When a discount can cost you money in cases of compensation
The Courts have always struggled with providing a fair means to compensate accident victims for losses they are going to incur in the future.
In theory money awarded now in respect of losses or expenses that will be incurred in the future has to be discounted to reflect the fact that the claimant could invest the cash in the intervening period and earn interest.
When the financial markets were relatively stable a Court could be confident of the likely return on investment without exposing the Claimant to the risk of losing the capital sum.
As a consequence Claimants lawyers are required to apply a discount on the calculation of future loss claims that reflected an average investment return of 2.5%. This rate was set by the then Lord Chancellor in June 2001 and has not changed since.
With the financial markets in turmoil that rate of return is, to all intents and purposes, now impossible to achieve.
The problem can be avoided in cases where the Court can make an order for an annual periodic payment rather than a lump sum.
Periodic payment orders have become more popular as a consequence especially in providing for the cost of long term care regimes.
Such orders are not always possible or appropriate, however, and for those settling claims for future loss now there is a real prospect that they will be significantly undercompensated.
Pressure has been growing on the Lord Chancellors office to adjust the applicable rate to reflect what can now be reasonably achieved.
The Ministry of Justice has just issued a consultation document for input from interested parties over the next three months.
The difficulty facing the MoJ is predicting what will happen to the financial markets in the future. The following extract from the Consultation document succinctly set out the conundrum
‘In setting the rate the expectation will be that any new rate should endure for a reasonable length of time. However, a balance may need to be struck as insufficiently frequent change may increase the risk of inaccurate rates, whilst over-frequent changes could engender uncertainty and make it more difficult and expensive to settle cases.’
Whether, and in what way, the results of the consultation will be implemented remains to be seen.
Author: Martin Pettingell