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The Discount Rate - all set to rise again
The Ministry of Justice has published its response to the consultation, The Personal Injury Discount rate: How Should It Be Set In Future?
The consultation was launched on 30th March 2017, a month after the Lord Chancellor announced the long awaited reduction of the personal injury discount rate from 2.5% to 0.75%, and just ten days after the new discount rate came into force.
The consultation examined whether changes were needed to the way the discount rate is calculated in order to ensure that injured claimants would not be over-compensated. It also asked whether the discount rate should be reviewed more regularly, whether changes should be made to the way the Lord Chancellor sets the rate and whether steps should be taken to encourage greater use of periodical payment orders (PPOs).
Responses were received predominantly from the insurance industry (25%), with additional contributions from National Health Service bodies, medical defence insurers, trade unions, solicitors for claimants and defendants, and professional organisations representing the legal profession and the judiciary. Based on these responses, the Ministry of Justice has announced its intention to proceed as follows:
- The key premise of the law of damages will be upheld. Claimants should be compensated in full for the losses they have suffered owing to personal injury caused by the defendant. (The 100% compensation rule refers to the claimant’s entitlement at law to claim sufficient compensation to cover the losses over the claimant’s lifetime in full, but no more or less. This does not mean that all claims must be settled at 100% of their claimed value. Where the defendant is found liable only for a proportion of the claimant’s loss, or the ‘litigation risk’ of losing an aspect or the entire case at trial is significant, discounted settlements may be negotiated to safeguard the claimant’s interests.)
- The present situation whereby claimants can choose whether to take their compensation as a lump sum, PPO or combination of both, remains unchanged. This is good news, because as I’ve discussed before, despite the long-term benefits of PPOs there are reasons why they might not be appropriate in every case.
- Opinion was divided, based on respondents’ vested interests as defendant/insurers or injured patient/claimants experience, as to whether claimants should be assumed to be ‘very low risk’ or merely ‘low risk investors’, but all agreed that claimants should be treated as more risk averse than ordinary investors for the purposes of setting the discount rate which reflects their investment behaviour. Unsurprisingly, the predominantly defendant/insurer responses suggested that claimants invest in low risk (but not very low risk or risk free) diversified portfolios. The assumption on which the law is currently based (that they are very low risk investors) is therefore now regarded as unrealistic and can be assumed (at minus 0.75% discount rate) to over-compensate claimants. Given the supposed impact on taxpayers via increased costs to the NHS and higher motor insurance premiums the Ministry of Justice will now set the discount rate on the revised assumption that claimants are low risk but not very low risk investors.
- The principles for setting the discount rate must now be set out in statute. This means that the government must pass legislation in Parliament to change the basis on which the discount rate is set. The principle will be that the rate reflects what a properly advised recipient of a lump sum of damages for future financial loss could be expected to receive if they invested the lump sum in a diversified, low risk portfolio, which ensured that the money would meet the losses and costs that it was designed to cover on time, and that the damages would run out at the end (not later or sooner) of the period for which they were awarded. In setting the rate, the Lord Chancellor must consider investments that are available and claimants’ investment behaviour, making allowances for taxation, inflation and investment management costs.
- The Lord Chancellor will continue to set the rate but with advice from a panel of independent financial experts.
- The current rate of minus 0.75% will be reviewed as soon as the new legislation comes into force and then at intervals of not more than three years after that.
For these proposed changes to come into force, the government must now pass legislation to enact the proposed changes as law. When or whether they succeed in doing so remains uncertain and any changes will not have retrospective effect.
A new discount rate, set according to the new principles, is likely to fall between 0% and 1%. The effect will be a sizeable reduction in claimants’ damages for future loss, although they will not fall back to the levels that preceded the increase in February 2017. In the context of a legal environment in which the 100% compensation rule must be seen to be preserved, and strength of feeling and opinions of claimant and defendant interests remain entrenched, have the events of the past six months enabled the Ministry of Justice to take an approach which, in essence, simply splits the difference?
The bad news for claimants is that, if successful with the proposed legislation, the Ministry of Justice will have made only a modest overall decrease in the discount rate whilst undermining, by law, the principle on which seriously injured claimants’ damages are paid.
In commenting on the proposed changes, the President of the Law Society reiterated that claimants’ needs and their entitlement to receive 100% damages should be considered to at least the same extent as the interests of defendants and the public purse. Given the insurance industry and political pressure to reduce damages for medical negligence and personal injury claims, one must question whether the interests of the many are outweighing the needs of the severely injured few. He called for the Ministry of Justice now to commission further and more in-depth research into claimant investment behaviour to confirm whether the government’s assumptions are correct.
In the meantime, until the law changes we will continue to value our clients’ future losses at the prevailing rate of minus 0.75%. However, given the likelihood of change and the impact of an increased discount rate on the value of maximum severity medical negligence claims, NHS Resolution can now recalculate its projected outlay for these types of claims.
At Boyes Turner our specialist clinical negligence lawyers are committed to serving the best interests of our severely injured clients. We are experts at securing maximum value awards. We ensure that the structure of each client’s award, whether a lump sum, PPO or combination of both, and the timing of the payments, as interim payments, final settlements and ongoing management of the money, provide the claimant with the best possible provision and future security that the individual circumstances of their case allow. Settlement in each case is quantified, negotiated, structured and implemented with the best interests of the claimant in mind after expert assessment of their short and long-term physical, psychological, educational, social and financial needs.
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