Justice scales tip in clamaints favour

When personal injury claimants who are victims of life-changing injuries accept a lump sum compensation payments, the actual amount they receive is adjusted according to the interest they can expect to earn by investing it.

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.

In finalising the compensation amount, courts apply a calculation called the Discount Rate – with the percentage linked in law to returns on the lowest risk investments, typically Index-Linked Government Stock (ILGS). The higher the discount rate, the lower the initial lump sum of compensation received.

Yet compensation awards using the rate should put the claimant in the same financial position had they not been injured, including loss of future earnings and care costs.

The last revision of the discount rate took place on 25 June 2001, when the then Lord Chancellor put into effect an order pursuant to section of the Damages Act 1996.

He prescribed a discount rate of 2.5% per annum to reflect the change in the average redemption yields on ILGS at that time. The discount rate has remained unchanged since. Yet, for the past 10 years, ILGS yields have been sliding down and significantly below that rate.

What is the reason for this?

A major factor was the program of Quantitative easing by The Bank of England in March 2009, when the world economy was in danger of collapse, this is a mechanism through which money is injected into the cash-starved banking system and it ultimately lead to inflation to rise and interest rates to fall.

As a result, the yield of ILGS halved from 1% (at the beginning of the QE programme) to the current level of around 0.5% only.  Now facing a great uncertainty of the future movement of ILGS yield rates, is now the right time for the Lord Chancellor to review the discount rate?

The answer is yes. It is clear from the current economic conditions that the rate of 2.5% far too high, which could lead to serious under-compensation of injured claimants, especially those who were young at the time of injury.

The decision to slash the discount rate from its current rate to minus 0.75% as of 20 March 2017, as well as seeing compensation payments rise, is also likely to have a significant impact on the insurance industry, who have described the decision as “crazy”,  and a knock-on effect on public services with large personal injury liabilities – particularly the NHS. The government has committed to ensuring that the NHS Litigation Authority has “appropriate funding to cover changes to hospitals’ clinical negligence costs”.

The significant changes in personal injury claims since the Jackson reforms in 2013 have gone in the favour of insurers and this decision to cut the discount rate to protect vulnerable victims of personal injury and clinician negligence into the future is one shift of the justice scales in favour of claimants.

Surely how a legal system responds to the needs of these vulnerable victims should be considered one of the key boundaries for judging its level of morality and civilisation, despite the opinion of insurance companies who have seen their profits increase significantly in recent year, potentially one might argue at the cost of access to justice.

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