Levenes welcomes change which will increase the amount of lump sum damages awards for future loss
Tim Beasley, Head of Catastrophic Injury Claims at Levenes Solicitors, has welcomed the announcement of the Lord Chancellor that will see the awards of lump sums for future losses increased significantly, but some issues still remain.
On 27th February 2017, the Ministry of Justice announced the outcome of a long awaited review of the discount rate. This is the fixed rate of return on investment which the law assumes a claimant will receive when investing their lump sum after settlement of the claim. The rate is currently 2.5% but from 20th March 2017 it will be -0.75%.
The reason why the law sets this rate of return is because the court has to work out how much money a claimant needs now for their losses that are going to be incurred over many years to come and one factor in this is the investment return which a claimant can expect to receive. Claimants are not allowed to claim the cost of investment advice as part of their claim and the law assumes that they will not take any risk with investments but instead buy low risk investments such as government stock with a very low return.
Claimant lawyers have long campaigned for a review of the rate which is set by the Lord Chancellor.
As a result of cutting the discount rate the value of lump sum awards for future losses will increase dramatically. This is going to be expensive for insurers and the NHS but it is consistent with how the law works. Claimants are supposed to be put in the same position, as near as money can, as if the accident had not occurred. If they are forced to chase higher risk investments in order to make sure that their lump sum will last, they take the risk that they will suffer losses which they might struggle to recoup. They did not ask to get injured and should not be asked to take this risk. Their awards are not a lottery win to be gambled. They have needs for the rest of their life and must be confident that the money will always be there when they need it.
Insurers are better placed to ride out the storms of investment markets than claimants and it is right and proper that claimants should be insulated.
To put some perspective on this change, consider this example. A 30 year old man needing care of £50,000 per year for the rest of his life would currently receive just under £1.5m for future care. From 20th March 2017 this increases to over £3.5m.
There are some further issues to consider. There is to be a review as to how the rate will be set in future and it will be interesting to see how this is going to be done. I suspect it may be an advisory committee something like the monetary policy committee of the Bank of England which is given the task of making a recommendation.
Accommodation claims, which have always been an oddity, are now even odder. The claimant can claim the amount of his loss of return on the amount of his capital tied up in a bigger house or bungalow which he needed to buy because of his injuries. The assumed return is at the discount rate - currently 2.5%. This approach has been heavily criticized but remains good law. Now, it is even more obvious that this approach makes no sense because the rate of return for a claimant is going to be negative, so the claimant is not losing any money that they have tied up in a bigger house or bungalow. Will the courts now find that the Claimant has no claim for extra accommodation costs except the cost of conversion or adaptations? Or will some other fudge of this issue emerge?
Some claimants might now turn to renting as a solution because a claimant can claim the extra rent of a bigger property and then multiply this by the multiplier appropriate for the rest of their life. It is likely that we will see more seriously injured claimants looking to rent, though issues with lack of security of tenure and the willingness of landlords to allow adaptations will be a challenge to overcome.
The other consideration now is whether insurers will start to think they may be better off paying periodical payments. These are essentially like a pension and can be paid instead of a lump sum for future losses. The insurer pays the claimant an annual payment which is indexed usually by reference to the rates of pay of carers. Periodical payments are attractive to claimants because the money is guaranteed for life and keeps pace with inflation and is tax free. The insurer has to worry about the rate of investments, not the claimant. Insurers have not tended to offer periodical payment because they have to find the money to pay year after year - they prefer to close the book on the case by offering a full and final settlement figure. The court is currently under a duty to consider whether future losses should be awarded as periodical payments but insurers have often not been keen to make offers on this basis because a one off lump sum will cost the insurer a lot less than periodical payments over a long period of time. With lump sums now about to increase, periodical payment based settlements might become more common.
Insurers can afford to take investment risks which claimants cannot. I wonder if we may see insurers swing round against lump sums and in favour of periodical payments in future.
Tim Beasley, Head of Catastrophic Injury Claims,