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Discount Rates and how they affect compensation

When personal injury claimants are awarded a lump sum of compensation payments that include damages for future loss, eg future loss of earnings, the amount they receive is adjusted according to the interest they can expect to earn by investing the damages.

In finalising the compensation amount, the Lawyers and courts apply a calculation called the Discount Rate – with the percentage linked in law to returns on the lowest risk investments, typically Index Linked Gilts.

The Discount Rate was set at 2.5% in 2001, and has been unchanged since then, despite interest returns on investments being very low – even more so since the economic downturn in 2008. This effectively meant that Claimants were being left out of pocket, as they were having a 2.5% discount applied to their future losses, when in reality the amount of return that they were receiving when investing the lump sum award was much lower than 2.5%.  

Thankfully for claimants, on the 27th February 2017, the Lord Chancellor and Justice Secretary Elizabeth Truss made the decision to lower the Discount Rate from 2.5% to minus 0.75%. The new discount rate came into effect on 20 March 2017.

The law makes it 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 the duration of their life.

Lord Chancellor and Justice Secretary Elizabeth Truss said:

The law is absolutely clear - as Lord Chancellor, I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set.

The decision, as well as seeing compensation payments rise, is also 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 NHS. However the Government has pledged to ensure that the NHS as well as GP surgeries have adequate funding to cope with the increased payment amounts.

The Discount Rate change has also been applied retrospectively to certain cases. Here at Dutton Gregory we assisted a child claimant (the case was Scott –v- The Royal Bournemouth & Christchurch Hospital NHS Trust) to successfully claim damages for Cerebral Palsy from the NHS, with the case settling in October 2012 for £7.1 million. However, because there was a clause inserted in the Court Settlement Order to provide for the agreed damages to be reviewed in the event of a change to the Discount Rate – this has resulted in an additional payment of £1.8 million being made to the Claimant.

If you want further information about this particular topic, or wish to discuss the possibility of bringing a claim for Clinical Negligence - or indeed any other type of injury, please contact the Dutton Gregory Clinical Negligence Team on (01202) 315005, or email c.hayter@duttongregory.co.uk  

NB This article does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Dutton Gregory LLP.