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Legal changes

The change in the discount rate – some improved certainty for quantifying future damages in personal injury claims

The Lord Chancellor has announced the result of the discount rate review under the Civil Liability Act 2018. From 5 August 2019, the discount rate…

Executive summary

The Lord Chancellor has announced the result of the discount rate review under the Civil Liability Act 2018. From 5 August 2019, the discount rate will increase from -0.75% to -0.25%.

The new rate is based upon the premise that claimants are to be treated as “low risk” investors and financially dependent on their damages for long periods of time. In announcing the change, the Lord Chancellor has specifically stated that he considered the following:

  • Actual returns available to investors.
  • Actual investments made by investors of relevant damages.
  • Such allowances for tax, inflation and investment management costs as thought appropriate and,
  • Wider economic factors.

The next discount rate review will take place in five years time following the new legislative methodology. This therefore now affords Defendants and Claimants in personal injury actions alike a much greater degree of certainty (at least for the next five years) in quantifying damages that arise in the future, for example for ongoing care and case management needs. Future reviews will be conducted using an expert panel, specifically established for the review.

What will this mean in practice?

There will be a fall in the level of damages on high value claims, but damages will continue to be uplifted for accelerated receipt. This is based upon the assumption that Claimants will invest their damages on a “low risk”, but not “very low risk” (as previously) portfolio of investments. It follows the government’s commitment to the full compensation principle as expounded in the House of Lords decision of Wells v Wells.

In relation to clinical negligence claims covered by the NHS Resolution Clinical Negligence Scheme for Trusts (CNST) the Treasury has been centrally funding the increased cost of the difference between the previous 2.5% rate and the current -0.75% rate. This means that Trusts in terms of their contributions to CNST have not yet been exposed to the full cost of the negative rate.

It will remain to be seen whether the continued uplift for accelerated receipt consequent upon a negative rate will result in any reluctance by some claimants to accept periodical payment orders and whether lump sum settlements will be perceived by some to be more attractive.

What should defendants do now?

  • Review all reserves to ensure they remain adequate.
  • Do not settle claims now unless the claimants’ solicitors are prepared to do so, on the basis of a discount rate of -0.25%.
  • Review all existing Part 36 offers. As a matter of urgency, defendants should review and consider withdrawing any Part 36 offer calculated on the basis of a -0.75% discount rate.
  • Review and amend any existing counter schedules.

The future

It is now clear that a negative discount rate will remain the norm for the foreseeable future.

Government Actuaries have actually provided an analysis of dual rates. This would involve a lower short term rate followed by a higher long term rate after a “switch over” period. The Lord Chancellor seems to be quite interested in this but there remains a lack of quantity and depth of evidence at the present time. However, it is possible that we will see a dual rate on the next review in five years time.

Furthermore there will be continued uncertainty caused by the impact of a negative discount rate on accommodation claims for seriously injured Claimants in light of the High Court decisions of JR v Sheffield Teaching Hospitals NHS Foundation Trust (2017) and more recently Swift v Carpenter (2018). The latter (which is not a clinical negligence case) is currently the subject of an appeal.

The Court of Appeal has acceded to an application by the Claimant to adduce further expert evidence on the basis that the appeal will now be dealt with as a “test case” on the principles of Roberts v Johnstone and future accommodation claims and whether any other methods of calculating these claims would be preferable in the current legal climate. The Court of Appeal has indicated that they intend to list the matter for a full trial commencing in early 2020. Weightmans act for the Defendant in this matter.

If you have any questions or would like to know more about our legal update, please contact Paul Thomson (Partner) or Rachel Kneale (Partner).

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