In many cases, when Claimants are injured and they are successful in a personal injury or clinical negligence claim, they end up with a lump sum which reflects not only their pain, suffering and financial loss to date, but all their future loss as well. But one of the huge difficulties with this is that in calculating what is the current value of that future loss, a discount rate is used which can potentially leave Claimants significantly out of pocket over time.
It is assumed that a Claimant can invest the lump sum and receive a return on it. The discount rate reflects the expected rate of return of the investment of the lump sum.
The Association of Personal Injury Lawyers (APIL) has campaigned for years that the current rate – 2.5%, set by the Lord Chancellor in 2001 – is too high and penalises Claimants.
“People with lifelong injuries are continuing to be undercompensated, in some cases, by hundreds of thousands of pounds, because successive governments have dragged their heels and failed to review the discount rate to reflect changes in the economy”, said Neil Sugarman, president of APIL.
“The discount rate is used to calculate the amount deducted from an injured person’s compensation to account for any income he may receive from investing his damages. The rate set by the then Lord Chancellor, Lord Irvine of Lairg, in 2001, and was based on yields generated by index-linked government stock (ILGS) calculated at 2.5%, Since that decision was made, yields have declined to the point that the discount rate is now clearly far too high” explained Sugarman.
The rate has remained unchanged for 15 years. By August 2012, the yield on ILGS had been declining for some time, falling under 1% – a long way below the 2.5% set under the Damages Act.
Despite the falling rates of return, no review was undertaken and therefore APIL began proceedings for a Judicial Review in July 2014. The court took the news that the government would soon reach a decision so no Judicial Review was needed.
Over 2 years later things have started to move at last. A Ministry of Justice spokesman said recently “The Lord Chancellor is reviewing the discount rate applied to personal injury claims to ensure Claimants are properly compensated”. It is expected that the government will announce the result of the review by 31st January 2017.
However, the Association of British Insurers (ABI) are trying to prevent the announcement by the Lord Chancellor and applied before Christmas to Judicially Review the decision to review the rate. The challenge was an indication that insurers expect the discount rate to fall from its current level of 2.5% to reflect current interest rates. It is understood that the ABI failed in their application.
Any reduction in the rate will increase the value of claims for future losses, and therefore, the costs of compensation claims as a whole.
By way of an example:
A future care claim for a 35 year old male is calculated at £50,000.00 a year for the rest of his life:
- At the current rate of 2.5% the damages for care would be £1,407,500.00
- If the rate were to fall to 1.5% the damages for care would be £1,747,500.00
- And if the rate were to fall to 1% the damages for care would be £1,967.500.00
A potential increase of £560,000.00 for just one head of loss!
That is a huge amount of money.
But it is rightfully the Claimants’ money, received as compensation for the catastrophic and life changing injuries they have sustained. Why should they be penalised by having an unfair deduction made on their damages? It has been 15 years since the rate was set and interest rates have changed.
Surely it is now time for some payback for Claimants?
This is not legal advice; it is intended to provide information of general interest about current legal issues.