The case for structured settlements

Defendants in serious injury or medical negligence cases are now fighting increasingly hard against the use of periodical payments in settlements.

NHS trusts, when facing clinical negligence or medical accident claims, are by and large still amenable to carefully costed and fairly structured settlements.

But many of the smaller insurance companies - long reluctant to commit to periodical payments for the duration of the claimant's lifetime - are pushing back against the trend and arguing for lump sum settlements.

In large part this is driven by financial concerns. Many insurers are keen to reduce their liabilities and such open-ended commitments are an obvious candidate.

Comparing lump sum settlements with periodical payment awards in purely cost terms is tricky, as any settlement is of necessity built around an assumption, rather than a fact - how long will the claimant live.

Medical professionals do not always agree on life expectancy - and as the name suggests, even the best predictions can only ever be expectations.

If the claimant lives longer than expected, agreeing to periodical payments for life will cost the defendant more in absolute terms than a lump sum settlement. Conversely, paying a lump sum may cost them more than a structured settlement if the claimant dies earlier than expected.

But this ignores the other great financial consideration - risk. When a defendant agrees a lump sum rather than periodical payment settlement, they are also offloading considerable financial risk onto the claimant.

While the scale of lump sum payments in serious injury cases can make them seem like giant windfalls, they also carry with them a range of financial risks.

Inflation will gradually erode the value of the payment - a trend that has been particularly acute in recent years as CPI has been consistently higher than the interest rates paid on savings accounts.

For claimants seeking better returns on investments other than cash - like equities or bonds - there is the risk that the value of their lump sum investment could fall.

There's also a tax risk - returns on lump sum investments may be taxed, while the income paid by an annuity is tax free.

All of these risks can be mitigated with expert financial planning, but the elephant in the room - the mortality risk - cannot. If the claimant lives longer than predicted, there is the very real danger that the money awarded in a lump sum will run out.

Such stress would clearly be an unacceptable burden to place on the victims of catastrophic injuries. It would also make a mockery of the legal principle of such settlements - that the claimant's quality of life be restored as closely as possible to what it was before the accident.

In cases of catastrophic injury, periodical payments still offer the fairest and best chance to restore the injured person's dignity and standard of living. Managed properly, an income for life should also give them a life.