Personal Injury Discount Rate consultation - Periodical Payment Orders (PPOs)

In my last post I commented on the Ministry of Justice’s recent consultation paper, The Personal Injury Discount Rate: How Should It Be Set In Future?

I expressed my concerns about the Ministry of Justice’s attempt to circumvent the financial implications of its legal obligation to lower the discount rate. The long awaited reduction increased damages for future loss, reflecting the difficulties faced by claimants in meeting rising costs with poor investment returns from low interest rates.

The problem remains that however careful the methodology for calculating future loss, lump sum compensation awards are based on estimates of the claimant’s longevity, future needs and care costs. The complex calculation uses life expectation and interest rates to predict how much compensation the claimant will need for their entire life. The aim of this process is to come up with a figure which will neither under-compensate nor over-compensate the claimant.

A totally dependent, severely disabled claimant’s compensation must provide a lifetime’s worth of nursing care, essential therapies, assistive technology, adapted housing and the specialist equipment required to put them (in so far as money can do so) back in the position that they would have been but for the negligence which caused their injury. In theory it should run out on the day the claimant dies having paid for all their needs arising from the defendant’s negligence. In practice it rarely happens that way. The claimant will either run out of money whilst still alive or die with money left unspent, either from premature death or because they deprived themselves of appropriate care to the make the money last.

Is there a better way? The consultation paper raises a secondary question of periodical payment orders (PPOs). Whilst only indirectly related to the discount rate, PPOs are directly relevant to any debate about the best way to ensure lifelong compensatory provision for severely injured claimants.

PPOs – What are they and when should they be used?

PPOs are not new. At Boyes Turner we have been using them in appropriate cases since their introduction in the 1990s. The difference with PPOs is in the structure of the compensation award, which is why they are sometimes referred to as ‘structured settlements’. A PPO requires the defendant to pay the claimant a regular income, at a pre-determined, agreed rate, for the remainder of the claimant’s life. The payments are based on the medical and care experts’ assessment of the claimant’s current and future needs. Stepped PPOs include scheduled increases in the payments at pre-set future dates to cater for life changes requiring different levels of care. PPO payments can be inflation-proofed by linking them to the Retail Prices Index (RPI) or Annual Survey of Hours and Earnings (ASHE).

There are several benefits to PPOs:

• Payments are guaranteed to continue for the remainder of the claimant’s life, even if they outlive their predicted life expectation. This removes the need to ‘gamble’ on the claimant’s life expectation from the calculation. The claimant’s money won’t run out.
• The payments are needs-based and are calculated to ensure that the claimant’s annual costs of care are covered.
• The compensation is paid as income but is treated by the Inland Revenue as capital and is tax-free in the hands of the claimant.

Given these benefits to claimants and the potential attraction to defendants of moving away from increasingly expensive reliance on the discount rate, the Ministry of Justice asks in the consultation why more claims are not settled in periodical payment form.

Disadvantages of PPOs

In maximum severity clinical negligence cases the major disadvantage of a PPO is that it limits the claimant’s flexibility as to how their money is spent. PPOs provide claimants with a regular income based on the future costs aspect of their claim, however, in order to put the claimant back in the position that they would have been but for the negligence, it may be necessary to make expensive one-off purchases. Most commonly, where a claimant needs a larger, adapted house as a result of their injury, only a proportion of the additional purchase costs, along with essential adaptations, will be covered by the claim. In practice, most claimants also need a lump sum payment so that they can use capital from other aspects of their claim to cover the capital cost of buying a larger house. Where a claim has been discounted to reflect litigation risks on liability or the claimant’s life expectation is very short, it may not be in the claimant’s interests to agree to settlement by way of a PPO.

The courts can order PPOs but in practice they tend to approve PPOS agreed between the parties, rather than impose them. Severely injured claimants are therefore dependent upon their own solicitor’s knowledge, experience and expertise to advise them about the possibility, availability and advisability of a periodical payments order.

At Boyes Turner we work closely with the families of brain-injured children to obtain the highest and most appropriate form of settlement. Our unique, multi-discipline team works with our experts to assess the individual needs of each client and then where compensation is received, we work to help ensure those needs are properly met.

Once liability is admitted, we secure substantial interim payments to provide early rehabilitation, respite and care and to meet essential capital costs such as adapted accommodation. We negotiate with the defendants’ representatives to achieve individualised settlements, combining lump sum and periodical payment orders as required, to provide our clients with flexible, workable and substantial compensation and financial security for the future.