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Compensation for major injury claims in ‘no man’s land’ despite reforms

Stuart Hanley, Minster Law’s Deputy Head of Legal Practice, reports on the impact of the Civil Liability Act on badly injured people.

The Civil Liability Act (CLA), which became law in December 2018, will bring about far-reaching reforms to how people suffering minor injuries in road traffic accidents (RTA) will be compensated.

It paves the way for secondary legislation, due later this year, which will reduce the amount of compensation payable, and will remove the right for injured people to engage a lawyer to assist them for any RTA claim under £5K unless they pay for it themselves. Motorcyclists, pedestrians and other vulnerable road users are not affected.

Much of the debate focused on small claims, but the CLA also contains significant reforms to the way compensation is calculated for major injury claims. The issue at stake is something called the Discount Rate.

The Discount rate (DR) is used to determine the deduction an insurer can apply to large personal injury compensation claims. These claims often run to £millions, for example where a car accident has left a driver paraplegic, or worse. Fixing the rate is the responsibility of the Lord Chancellor, following the Damages Act 1996.

What is the purpose of the Discount Rate?

Where a lump sum is paid to a claimant, the DR is applied to the part paid for future financial losses, such as loss of earnings or the cost of medical care. The DR takes into account that such lump sums can be invested by the claimant to produce a financial return.

The DR will therefore reduce the lump sum compensation received; as will other factors such as the age of the claimant. For example, injured people nearing retirement age will receive less for loss of earnings.

The aim is to provide full compensation and, in so far as a sum of money can do so, to put the claimant in the same position as they would have been in but for the injury. This is known as the 100% compensation principle.

Why is the DR changing?

The current rate of -0.75% was set in March 2017 and is a significant reduction from the previous longstanding rate of 2.5% (last set in 2001). There were loud protests from insurers when the discount rate changes were announced, largely because it meant they would have to pay out significantly more compensation for major injuries than previously. Since then, insurers have campaigned vigorously for the rate to be raised back to what they would regard as a more appropriate level.

The DR is calculated by reference to returns on the lowest risk investments, typically Index-Linked Gilts. The yield on these gilts, or Government bonds, has fallen dramatically since the global financial crisis in 2009. Lower yields mean less compensation available to pay for key future losses such as care.

This was the prime factor behind then Lord Chancellor Liz Truss’ decision to cut the DR from 2.5% to -0.75%, Explaining her decision, she noted: “The law makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life”.

Following the decision, insurance company shares fell sharply (by 7%), and the ABI slammed the decision as ‘crazy.’ It said that 36 million people would see premiums increase as a result. The following day, insurance CEOs met the Chancellor, Philip Hammond, to demand the government row back. The government’s decision to insert new measures to calculate the DR into the Civil Liability Bill was a direct result of this lobbying.

What are the new proposals?

Now the DR must now be based upon a rate of return that, in the opinion of the Lord Chancellor, is ‘low risk’ rather than ’very low risk’ investments as at present. The rate is to be reviewed every five years by a panel of experts and needs to account for the prevailing economic conditions, such as inflation.

To date, nobody knows what the new rate will be. The last government statement says that, if the new system were to be applied today, the DR might be ’in the region of 0% to 1%’. Ministers have asked for more evidence on the issues, and the deadline for responding is 30 January.

What is the impact?

Does it really matter if the DR changes from -0.75% to, say, 1%?

While the percentages seem small, and the impact per £1k of compensation would be small, it is then multiplied over every £1k of the future loss claim.

A seriously injured 15-year-old who requiring lifetime care may need £250k per year to pay for it; under the previous DR of 2.5% the capital value she would receive was £8.5m, but under the current government-sanctioned rate of -0.75% it would be £23.5m.

During the passage of the Civil Liability Bill through Parliament, MPs and peers heard from ministers that the UK’s discount rate was one of the lowest in the world, and thus too generous. These were similar to the arguments deployed by the Conservatives before they hollowed out Legal Aid.

Insurers have a fiduciary duty to their shareholders, but they are also there to protect people in the event of a major injury. That after all, is why we pay our insurance. It is also clear that insurers benefitted financially from a 2.5% DR between 2009 – 2017, so it is a bit rich for them to cry foul after a much-needed rebalancing exercise.

And surely it is appropriate for claimants to adopt a cautious approach to investing, given the serious consequences of running out of money, both for the claimant, and also for the taxpayer, as the State would need to provide a safety net.

Conclusion

Whatever the new body responsible for setting the DR decides, the decision is not an easy one, and fraught with moral, ethical and financial hazards. For this reason, it’s questionable whether the Lord Chancellor, a government appointee, should have the final decision, as opposed to the Judiciary, who are fundamentally impartial and thus impervious to political expediency.

In the meantime, Minster Law is representing clients who are caught up in this no-man’s land, waiting for a decision. These are real people, who are dealing with terrible misfortune, while insurers drag out and delay cases in the hope that they settle under a higher DR; in effect, they are gambling the eventual rate will be more generous to them and their shareholders.

Civil Justice is under pressure as never before, thanks largely to a chronic lack of money. Access to Justice is, as ex-Lord Chancellor Ken Clarke said in 2014, the mark of a civilised society. In light of the government’s determination to curtail access to justice across both civil and criminal law, it is right to ask whether our civilised society is suffering as a result.