Calculating Compensation for those with Life-Long Needs
Calculating Compensation for those with Life-Long Needs
For the vast majority of individuals who suffer injury at the fault of others, damages, that is compensation, is relatively small and the financial losses are easily calculated. The calculation of the financial sum is undertaken with reference to the actual expense incurred in consequence of the injury, or the precise loss, for example earnings, being the difference between actual and real earnings while absent from work. In contrast, where an injury or illness has a long term effect, then not only does the calculation become more important, but similarly important that the formula used is one that takes account of reality. Frequently, when acting for those with brain injury, including cerebral palsy, spinal injury or mesothelioma, the individual will either not be able to work or their earning power will have been greatly reduced by, for example, the brain injury or illness, such as mesothelioma. In those circumstances the loss of earnings claim will be substantial. Indeed, it may be the largest part of the claim.
For other types of cases, particularly those individuals with cerebral palsy, other traumatic brain injury and spinal injury, the largest component will be the cost of care and, possibly medical treatment. Where children are the involved, perhaps having been diagnosed with cerebral palsy, the care and or medical treatment claim will be for substantial sums, running into seven figures. Therefore, determining the annual costs of that care (for example) and applying a formula to calculate the loss over life, is absolutely critical. It is critical because if insufficient sums are awarded then the individual will not be able to afford the cost of care as they get older. Those who have suffered at the hands of others should therefore be awarded sufficient amounts to ensure that based on current information, they will be able to afford the cost of care when they most need it.
How Compensation Claims Are Calculated
One way of overcoming this problem is give an individual annual financial instalments of their compensation, to reduce the risk of that compensation running out before they die. However, empirical evidence indicates that most individuals obtaining compensation for brain injury, spinal injury or illness, prefer to have a lump sum. Part of the reason is that when their brain injury or spinal injury claim comes to a conclusion they wish to sever all contact with the insurer, who will be paying their compensation. For that important reason they prefer a once and for all lump sum payment, rather than a contract with the insurer to pay them an index linked annual amount for the rest of their life. With the lump sum remaining the most popular form of settlement, it remains critical that the method of calculation is sound.
So what is the calculation? If the cost of care is going to be £100,000 per annum and through life tables it is assumed the individual will live for another 35 years, the simple calculation is to multiple those two figures, producing a claim of £3.5M. However, if the individual receives all the cost of the care in one lump sum, today, then they will be able to earn interest on that amount and thus end up with more than the care will cost. This will result in a profit, which they are not permitted to make from a personal injury or negligence claim. Therefore, in determining the award for care, the courts assume the claimant will invest their compensation which will, in turn, produce interest. The question then arises as to how much interest will their investment earn. This is called the discount rate.
Since July 2001 the discount rate has been set at 2.5% by the Lord Chancellor. The assumption is that claimants, with their compensation, will be able to earn 2.5% in real terms, ie after inflation and tax, from their investment. That is the theory. However reality has shown that rate of return is not possible and a number of cases in the courts have demonstrated it is unrealistic to assume a claimant can gain a return of 2.5% from their investment, unless they are prepared to take significant risks. People should not have to take risks with large sums of money, designed to provide for care and other losses and expense over life. Those most vulnerable individuals should be able to adopt a prudent approach, to ensure adequate returns on their investment. Following a claimant lawyers’ campaign the Government has, perhaps reluctantly, agreed to review the discount rate to see if it should be changed. The Government launched a consultation in 2012 and this has been followed by research, the results of which were published in September 2013. The aims of the research commissioned by the Ministry of Justice was to:
- Understand the profile of settlements for future losses to which the discount rate applies
- Outline how, in practice, the discount rate is used when agreeing a lump sum settlement and how a change in the discount rate might impact on the process and the final settlement
- Obtain a better understanding of how changes to the size of a settlement may affect the claimant’s investment and consumption behaviour.
Unfortunately, the conclusions of the research are disappointing. That is not surprising to a seasoned lawyer, when the number of stakeholders interviewed were few in number. The researchers gathered evidence from just nine claimants and three professional deputies (who managed the claimants’ finances), plus three claimant solicitors, two claimant charity representatives, three defendant representatives, one representative from the Court of Protection, three financial advisors and two case managers to personal injury claimants. To the writer it is not surprising that the researchers concluded there was inadequate data. They said, rather axiomatically, further exploration would expand on the findings presented in the research. However, one strong conclusion did emerge from the current research which mirrors the writer’s own experience. There is clear evidence that claimants are a (financially) cautious and risk averse group. The researchers say this should be tested by further sampling but I am confident further research on this point will lead to a similar conclusion. Indeed, if justice is to be done and those with cerebral palsy, spinal injury, mesothelioma and brain injury are to receive proper compensation, the discount rate should be reduced. This will result in awards of damages being higher, more reflective of real rates of return on investment. This will in turn enable claimants to have sufficient funds to meet their needs throughout their entire life.
If you want to enquire about making a personal injury compensation claim, please contact a member of our team on 01895 207835 or 01895 207295. Alternatively, you can send an email with your name and contact information and brief details as to the nature of the accident/clinical negligence and the injuries sustained to PI@ibblaw.co.uk and one of our team will be able to help you.