New Discount Rate
New Personal Injury Discount Rate
How will it affect your injury claim?
The Lord Chancellor recently made a long anticipated announcement following her review of the Discount Rate. The Discount Rate is a percentage used by Lawyers to calculate future losses in personal injury and fatal accident claims. It is designed to discount the lump sum for future losses on the assumption that the money can be invested and earn interest in the future. The aim of setting this rate is to ensure that Claimants are not over or under compensated.
It makes adjustments to personal injury awards to take into account the return expected when a compensation lump sum is invested.
The discount rate was set at 2.5% 16 years ago in 2001.
The rate of 2.5% (fixed in 2001) has now been adjusted to -0.75%.
There had been concern within the legal industry that Claimants had been under-compensated for many years. The announcement followed a lengthy review – initially provoked by Judicial Review proceedings brought in March 2011 by the Association of Personal Injury Lawyers (APIL).
The effect of this decision
The discount rate changed on 20 March 2017. This is a decision which will drastically increase the size of lump sum payments across the scale of serious personal injury cases. The change only affects future losses and any claim for past losses will be unaffected. It is vitally important that calculations of a victim’s loss are calculated accurately. The people who will be positively affected as a result of this decision are those who have suffered serious or catastrophic injuries through no fault of their own.
The difference it will make
Consider how a Claimant’s damages will be affected by the decision:
Joanne is a 25 year old woman who had been earning £15,000 per year after tax. Unfortunately she suffered severe injuries in an accident that means she is unable to work. If she had continued until a retirement age of 68 she could have expected to earn a total of £15,000 x 43 years = £645,000.
It is not possible just to merely award Joanne £645,000 because she would, by receiving it now, have the benefit of being able to invest it and earn interest over the next 43 years. A discount rate is therefore applied.
If a 2.5% discount was applied the actual multiplier would be 26.1 instead of 43 and Joanne would therefore receive £15,000 x 26.1 = £391,500.
If the new discount rate of -0.75% is applied the multiplier becomes 49.66 and Joanne therefore suffers a loss of £15,000 x 49.66 = £744,900.
Solicitors currently valuing claims will have to recalculate future losses although the task is made difficult by the absence of a -0.75% column in the Ogden Tables.
It is unlikely that the discount rate will remain at -0.75% for the next 16 years but it seems likely the insurance industry will challenge the decision. However, it is important to remember that the objective of the discount rate is to ensure that seriously injured people are fairly compensated.
Unfortunately the Ministry of Justice have recently announced that a consultation will be carried out in respect of calculating the rate. The consultation is due to close on 11 May 2017. The core issues to be considered in the consultation are:-
What principles should guide how the rate is set
- How often should the rate be set
- Who should set the discount rate
It is important to note that the objective of the discount rate is merely to ensure that seriously injured people are fairly compensated.
I am a Partner at Edwards Duthie Shamash Solicitors and have experience in handling claims of the utmost severity. If you or a loved one have suffered an injury as a result of someone else’s negligence, please contact me on 020 8514 9000 or email me at: email@example.com