Canadian Underwriter

Peas In A Pod?

January 1, 2004   by Saqib Durrani

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Gone are the days where insurers required simple calculations to estimate a loss of income claim under Ontario’s auto insurance legislation. This is particularly the case when claims are made by self-employed individuals or business owners.

The situation becomes significantly more complex in the latter instance due to the fact that self-employed individuals tend to utilize sophisticated financial arrangements for income tax efficiency purposes. This tendency has caused insurers problems with calculating loss of income claims, and has required them to contract the services of economists and accountants to investigate the true financial picture of these individuals. Are insurers applying the appropriate methodology in their assessments?

The assessment of economic losses to a self-employed individual caused by a personal injury involves an in-depth analysis and a tailored methodology specific for the circumstances. In typical cases involving personal injury to a self-employed individual, the loss of income is quantified by calculating the difference between the self-employed individual’s expected income before the injury and the self-employed individual’s actual earnings since the injury.

But, there are a number of issues that insurers should be aware of in quantifying economic losses of a self-employed individual. The following discussion points to some of the issues that practitioners should be aware of when calculating the loss of income of a self-employed individual.


One of the issues in assessing the loss of income claim by a self-employed individual is ascertaining pre-accident income. The earnings of a self-employed individual usually cannot be assessed simply by reference to receipts over a period of weeks, since the gross income is usually not received uniformly over the year. Moreover, self-employed individuals experience substantial variations in their income year-to-year.

Further complicating the matter is that the income of self-employed individuals for tax purposes may provide little guidance as to the true return from the individual’s labor or expertise. Sometimes this is due to tax evasion, as where the individual fails to report receipts to the tax authorities. Other times it may be because of lawful tax minimization techniques. Nonetheless, the most useful starting point when examining a loss of income claim is investigating the income from self-employment shown on the T2124 “Statement of Business Activities” (income statement).

In many businesses that earn income on a cash basis such as convenience stores, taxi operators, and restaurants, there may be some earnings that are not reported to the tax authorities. Analysis for these types of self-employed scenarios will involve looking beyond the numbers to establish what actual returns the individual was receiving from the business.


If attention is focused on the post-accident period, similar problems arise. Often it is difficult to ascertain the true post-accident earnings for a self-employed individual, especially when considering some of their claimed expenses. One of the most formidable problems is the manner in which self-employed individuals are able to allocate expenses to minimize net income.

Self-employed individuals have greater flexibility in utilizing operating expenses. Such expenses may take many forms and would need to be adjusted for self-employed individuals when determining a loss of income claim in a personal injury setting. These include above market salaries and fringe benefits.

Self-employed individuals may also show reduced income in the post-accident period of the disability by paying their family members more in salary and bonuses than is normal practice. Sometimes these individuals are not working at all, but when self-employed individuals claim these salaries as expenses, they reduce their post-accident income.


Self-employed individuals may use a personal automobile and allocate the expense thereof as a “business benefit”. In fact, use of the vehicle may really only be beneficial to the individual and not the business. In this respect, insurers need to look at items like lease payments, gasoline, insurance, repair, and maintenance expenses.


Owners of small businesses, such as farmers, often seek to accelerate depreciation as much as possible to reduce taxes. Restating the depreciation accurately to reflect the lives of the assets involved can change financial statements to transparent levels.


Self-employed individuals often benefit from generous “travel and entertainment” compensation packages, which may include a variety of perks such as country club dues, vacations, sporting event tickets, personal meals, and other personal expenses. These costs would need to undergo careful analysis and be adjusted to reflect actual business use.


Estimating economic losses requires careful analysis and a solid grounding in appropriate quantification practices for a self-employed individual. It is clear from the factors outlined above that there can be no “one approach” when it comes to calculating a self-employed individual’s loss of income claim. For insurers, these issues must be understood if accurate and defensible claims are to be offered in personal injury actions.