Following 16 years of grave under-compensation of seriously injured claimants, the former Lord Chancellor, Liz Truss, announced on 27 February 2017 that the personal injury discount rate would be reduced from 2.5% to minus 0.75%.
Hot on the heels of this announcement, the Ministry of Justice’s launched a consultation into the framework underpinning the calculation of the discount rate. On 11 May 2017, Stewarts submitted its response, which included the following points:
- This discount rate issue only affects those with serious injuries that cause losses and disability-related needs that can extend for decades into the future.
- When someone sustains life-changing injuries because of the negligence of someone else, there are three choices for who should bear the financial losses that follow: the seriously injured person, the wrongdoer (usually covered by their insurance) or the state (and consequently taxpayers).
- It is a long-standing legal principle that the wrongdoer, often through their insurance, should provide this compensation. Insurers are much better placed than seriously injured individuals to spread the risk of investments. The injured party ought not to be compelled to take investment risks and hence gamble their compensation for the benefit of the wrongdoer’s insurers.
- The current methodology remains the fairest and best way of meeting the full compensation principle. That methodology has been considered on numerous occasions by the highest courts and upheld on every occasion. It is based on index-linked government securities (ILGS). This removes the need to speculate about future investment returns or inflation, ie the flaw that fatally undermines any alternative methodology.
- Any departure from this methodology would be to the detriment of seriously injured claimants and taxpayers. This is because if the compensation fund runs out then the individual falls back on the state to support them.
- As has already been recognised in the laws relating to Periodical Payment Orders (PPOs) and by the appeal courts of a number of Commonwealth islands in relation to lump sums, it is essential for compensation of future losses of earnings and the cost of care to allow for the long-standing trend that earnings rise faster than prices. To provide full and fair compensation, it is crucial to allow for an annual earnings differential of 1.5 to 2%. This could and should result in a negative discount rate – below any zero percent floor for earnings related heads of future loss.
- If, and only if, for policy reasons the government is determined to depart from the current methodology, then the “least worst” solution would be to maintain the ILGS methodology but with a zero percent floor below which the standard discount rate could not fall, but still subject to an adjustment for the inflation differential for earnings-related losses.
- The discount rate ought to be recalculated at annual intervals, applying a predetermined formula by reference to average real yields on ILGS. This would depoliticise the process and avoid the 16-year delay followed by disruption of the type we have just witnessed.
- PPOs are usually the fairest and best way of compensating long term regular future losses, such as care costs and loss of earnings. But they are not the complete solution, as they are not always available and are not suitable for all heads of loss. So the discount rate should not be set at an artificially high rate on a false assumption concerning PPOs.
- A survey of 87 cases recently concluded for Stewarts’ seriously injured clients showed that over 50% of those clients felt they had no choice on the form of their compensation and of those who did have a choice the overwhelming majority would have preferred a PPO. All the clients who favoured a PPO were worried that lump sum compensation would run out, leaving them unable to meet their care needs. The vast majority were also worried about how to manage the investment of a large lump sum and who to trust for investment advice.
- Claimants often feel forced into accepting lump sum offers by insurers. To address this problem, Part 36 of the Civil Procedure Rules should be amended to require any offer to settle in cases involving significant injuries and future losses to be put on PPO terms as well.
- The use of PPOs should be encouraged by the government committing extra funds, (from the recent huge hike in civil court fees), to enable the courts to take a more active role in determining the appropriate form of award at an earlier stage in the proceedings.Security of funding for PPOs is a real and live issue. If the government is serious about increasing the number of claims that are concluded by way of PPO, then they or the insurance industry ought to set up funds of last resorts, akin to the Motor Insurers’ Bureau (MIB), for other classes of insurance.
Julian Chamberlayne, partner and Head of International Injury at Stewarts commented:
“I hope our new Lord Chancellor, David Lidington, will carefully consider these compelling points when making any decision on this consultation.
Whilst the insurance lobby has presented superficially attractive arguments, those arguments have repeatedly been rejected by the Courts as they fall far short of full compensation.
Raising the discount rate would leave seriously injured claimants under compensated and hence falling back onto the State to meet their long term needs.”