Calculating Interest: Making the “Compound” “Simple”
Abstract: The Commonwealth of Pennsylvania does not provide guidance as to the
proper method of calculating interest owed on past due workers’ compensation benefits
so attorneys must determine the proper calculation method.
By: Abbey R. Lacheen, Esquire
Insurers, self-insureds, and third-party administrators are often asked to calculate
and pay interest owed on past due workers’ compensation benefits. In the past, the
Bureau of Workers’ Compensation (“Bureau”) advised parties on the amount of interest
payable, and provided computations of both simple and compound interest. The Bureau
has now removed the interest calculator from its website and has stopped giving advice
on how to calculate interest. The Bureau, instead, now advises the parties to select their
own methods of interest calculation.
The Workers’ Compensation Act (“Act”) does not provide a
definite method for calculating interest. A critical but unanswered
question is whether simple or compound interest, or perhaps both,
should be applied.
Simple interest is an example of arithmetic growth where the
amount of interest generated each term is constant; it is based on the
starting principal amount only.
Compound interest, on the other hand, is an example of geometric growth where
the amount of interest generated each term increases because it is based on both the
starting amount and the previously earned interest.
Calculating simple interest is simple; you take the principal amount due, multiply
by 10% (statutory interest rate under the Act), and multiply by the years since the amount
was due. For example, $50,000.00 was due in 2000. To calculate the simple interest
owed, you multiply $50,000.00 (Principal) x 10% (Interest Rate) x 6 (Years) =
$30,000.00 (Total Interest). See Example 1.1.