The government has today announced a significant reduction to the discount rate that is used to calculate claimants’ future losses in personal injury and clinical negligence claims. The discount rate had stood at 2.5% since 2001, but has now been slashed to – 0.75%.
This means that claimants with life-long injuries and on-going limitations now stand to receive substantially more compensation.
The discount rate sets how much compensation payments should be adjusted to reflect the interest claimants can expect to earn by investing it. When an injured person is awarded damages in a personal injury or clinical negligence case, the purpose is to put them back in the same financial position they would have been in, had they not been injured, as far as possible. A discount rate has always been applied to claims for future loss (for example, loss of earnings in the future, cost of care, cost of future medical treatment etc), to avoid claimants potentially being over compensated, given that they can take their damages and invest them to increase their money.
The formula for calculating the discount rate is based upon the claimant being a risk-averse person and the percentage is linked in law to returns on the lowest risk investments (usually Index-linked gilts). The rate was set at 2.5% since 2001. However in recent years, with interest rates so low, there have been growing calls for the discount rate to be lowered as claimants were facing real risks of being significantly under-compensated, and not having enough money to pay for their on-going needs.
Tom Hartigan, Partner and Head of the Personal Injury team at Trethowans commented: “The reduction of the discount rate is long overdue and is great news for claimants. Injured people who have life-changing injuries will now be able to obtain the level of compensation they need for the rest of their lives. This will give them greater security, and the means of achieving some quality of life. It is a shame that the discount rate has remained so high for so long, resulting in claimants inevitably struggling to make their compensation last. We now hope that compensation will continue to be correctly calculated in the future.”