What's next for the discount rate?
The needs of seriously injured people must be considered to at least the same extent as the interests of insurance companies and the public purse, writes David Marshall
Lump sum settlements for people who have been injured or died in accidents that are someone else’s fault have long been subjected to a discount rate to reflect the anticipated net return on investment of that lump sum over the period of the loss for which it is awarded.
The level has recently been revised by the Lord Chancellor from a rate of +2.5 per cent to -0.75 per cent.
Lawyers take account of the discount rate when calculating future losses as a result of a personal injury or a fatality. So, for example, it could be based on projected earnings.
The +2.5 per cent rate was set in 2001 by Lord Irvine and had not been varied since, despite economic shocks in the wake of the 2008 financial crisis.
Arguably even from 2001, but undeniably since 2008, it has not been possible for a 100 per cent investor in gilts to achieve such a rate of return.
So, despite the assumption inherent in the discount rate, for many years no claimant with a lump sum who invested it solely in gilts could possibly have made that lump sum award last long enough to pay out all the costs for which the damages were awarded.
Insurers complain that in practice accident victims do not only invest in gilts. But this is a circular argument. Given the +2.5 per cent discount rate which was used to produce the capitalised value of their future loss, what else could they do?
The House of Lords in Wells v Wells set the standard of assuming investment in a portfolio that offers the least risk to investors in protecting an award of damages against inflation and market risk. Like Lord Irvine, it had worked on the basis that this was best achieved by a portfolio containing 100 per cent gilts.
Liz Truss took the same approach in her decision this year. She also had to take account of the public sector equality duty under section 149 of the Equality Act 2010. As she said, to act lawfully she really didn’t have any choice and any objective observer would agree.
The purpose of the law of tort is to put the claimant back into the position they would have been in but for the tort, so far as this is reasonably possible through compensation. Very few of us do or indeed could afford to take out insurance personally against the risk. It is therefore an important part of our justice system for people catastrophically injured through someone else’s negligence to know that the wrongdoer will pay what is necessary, and for that cost to be spread widely throughout society through insurance.
Such insurance is a compulsory one in the case of drivers and employers, so it is also important that insurers provide a product for the premium that is value for money. The proposed changes to whiplash will soon take out of the scope of a motor policy most compensation payable for minor injury.
The reaction from insurers to a development they must have long anticipated has bordered on frenzy. An emergency summit was convened with the chancellor of the exchequer within 24 hours of the decision. When the chancellor backtracked on national insurance contribution increases for the self-employed in the Budget, it was shamefully and opportunistically suggested that he could fill the ‘black hole’ by reversing the discount rate decision.
This is playing politics with the lives of catastrophically injured people. Reversing the discount rate change would make it far less effective in the case of serious injury. What eventually would be left within the insurance cover? And if insurance doesn’t pay for the full costs of care, then the burden of providing it will fall back on the state.
That is not to say that this hasn’t brought to light consequential issues which need proper debate, including:
Is the investment standard set in Wells still appropriate in a post-2008 crisis world?
Can an investor in 100 per cent gilts make a net rate of return even using the new discount rate?
How can the Roberts v Johnstone approach to accommodation work with a negative discount rate?
Should courts have greater powers to impose periodical payments in appropriate cases?
Can the cost to the NHS be mitigated without penalising the injured person?
Will the uncertainty lead to a delay in the resolution of claims?
The Law Society looks forward to the forthcoming Ministry of Justice consultation paper on these and other issues. This needs to be a measured debate where the needs of people seriously injured through another’s negligence are considered to at least the same extent as the interests of insurance companies and the public purse.
David Marshall is a member of the Law Society Civil Justice Committee and a partner at Anthony Gold Solicitors