A Shock to the System: Significant Changes to the Discount Rate Applicable to Personal Injury Damages Awards in England and Wales

By: Alex Potts and Caitlin Conyers, Bermuda

In the United Kingdom, when victims of life-changing personal injuries accept lump sum compensation payments, the actual amount they are awarded by English Courts is adjusted according to the interest that they can expect to earn by investing the award. In finalising the compensation amount, English Courts apply a calculation called the Discount Rate – with the rate percentage linked legally to returns on the lowest risk investments, typically Index Linked Gilts.

On 27 February 2017, the Lord Chancellor and Minister of Justice announced significant changes to the Discount Rate applicable under the “Ogden Tables” to the calculation of the compensation payments and lump sum damages awards in England and Wales. The announcement was not welcomed by the UK insurance industry, as many UK insurers will face the prospect of significantly increased personal injury damages liabilities.  However, legal representatives for injured claimants have long been advocating for Discount Rate reform in England and Wales, against the background of a number of consultation exercises.

The decision by the Lord Chancellor to lower the Discount Rate from 2.5% to minus 0.75% was made in accordance with the UK’s Damages Act 1996, which makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or for the duration of their life.  Compensation awards using the discount rate should, so far as possible, put the claimant in the same financial position that they would have been in had they not been injured, including loss of future earnings and future care costs.  The new Discount Rate of minus 0.75% comes into effect in England and Wales on 20 March 2017, following amendments to the current legislation.

The Discount Rate previously had been set in 2001, and remained unchanged for 16 years.  The Lord Chancellor’s recent change to the Discount Rate will see compensation payments rise in England and Wales, and, as such, it is likely to have a significant impact on the insurance industry, and a knock-on effect on public services with large personal injury liabilities (particularly the National Health Service).

In the Lord Chancellor’s announcement to the London Stock Exchange on 27 February 2017, the UK Government made four key pledges:

  • the UK Government has committed to ensuring that the NHS Litigation Authority has appropriate funding to cover changes to hospitals’ clinical negligence costs;
  • the Department of Health will work closely with general practitioners (GPs) and Medical Defence Organisations to ensure that appropriate funding is available to meet additional costs to GPs, recognising the crucial role they play in the delivery of NHS;
  • the UK Government will launch a consultation in the coming weeks to consider whether there is a better or fairer framework for claimants and defendants, with the government bringing forward any necessary legislation at an early stage. The consultation will consider options for reform – including whether the rate should in future be set by an independent body; whether more frequent reviews would improve predictability and certainty for all parties; and whether the methodology is appropriate for the future;
  • the UK Government’s Chancellor of the Exchequer, Philip Hammond, will meet representatives of the insurance industry to assess the impact of the rate adjustment.

It should be noted that in certain other common law jurisdictions such as Bermuda, the Courts already had moved in recent years towards a Discount Rate consistent with the minus 0.75% now applicable in England and Wales, on a case by case basis (see, e.g., Simon v Helmot [2012] UKPC 5; Argus Insurance v Talbot [2014] Bda LR 114; Warren v Harvey [2015] Bda LR 59; and Colonial Insurance v Thomson [2017] Bda LR 41).

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