Personal Injury Awards Set To Rise
Malcolm Underhill, Partner at IBB Solicitors, who specialises in cases of maximum severity, particularly head and spinal injury arising out of road traffic accidents and events at work, is delighted the Government has agreed to review the discount rate applicable to the calculation of personal injury awards.
Frequently the two largest components in substantial personal injury awards for head and spinal injury are those for lost earnings and long term care. In calculating the appropriate award, the court first assesses the annual loss or cost, termed the multiplicand. Thereafter, the court will determine the specific award for care and lost earnings by applying a number of years purchase to the multiplicand, known as the multiplier.
The multiplier is taken from the Ogden Tables. These are actuarial tables for use in personal injury and fatal accident cases, which are prepared by a multi-disciplinary group of actuaries (including the Government Actuary), lawyers, accountants and insurers.
The multiplier takes account of a number of factors, including how long the claimant (injured person) would have worked but for the serious head injury (in respect of wages) and how long the Claimant will require care (ie their anticipated life expectancy.
The multiplier is essentially the number of years the loss of earnings or cost of care will last, discounted at the appropriate rate (currently 2.5%). There is a discount rate because the damages in the vast majority of cases are awarded as a lump sum, immediately upon conclusion of the claim at trial, or when damages are agreed between the parties. If any Claimant was told they could receive all their future income in one lump sum, they are likely to accept such a settlement and invest it, to make a profit over and above tax and inflation. What profit should the court assume the Claimant will receive on that investment? The profit over inflation and tax is called the discount rate and it is currently 2.5%. This was set by the Lord Chancellor in 2001.
It has subsequently been challenged by a number of Claimants, in separate actions, who have argued the rate does not reflect reality. They have all failed, in part because the court was not inclined to vary the rate with reference to individual cases, as this would create uncertainty in following cases. Therefore, the court has adopted the standard, to provide certainty, although after much criticism the Lord Chancellor has now agreed to review the appropriateness or otherwise of the said rate.
The discount rate set by the (then) Lord Chancellor in 2001 was based on yields generated by index-linked government stock (ILGS) and was calculated at 2.5 per cent. Since 2001 the yields on index-linked government stock has declined markedly, as a consequence of the economic downturn and the associated Bank of England base rates (currently at 0.5%). The consequence is that the real rate of return is close to 1% and thus, for too long, insurers have been allowed to under compensate claimants.
Malcolm Underhill reports that if the Lord Chancellor amends the discount rate then in the many head injury cases that he deals with, claimants will see their damages increase. By way of example, assume a 30 year old man, intending to work to age 65, sustains a serious head injury, thus preventing him from returning to employment. If his net earnings were £20,000 per annum, then should the discount rate reduce from 2.5% to 2.0%, his loss of earnings claim will increase by about £35,000. Should the discount be reduced even further, to 1.5%, then the claim for lost salary will increase by about £75,000.
Malcolm is delighted with the announcement from the Lord Chancellor and applauds the Association of Personal Injury Lawyers (“APIL”) who were considering an application for judicial review, if the Lord Chancellor had not made this announcement. Malcolm as a member of APIL and one of their trainers, will be providing guidance to solicitors on the practical implications of the Government review, in his series of training sessions to personal injury lawyers, nationwide, next year.
Unfortunately a time frame has not been given for the review by the Lord Chancellor, but with Malcolm Underhill anticipating a decision in favour of innocent victims of the most serious personal injury, he will be recommending to his clients that, if now on the verge of settlement, they delay a few months, as the Government review may be very much in their favour. A short delay in settling claims will not prove a hardship to clients, as interim payments can be sought from the Defendant insurers to ensure his clients do not suffer from lack of funds.
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