There has been much press coverage over the decision of Liz Truss, the Lord Chancellor, yesterday to reduce the ‘Discount Rate’ used for calculating damages in personal injury claims.
Headlines have centred on the likely increase in insurance premiums resulting from the change. It has been suggested that this will undermine insurers’ promise to cut premiums in conjunction with planned Government reforms to whiplash claims. The changes will allegedly reduce insurers’ profits by millions of pounds and line the pockets of personal injury lawyers.
However, it is perhaps not clear from some of the reporting that the changes will only affect relatively serious injury claims where compensation is awarded for future losses such as loss of earnings – where an injured person is prevented from working by reason of injuries for a prolonged period of time – future treatment costs or future care provision. They will have no impact in low value whiplash claims where there is no future loss.
Further, as the changes relate to compensation, not legal costs, they should not result in a significant increase in costs payable to solicitors in personal injury claims.
So what is the ‘Discount Rate’ and what is the fuss all about?
The law is intended to provide full compensation where a person has suffered a wrongfully inflicted personal injury, no more, no less.
Where future losses or costs will be incurred due to such an injury, damages are calculated by applying a ‘multiplier’ to the anticipated annual loss/cost.
The ‘multiplier’ is determined by reference to actuarial tables which take into account life expectancy and are also discounted by a factor – known as the ‘Discount Rate’ – to reflect the fact that the sum will be received earlier than would have been the case but for the accident resulting in the injury which anticipates returns that will be earned upon investment of the lump sum. Over a period of time, the damages and income yielded by their investment should reduce to nil, the intention being to avoid over or under compensation.
Under the Damages Act 1996, the Discount Rate is to be prescribed by the Lord Chancellor taking into account assumed investment returns. However, the Discount Rate has not changed since 2001 when the Lord Chancellor set the Discount Rate at 2.5%, notwithstanding changing market conditions resulting in a generally significant reduction in returns anticipated from investment in the intervening years.
The Association of Personal Injury Lawyers has campaigned for many years for the Discount Rate to be reviewed, contending that the rate of 2.5% was too high and that injured people have been penalised as a result, being unable to obtain the necessary returns from investment to meet their long term care, treatment or accommodation needs and/or compensate them for future loss of earnings.
Following yesterday’s announcement, the reduction in the Discount Rate from 2.5% to -0.75%, due to come into effect on 20 March, should result in higher multipliers, hence higher awards of compensation enabling injured persons to invest their awards and obtain sufficient returns to meet their needs.
Notwithstanding insurers’ discontent at the changes, lawyers representing those suffering significant injuries maintain that the reality is that the review of the Discount Rate is long overdue and that injured persons have been undercompensated during the intervening years with insurers having made considerable savings at their expense.
It is an unfortunate consequence of the change that insurance premiums will increase, but anyone having the misfortune to suffer a life changing injury through another’s fault will be thankful for the changes.
Not all serious personal injury claims result in a lump sum award, however, as damages for future loss can also be awarded wholly or partly in the form of periodical payments to meet the losses as and when they arise.
Part of my job as a Personal Injury lawyer representing Claimants is to ensure that my clients are adequately compensated for their injury and, in a serious case, to advise whether it is better to receive a lump sum or periodical payments to cover anticipated future losses and costs.
Bernadette Mackie. Senior Associate Solicitor, is an expert in Personal Injury and Clinical Negligence Claims and is able to offer expert advice. She is based at our Kidderminster Office but able to travel to see clients at other offices or at home if appropriate. She can be contacted on 01562 820575 or firstname.lastname@example.org.