With the introduction of the Civil Liability Bill into the House of Lords this week, the Ministry of Justice has produced their response to the report of the Civil Justice Committee (CJS) and has rejected the argument that there is insufficient evidence to overhaul how the discount rate in personal injury claims is set.
What is the discount rate?
Clinical negligence compensation awards are intended to put the Claimant in the position that they would have been ‘but for’ the negligence. In the most serious cases, the Claimant is awarded a lump sum to cover future loss of earnings, care and future treatment and is expected to invest these funds and receive a return to use for their future needs. The Discount Rate is a figure used to calculate how much Defendants should pay Claimants in cases of life changing injury.
On 20 March 2017, the discount rate was reduced from 2.5% to -0.75%, significantly increasing the amount of compensation that a Claimant could recover.
Why is the discount rate being reviewed?
There has been much debate given the reduction of the discount rate last year. If the discount rate is set too high, the value of the return will not keep up with inflation and the Claimant may not be adequately compensated. A Claimant with life changing injuries is likely to be financially dependent on the lump sum awarded for the rest of their lives. If the rate is set too low, the Claimant could be overcompensated with the taxpayer footing the bill.
So is the Claimant expected to look for riskier investments to achieve a better return and what return can be expected? The balance has to be struck.
The MOJ’s response to the Civil Justice Committee’s recommendations
Claimants have historically been treated as more cautious investors as they are expected to secure their future financial position.
The Government has confirmed that the overriding objective of setting the rate remains to support the 100% compensation rule, i.e that the aim is to neither under-compensate nor over-compensate the Claimant by ensuring that the Claimant receives the money that they are expected to need and that this is fair for both parties.
The Government has highlighted a need for Claimants to move away from a ‘risk-free’ approach which tends to ‘create excessively large awards of damages’ and that this is ‘unrealistic’. At the same time the Government shares the concern of the Committee that the setting of the rate should not result in significant under-compensation for the most vulnerable Claimant.
The government has not dismissed the proposal that setting different rates for different cases may be appropriate.
Although the decision to set the discount rate is likely to continue to rest with the Lord Chancellor, the Government has agreed with the proposal that an expert panel (comprised of an actuary, an economist, an investment manager and an expert in consumer affairs as relating to investments) will assist with the process of setting the rate. The Lord Chancellor’s report and the expert panel’s recommendations would be published at the same time once the rate to be set is decided.
Despite criticism, the government has advised of their intentions to continue to retain the proposed interval of review at 3 years, although it is unclear how this will work in practice given that the discount rate applies to the most serious cases which typically take 3-5 years to conclude.
The Lord Chancellor will however, at least be required to provide the reasons for setting the rate and the soon to be formed expert panel will have a role in analysing the data and considering actual investment behaviour.
The Government is particularly keen to encourage periodical payment orders and that Claimants are adequately advised of these as an option.