A lump sum just right for injured Goldilocks

By Adrian Denson, Chief Legal Officer, Fletchers Group

With the next Discount Rate (used to determine lump sum damage awards to claimants who suffer a serious personal injury) review due to complete in 2024, Fletchers Group chief legal officer Adrian Denson sets the scene for what is expected to be a fierce debate between claimant and defendant interests.

The Civil Liability Act 2018 stipulated a review of the Personal Injury Discount Rate (DR). Following that review, the DR for calculating lump sum personal injury losses was raised on 5 August 2019 from -0.75% to -0.25%. The previous rate had been set by Liz Truss when she was Lord Chancellor, to the enormous chagrin of insurers and other compensators, and the new rate did little if anything to appease them.

As part of the review, the Government Actuary produced a written Advice for then Lord Chancellor, David Gauke, in June 2019. While the Actuary recommended a single DR rate should be maintained on that occasion (due to time constraints), it suggested that in future a dual DR should be considered in order to see claimants compensated more accurately (in line with the established principle of full compensation, neither too much nor too little).

The Civil Liability Act 2018 also provided for the DR to be reviewed at least every 5 years, so a review was expected sometime soon, with any new rate to be introduced by August 2024 at the latest. That process began on 17 January 2023 when the Government announced its ‘Open Consultation – Personal Injury Discount Rate: Exploring the option of a dual/multiple rate.’

Clearly the Actuary’s Advice from 2019 has been heeded. The consultation considers the experiences of other jurisdictions (Ontario, Hong Kong, Ireland and Jersey) and asks whether a dual or blended rate is more likely to lead to claimants receiving full compensation by allowing for expected future investment returns (normally assumed to be lower in the short-term but much higher in the long-term).

With a dual or multiple DR, I can see real benefits. When it comes to lump sum settlements (whether in full settlement of all heads of loss or as part of a PPO settlement) there is only ever one certainty: the lump sum will either be too much, or too little, and only time will tell which. If a dual or blended DR reduces uncertainty by getting much closer to full compensation, then I am all for it.

However, I have wider concerns about any changes to the DR. Whether we have a single rate or dual rates, seriously injured claimants must be able to afford what their compensation is meant to fund, from rent to rehabilitation, case management to care, home adaptations to aids and equipment. And for that to happen, they must know that their damages will be enough and will last.

Given performance of investments over the past five years, there is grave doubt whether the current DR of -0.25% is set at the right level to protect investments and ensure that they grow at least in line with inflation and the real cost of everything that claimants must be able to afford.

Short term investments are generally lower and certainly higher risk than long term ones (hence the suggestion of a dual rate) but given the current economic conditions and long term uncertainty, can we have any confidence in investments over, say,  the next 10-20 years?

The answer is surely no. In which case, with a current DR that is not protecting invested damages and with perhaps unprecedented uncertainty in the markets, my primary concern is to ensure that any new DR (whether a single rate or dual rate) is set appropriately.

Claimants must not be put in the situation where their damages calculations are too low due to a DR that does not reflect economic reality.

Compensators argue that it’s a fallacy that claimants choose to invest their damages in a way that guarantees them losing money. However, the markets over the last five years have been extremely volatile and the truth is that claimant investments have fallen significantly in real terms.

Those seeking  a higher DR  will cite higher interest rates, signs of market normality returning and so on. But there is no sign of normal economic behaviour returning; indeed during my entire career there has never been a more uncertain time for a claimant to be investing their damages.

Forensic analysis by the financial experts will be crucial, but I’m convinced that  that any new rates coming out of the next review, whether single or dual,  should be reduced from the current rate -0.25% in order to shelter claimants from the current economic crisis and long term uncertainty.