So. 2d 902 (Miss. 1962); Southlake Limousine and Coach, Inc. v. Brock, 578 N. E. 2d 677 (Ind. Ct. App. 1991); Cornejo v. State, 788 P.2d 554 (Wash Ct. App. 1990); Atchinson, Topeka & Santa Fe R. R. Co. v. Ham, 454 S. W. 2d 451 (Tex. Civ. App. 1970).

3. See I. R. C. ¤ 104(a)(2)(1986); Treas Reg ¤ 1.104-1(c); P. L. 97-473 ¤ 101(a), inserting the parenthetical language "whether as lump sums or as periodic payments" into I. R. C. ¤ 104(a)(2); Rev. Ruls. 79-313, 1979-2 C. B. 75; 79-220, C. B. 74; 77-230, 1977-2 C. B. 214.