All Change – The discount rate for personal injury claims is set to change again
by Rachel Mills
The Lord Chancellor and Justice Secretary has today announced that he will be placing draft legislation before Parliament which proposes to change the way in which the personal injury discount rate is calculated. If this legislation is enacted by Parliament, the discount date under Section 1 of the Damages Act 1996 will change at a date to be determined. These changes will not apply retrospectively but will apply to all future settlements and assessment of quantum by the Courts.
The discount rate is the rate applied to personal injury damages to account for the investment of a lump sum payment. The rate was amended in March 2017 with a reduction from 2.5% to -0.75%. This has had a significant impact on the value of damages for future losses and resulted in higher multipliers in Schedules of Loss and increased awards of damages. This has been a cause of considerable concern for Defendants and Insurers. This latest development is as a result of a consultation process which was commenced following the announced changes in February 2017.
The effect of the proposed legislation is that a new rate will be calculated. It is anticipated that the new discount rate will be in the range of 0 – 1% which will, in practical terms, mean a reduction to future losses in personal injury claims and reduced compensation awarded.
The principle of the law of damages is that Claimants should receive 100% compensation for the losses they have suffered as a result of a personal injury. The aim in applying a discount rate is to ensure Claimants receive no more or no less than the full compensation they are entitled to as a result of their injuries. The new legislation proposes the following changes:
- How will the rate be set?
The legislation proposes the rate is to be set by reference to expected rates of return on a low risk diversified portfolio of investments rather than very low risk investments as currently used.
- How often will the rate be reviewed?
The legislation proposes the rate will be reviewed at least every three years after any initial amendment.
- Who will set the rate?
The new rate will be set by the Lord Chancellor after consulting an expert panel.
We do not know when the new legislation will be enacted but the Government has invited comments to the draft legislation and has indicated that new legislation will be introduced into Parliament at the earliest opportunity. The legislation anticipates any new rate would be calculated within 180 days of enactment.
It is encouraging to see that this period of uncertainty relating to changes in the discount rate should soon be at an end. We will keep you fully updated as changes come into force but should you have any queries in the meantime please do not hesitate to contact Rachel Mills, whose details are below.