The Discount Rate in Clinical Negligence and Personal Injury Claims
Compensation in a clinical negligence or personal injury claim is to put an injured person back in the position they would have been had the accident/negligent treatment not occurred.
For someone who has suffered life changing injuries, there can be many future losses for example loss of earnings and care needs.
Where lump sum payments are made, the discount rate is applied to account for investment.
What is the discount rate?
The discount rate is a multiplier used to adjust compensation for future losses to take into account interest and inflation. Currently, the discount rate is set at -0.75%
However, as of 5 August 2019, the discount rate will increase from -0.75% to -0.25%
The rate had been at 2.5 per cent since 2001. This discount rate was not reviewed until 2012 and by this time it had attracted a significant amount of criticism from claimants and their legal representatives. Interest rates had plummeted since the financial crash of 2008, meaning that it was impossible for a claimant to secure a safe investment with a discount rate of 2.5%.
On the 20th March 2017, the Lord Chancellor, reduced the discount rate to -0.75%.
This change was of course welcomed by claimants and criticised heavily by defendant insurers.
It was expected for some time by both sides that the discount rate would be lowered, as it had not been changed in sixteen years, however, no one expected a negative figure.
Within 24 hours of the announcement, sixteen executives of the UK’s largest insurance companies had called a meeting with the Chancellor of the Exchequer to request a U-turn. They warned that this would lead to increased lump sum payments to claimants which would push insurance premiums up for millions of UK businesses and people.
Claimants saw this as a long awaited change and felt the new discount rate finally reflected the fact that claimants were risk adverse investors. They felt that the defendants had benefitted for too long from undercompensating the claimants and welcomed the change.
What has been the impact?
Defendant insurers and public services with large liabilities such as the NHS have been impacted in the way they feared. Profits have decreased as pay outs to claimants have increased.
Catastrophic injury claims and clinical negligence claims involving children now produced pay outs that were 30% and 50% higher.
Future change to the discount rate
The Lord Chancellor recently announced a change in the discount rate following a review under the Civil Liability Act 2018.
As of 5 August 2019, the discount rate will increase from -0.75% to -0.25%
Essentially this rate change will mean that the level of damages payable on high value claims will fall slightly but damages will continue to be uplifted for accelerated receipt on the assumption that Claimants will invest their damages in a way that will result in them losing money.
Here’s an example of how it works:
A 30 year old skilled worker was seriously injured during their employment. They will not be able to return to this previous skilled employment but are still able to do some work using his relevant skills and knowledge but with a decrease in net annual income of £10,000, and an expected retirement age of 60.
Loss will now be calculated as follows;
Future loss of earnings using the previous -0.75% discount rate
Multiplicand: £10,000
Multiplier: 32.84
TOTAL: £328,400
Future loss of earnings using the new -0.25% discount rate
Multiplicand: £10,000
Multiplier: 30.44
TOTAL: £304,400
In very serious injury cases there are likely to be several elements of the claim to which the multiplicand/multiplier formula will apply.
Whilst a move in the right direction it is felt that the Government has not gone far enough.
Taking legal action for medical negligence or personal injury
If you would like to discuss a potential claim please contact a member of the team who will be pleased to assist you.
