Damages Discount Rate Dramatically Changed at Last

After years of delay and prevarication the Government has finally announced a dramatic change to the way damages for future financial losses are calculated. This change relates to the way, for example, future care and future lost earnings are to be calculated for injured claimants and those affected by the loss of relatives in mesothelioma, asbestosis and other fatal diseases and accidents.  The change will drastically increase the amount of compensation successful claimants with  future losses will get from both the state, in NHS and MOD claims, and insurers.

In working out how much the future loss or expense is likely to be, a court will work how much a person will lose over their lifetime in, say, earnings which they can no longer expect to earn due to ongoing disability. The claimant will receive that loss as a lump sum at the time of the settlement or trial of the case in their hand.

However because it is received early and before the loss or expense has been actually sustained the Claimant will not receive the full amount because it is assumed that by investing in relatively risk free Government Index Linked Guilts they will receive a return from investing the money.

Entirely unrealistically it has been assumed by the Ministry of  Justice that the return on investment would be at 2.5% per year. In fact it was not possible to make anything like this level of return on Index Linked Guilts, and that had been the case since its inception, resulting in thousands of claimants being seriously under compensated and running out of money for care and support in later life.  It was suggested that by investing in riskier equities they could ameliorate this risk.  Most claimants are risk averse and it is patently unfair that they should have to risk all on the unpredictable Stock Exchange just to have the possibility of making up the difference between 2.5% and the actual return of minus 0.75% on their capital to make up some of the shortfall.

Acknowledging the unfairness of this, the Government has recognized Claimants will in fact be making a loss of minus 0.75% if they invest in Index Linked Government Guilts! Accordingly the assumed rate of return will be set at that lower figure.

The effect of this will be that Claimants when a case is settled or decided by a Judge will be awarded more than they will actually lose in earnings or income or will need in future care to cover their losses in full!

The change highlights the unfairness which has persisted over many years during which Claimants have been under compensated.   There will be no backdating for those whose cases are already settled but whose losses are ongoing perhaps over the next 80 or more years in the case of children.  So the injustice will continue to affect this group.

Whereas the change is to be very much welcomed, there is a sting in the tail because the Government has announced at the same time a consultation on whether the basis on which this negative rate of return has been calculated, ie by reference to relatively risk free investment, is fair and reasonable.  This suggests that the Government, as paymaster in many of these cases, may be willing to change the law, set out in the House of Lords decision of Wells v Wells requiring Government Guilts to be the benchmark,  to assume a higher rate of return from riskier investment in equities by Claimants thus reducing the amount it must pay.

By way of a rough example, a woman whose case is settled at the age of 40 who is unable to work until normal retirement age assumed to be 65 and had earnings of £50,000 per year net prior to the injury would have received ££915,000.00 for that aspect of her loss on the assumption of a £2.5% return.  Now she will receive roughly £1,345,000.00.  A similar woman injured aged 20 with a similar income would have received £1,344.000.00 but will now receive roughly £2,641,500.00.  When one considers that in the case of an injured child needing full time care from the age of say 5 to 80 years,  the increase in cost to the state and insurers will be very large.

The announcement has also been made within a few days of the Government saying it will very drastically reduce the value of compensation for soft tissue injury claims in road traffic claims and remove the right to recover legal costs in those cases where the injury element is worth less than £5000.   It is said that these claims are around 50% or more of all injury claims so this will result in a colossal saving for insurers.   Insurers say that they will pass on these savings of £40 to each driver to the consumer – but can they be trusted to do that?  Lets see, they have already said today that they will be passing back to the consumer the cost to them of the changes to the rate of return above at around £75 per year each.