On the 27th February 2017, Liz Truss, the Lord Chancellor announced a change in the way personal injury awards are calculated. The changes, which came into effect on the 20th March 2017, change the “discount rate” from 2.75 to -0.75, essentially increasing the value of compensation to Claimants, where future losses are claimed.
So what is the discount rate?
When calculating the amount of damages to be awarded to a Claimant in a personal injury claim, the injured persons solicitor has to consider all the possible areas of loss. One of the most significant areas of loss, particular in clinical negligence and serious injury claims relates to compensation for future losses. Future losses can include
• Loss of earning i.e., whether someone will no longer be able to undertake paid employment as result of the injury
• Care and assistance from nurses and family members
• Medical treatment such as physiotherapy and hydrotherapy
• Aids and equipment, such as wheelchairs, prosthetics and adaptations to the home in later life
Essentially, the discounted rate is the rate by which any future awards for compensation is discounted to ensure that the award keeps up with inflation. Some claimants will chose to accept their compensation in a series of payments over time but most will opt for a lump sum. Part of the consideration to be applied in considering that lump sum is how it will be invested and how the investment will grow over time. The discount rate takes into account that early payment and lump sum and the expected return on the investment.
The discount rate is not just used in the UK but countries all over the world.
How will the rate change and what does it mean?
The rate will change from 2.5 to -0.75, to reflect the fact that low risk investments produce less returns and the ability to grow an investment is weaker.
In simple terms, if the discount rate is too high, the value of the award will not keep up with inflation and if the rate is too low, the Claimant would be overcompensated.
The basic idea is to try and ensure that by the time the Claimant comes to pay for future care or treatment, they will have the right amount to pay for it.
So why is this change so controversial?
Almost everyone within the legal sector expected a change to the rate but many were surprised by the size of the recalculation. The rate change will now significantly increase the value of personal injury awards. Those in the insurance industry believe the change is too significant and will result in huge compensation payouts whereas many of those who act for victims of medical accident would say the change is long overdue and only now reflects the true effects of investment and the impact of inflation.
Bill Braithwaite QC, a highly respected Barrister within the field of Clinical negligence and serious injury, recently commented “This is hugely significant and could double awards in some cases”
Personally, I think this really is a welcomed development and will have a just and fair effect on Claimants damages. To put this in a context, someone seriously injured in their early twenties could see their damages increase from £11 million to over £20 million. For many years I have been an advocate for a change to the discount rate, as it was commonly accepted that, having not been changed for 16 years, given the economic climate and inflations rates, the rate required review. I have always felt that the old rate meant that Claimants were, in the long term under compensated. This is a positive development for seriously injured people.
If you would like to talk to us about medical negligence or if you have suffered serious injury, you can call Farleys’ medical negligence specialists on 0845 287 0939 or send your enquiry through our online contact form.