Could personal injury settlements be more in the future?

08 Apr 2011

The Lord Chancellor is reviewing the discount rate that is applied to personal injury compensation claims.

When Courts are deciding on the amount of compensation awarded to Claimants for items of future expense, they use this discount rate to make an adjustment to the final award.

The Lord Chancellor has the power to set the level of the discount rate and he announced last year that he would review the discount rate. However, we are still waiting to hear the outcome of the review. The Association of Personal Injury Lawyers (APIL) is actively pressing for a response from him on this important issue. Why does it matter? It matters because it is affecting the settlement of personal injury cases. The review will affect Claimants who are claiming compensation for future losses. The discount rate is used by the Courts to calculate the amount of compensation awarded to Claimants for items of future expense, such as the cost of a future operation or the cost of future care.

The Courts have held that Claimants would be over compensated if they received the full amount of an expense that they will not incur until some time in the future. This is because by receiving the full amount up front, the Claimant has the chance to invest the money and achieve a greater return than the amount they are actually claiming. The discount rate is therefore used to calculate the amount that they should receive.

Currently the discount rate is 2.5% and has been since 2001. This figure is based on an assumption that a Claimant will be able to invest the money that they receive for their claim and receive an annual net rate of return on that investment of at least 2.5% after inflation in the future.

However, there is a danger that if the discount rate applied by the Court is incorrect, Claimants may find that they do not have enough money to cover their future expense when they ultimately need to pay it. In such circumstances they will have been under compensated and would have to rely on public resources or their own savings to make up the difference or go without something which they need. This is clearly unacceptable. Claimants who have been injured through no fault of their own are entitled to be compensated in full for any losses or expenses caused by the Defendant's negligence.

It is widely recognised that the current discount rate is out of date. The economic turmoil in the stock markets over the past years, reduced yields, and the Bank Of England's decision to keep the base rate at 0.5% mean that the assumptions on which the 2.5% discount rate was based are out of date. This is because it was assumed that a Claimant would be able to get a much better rate of return on investments than exists at the current time.

The current discount rate may lead to Claimants being under compensated and unless and until the rate is revised downwards, it will continue to do so.

After significant pressure from the Association of Personal Injury Lawyers, the Lord Chancellor agreed to review the discount rate in November 2010 pursuant to his powers under section 1(2) of the Damages Act 1996. If the discount rate is revised downwards, it would make a substantial difference to the amount of damages awarded to a catastrophically injured Claimant with large future losses. Whilst we are waiting for the Lord Chancellor's decision which will involve consultation with HM Treasury and the Government Actuary, lawyers need to consider the financial impact of any likely alteration in the discount rate on personal injury claims being pursued.

Clare Carter a personal injury lawyer comments; "At Trethowans we deal with many cases which include future loss claims. Indeed, head injury and spinal injury cases will always involve substantial future losses due to the severe nature of the injuries and our clients' ongoing need for care and inability to work. Careful consideration is given to this issue when advising our clients."