MINI CASE

Allison Boone, M$.$D$.$

Allison Boone had been practicing medicine for seven years. Her specialty was neurology. She received her bachelor$$s degree in chemistry from the University of Toronto and her M$.$D$.$ from McMaster University. She did her residency at Toronto General Hospital. Allison practiced neurology in a clinic with three other doctors in Toronto. Her husband, Samuel L$.$ Boone, held an administrative position at the Toronto Dominion Bank. Allison and Samuel had been married for five years and were the parents of young twin sons, Todd and Trey. They lived in the Beaches area in a beautiful four$-$room house overlooking Lake Ontario.

Allison normally left for work at $7$:$30$ a$.$m$.$ and closed her office at $5$:$30$ p$.$m$.$ to return home. On Tuesday, July $6,2023,$ at $5$:$15$ p$.$m$.,$ she received an emergency call from Toronto General Hospital and immediately went to the hospital to help a patient who had suffered serious brain damage. When she had administered aid and helped prepare the patient for surgery, it was $11$:$00$ p$.$m$.$ On her way home along Lakeshore Boulevard, she was confronted head$-$on by a drunken driver going over $110$ kilometers an hour. A crash was inevitable, and Allison and the other driver were killed instantly. The drunken driver was making a late delivery for Wayland Frozen Foods Inc.

Legal Considerations

The families of both drivers were devastated by the news of the accident. After the funeral and explaining the situation to the children, Samuel Boone knew he must seek legal redress for his family$$s enormous loss. Following interviews with several lawyers, he decided to hire Sloan Whitaker.

Whitaker was with a Toronto law firm $($Hanson$,$ Whitaker, and Thomason$)$ specializing in plaintiff lawsuits. He had been in practice for over $20$ years since graduating from Osgoode Law School.

When Whitaker began his investigation on behalf of Samuel Boone and his family, he was surprised to find out the driver of the delivery vehicle had a prior record of alcohol abuse and that Wayland Frozen Foods Inc. had knowledge of the problem when it hired him. It appears the driver was a relative of the owner, and at the time of employment he revealed what he termed $$a past alcoholic problem that was now under control.$$ In any event, he was acting as an employee for Wayland Frozen Foods in using its truck to make a business related delivery at the time of the accident. The fact that he was speeding and intoxicated at the time of the impact only increased the legal exposure for Wayland Frozen Foods.

After much negotiating with the law firm representing Wayland Frozen Foods $($and its insurance company$),$ Whitaker received three proposals for an out$-$of$-$court settlement to be paid to Allison Boone$$s family. The proposals intended to replace the future earnings of Allison Boone, less any of the earnings she would have personally needed for her normal living requirements. Also, the value that she provided for her family as a wife and mother, quite aside from her earning power, had to be considered. Finally, there was the issue of punitive damages that Wayland Frozen Foods was exposed to as a result of letting an unqualified driver operate its truck. If the case went to court, there was no telling how much a jury might assign to this last factor.

The three proposals are listed below. An actuarial table indicated that Allison, age $37$ at the

time of the accident, had an anticipated life expectancy of $40$ more years.

Proposal $1$ Pay the family of Allison Boone $$300,000$ a year for the next $20$ years, and

$$500,000$ a year for the remaining $20$ years.

Proposal $2$ Pay the family a lump$-$sum payment of $$5$ million today.

Proposal $3$ Pay the family of Allison Boone a relatively small amount of $$50,000$ a year

for the next $40$ years, but also guarantee them a final payment of $$75$ million

at the end of $40$ years.

To analyze the present value of these three proposals, Whitaker called on a financial expert to do the analysis. You will aid in the process.

a$.$ Using a current long$-$term interest rate which is $6\%,$ recommend a proposal to the Boone family recommending which of the three alternatives provides the highest present value? $(6)$

b$.$ Now assume that a discount rate of $11$ percent is used. Which of the three alternatives

provides the highest present value? $(6)$

c$.$ Explain why the change in outcome takes place between part a and part b$.(1)$

d$.$ If Whitaker thinks punitive damages are likely to be $$4$ million in a jury trial, should he be more likely to settle out of court or go before a jury? $(2)$