Consultation proposes change to PI damages calculation
The “discount rate” used to calculate damages for future losses in personal injury claims could be increased because claimants make riskier investments than previously thought.
A Ministry of Justice (MoJ) consultation launched this week suggests the current 2.5% rate for lump sums could rise, and asks whether periodical payments should be used more frequently.
Lump sum awards for future financial loss, medical expenses and costs of care have to be adjusted to take account of the income they might produce before they are spent.
The consultation asserts there is evidence that claimants “do not invest their awards in the cautious way envisaged”, but opt for a mixed portfolio of safer and riskier investments, thus securing a higher return. This results in “over-compensation for claimants and extra costs for defendants and those who fund them...Conversely, if the rate is too high, it is the victims of wrongful personal injury who will suffer.”
It proposes that claimants be given lower lump sum awards to reflect a higher discount rate, or that the rate be kept as it is. It also asks whether there is a case for encouraging the use of periodical payments.
The consultation, Damages Act 1996: The Discount Rate, will end on 7 May.
Last August, the MoJ consulted on whether the discount rate should be linked to government gilts or to a broader investment portfolio.
Claimant lawyers have argued that the discount rate is too high, since yields on gilts have been decreasing. In 2011, the Association of Personal Injury Lawyers (APIL) warned that some claimants were being under-compensated by hundreds of thousands of pounds and threatened to bring a judicial review on the issue.
Christopher Malla, partner at defendant PI firm Kennedys, says: “If claimants want risk-free protection in high-value claims, they should avoid a lump-sum payment in favour of an annual periodical payment, which would be index-linked, tax-free and paid for the duration of their life, regardless of actual life expectancy. If not, then they should not be treated as a special investor.”
A spokesperson for APIL said it would consider the consultation in detail.
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