Damages set to increase for personal injury cases

Craig HowellOn the 27th February 2017 the Justice Secretary Liz Truss made a decision to dramatically reduce the discount rate from 2.5% to -0.75%. It was a decision that has rocked the insurance industry that is in uproar. The effect of the decision is to significantly increase damages awards in all personal injury cases where there are future losses, and it will effect claims involving road traffic accidents, accidents at work, medical negligence claims and asbestos claims. Craig Howell of Birchall Blackburn Law explains more.

What is the discount rate?

The discount rate is used to discount a lump sum compensation payment for future losses, to balance the fact that claimant’s invest their lump sum rather than receiving it in annual amounts.

E.g. John was injured as a result of a negligent co-worker and as a result has care needs that will cost £10,000 per year for the next 30 years. However, John will not be awarded £300,000 to settle this aspect of this claim. That award will be discounted to take into account the income John will receive from that money if he were to invest it.

The discount rate has been 2.5% since 2001. However, the rate has not reflected the fact that a return on investments have fallen dramatically over recent years, in particular after the financial crash of 2007 to 2008

It’s for that reason the Government has reassessed that rate to -0.75%, which means in the example above, John will actually get more than £300,000 to take into account a drop in value this lump sum is likely to suffer over the years despite investing the money. He still will need to invest the money because if he simply “kept it under the mattress” the value of his £300,000 would diminish even more over time because of inflation.

What is the effect?

The effects of the decision are huge for personal injury claims with large future losses. Before the change was made a 25 year old man compensated for loss of an annual salary of £25,000 to retirement at age 65 would receive £621,250. After the change the new award would be £1,130,750, an increase of £509,500 or 82%.

The effect of the change on insurers is enormous. It will result in lower profits and lower shareholder returns. The government has pledged an additional £1 billion to the NHS Litigation Authority to cover the costs of increased claims.

The Association of British Insurers has called for urgent action to change the way losses are calculated and thereby effectively reverse the decision. There has been a meeting between Philip Hammond and the Chief Executive Officers of most of the major insurers. The insurance industry is a very powerful lobby, and we know from recent events that the government can U-turn in the face of powerful lobbying, and indeed they have promised an urgent review will be undertaken.

Is it fair?

Is the decision a fair one? There is a strong argument that severely disabled people should not have to speculate with their compensation by investing on the stock market. They need security and the stock market is full of risks, for example see the crash of 1929 and more recently 2009. Severely disabled people, the weakest members of society, should not have to face these risks. Insurers argue that they will invest their money and receive better returns but why should they have to take any risk?

Insurers also argue that society, or the British economy, cannot afford to fully compensate victims in this way. However, surely the most needy and vulnerable members of society deserve the fullest protection. We are talking about victims seriously injured by the negligent acts of others. If the claimant’s damages run out they have no alternative but to fall back on the protection of the State.

Craig Howell, Partner and specialist industrial disease lawyer at Birchall Blackburn Law, said: “A permanently injured persons needs still carry on even after their compensation money runs out. Whatever the consequences for the insurance industry as a whole, the fact that victims of life changing injuries are now more likely to be able to afford their future care needs, when previously there was a risk they could not, can only be a good thing.”

The uncertainty created is another unfortunate consequence for ongoing claims. In cases that are already underway, where a claimant has made an offer to settle a case based on future loss that offer will need to be urgently reviewed and if necessary they will need to be withdrawn urgently as defendant insurers will now be looking to accept offers before Claimants get the chance to put recalculate what their future losses might be.