Personal injury compensation – the effect of the discount rate of life ?
On 27 February 2017 the Lord Chancellor Liz Truss announced that the discount rate , used to calculate compensation in severe personal injury cases , will drop from 2.5 % to 0.75 % from 20 March 2017 .
What is the discount rate ? The discount rate is a deduction made from large compensation payments awarded to people with severe , often lifelong and life-limiting injuries . It is designed to offset any interest ( net of income tax and inflation ) made from the investment of compensation payments and to ensure the amount received is no more , or less , than the injured person needs .
The current rate of 2.5 % was set in 2001 , against a very different economical background , when interest rates were much higher than in recent years . Under the current rate , too much is deducted from compensation payments meaning seriously injured people have lost millions of pounds over the years .
A severely disabled child , for example , injured at birth as a result of medical negligence will currently have their compensation reduced by so much that there is a real risk the money will run out and their life-long needs will not be met . The only way they can try to eke out this money and get a higher return on their compensation is to place it in high risk investments , which may or may not pay off . This is an unreasonable position for claimants to be placed in because , more often than not , they have no other source of income other than their invested compensation . They cannot go out to work to ‘ top up ’ any under-performing investments .
Why has it been changed ? Under the Damages Act 2001 the Lord Chancellor has power , from time to time , to set the discount rate applied to personal injury compensation .
In 2010 the coalition government of the time agreed to a long-overdue review of the discount rate , after the Association of Personal Injury Lawyers ( APIL ) threatened to bring judicial review proceedings .
Despite Lord Chancellor Kenneth Clarke ’ s assurance that “ his decision will be made as promptly as practicable ”, successive governments have repeatedly delayed the review and failed to progress the issue .
In 2016 APIL took the unusual step of issuing proceedings against the Lord Chancellor amid concerns about the wait for the review . This action prompted the Ministry of Justice to announce in December that the Lord Chancellor was reviewing the situation and would be revealing the results of the long-running review in due course .
In a move described by claimant lawyers as ‘ worthy of Scrooge himself ’, the ABI applied for an injunction to prevent the Lord Chancellor from concluding the review of the discount rate . It argued that the discount rate should be based on a formula and accused the government of trying to “ rush out a new rate … at a time of great uncertainty in the investment markets ”.
“ To suggest that the Lord Chancellor has not been thorough in the review is beyond ludicrous ,” said APIL ’ s President Neil Sugarman . “ It has taken three years , two major public consultations , a hefty research paper , and a panel of specially selected experts to make this decision and the only right decision is for the rate to be substantially reduced .”
Fortunately for claimants , the ABI ’ s application was refused and permission for a judicial review was also denied , leaving the Lord Chancellor unfettered to make her decision .
What does this mean for personal injury claims ? The Lord Chancellor ’ s announcement has caused a bit of a stir . Defendant insurers , who have been profiting from an artificially low rate for years , argue that the change only serves the interests of “ fat cat lawyers ”. Headlines in the Daily Mail report that insurance claim costs will soar and there will be inevitable increases in motor and liability premiums . With such scandalous reporting , the public could be forgiven for thinking that the change in the rate is a bad outcome .
The reality is that people who most need compensation to meet their life-long care needs will no longer be at risk of running out of money . Therefore the decision to lower the rate should be applauded as a long overdue turning point towards treating injured people fairly . It is not only the right thing to do for them , it also puts the cost of caring for people squarely where it should be — with the party who caused the injury and their insurer – rather than the State having to pick up the shortfall .
By Gail Waller
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