The Discount RatePublished on: 24 July 2019
On 15 July 2019 the Lord Chancellor announced a new discount rate of -0.25% for all personal injury and clinical negligence claims. The Association of British Insurers (ABI) was swift in its criticism of the rate and renewed existing arguments that the new rate would lead to a rise in insurance premiums and pressure on public services such as the NHS, which would have knock on effects on the taxpayer.
The aim of compensation
As we have explained in previous blogs, the aim of compensation in a clinical negligence case is to put a claimant in as close to the position that they would have been in, but for the negligence. This is not always possible, for example in a case where a child has suffered a brain injury in the form of cerebral palsy, the compensation is used to ensure that they are able to achieve their full potential during their lifetime, by ensuring that they can afford the care and support they need for life.
What is the discount rate?
Generally, all compensation payments consist of at least some element of a lump sum, which is awarded for past and future losses. However, the future loss element is discounted at the point of payment to reflect the fact that the compensation could be invested by the claimant and they could actually make money on it. If it were not discounted, this could be unfair since in reality the claimant could be overcompensated for their loss. The idea of discounting is therefore that when the claimant invests their money, the only money they will make is the amount of compensation that was deducted when they received it.
Until 2017, the discount rate was set at 2.5%; the assumption being that interest could be earned at that rate. For example, if a man aged 37 at the time of the negligence sustained a loss of £30,000 a year that would continue until he reached the age of 65, the discount rate would be applied and his claim would be for £606,300. We would not simply multiply his loss by the 28 year period and then claim back £840,000 because the law assumed he would earn a good rate of interest during that 28 years.
Why was it unfair?
Unsurprisingly, defendant insurers and the NHS were happy with this arrangement as they did not have to pay out as much in compensation as the claimant deserved. They happily ignored the fact that, in reality, it is almost impossible for a claimant to earn the necessary rate of interest to make up the shortfall in their compensation. This meant that claimants were being undercompensated.
In 2017, the government recognised this and implemented a new discount rate of -0.75%. This meant the loss of earnings claim in the above scenario changed to £935,100. It recognised that claimants would not be able to earn interest on their compensation. It also provided an advance top-up of their compensation to reflect the fact that over time the value of their money would actually go down as the cost of living goes up (inflation), as a further safeguard against under compensation.
However, defendants were unhappy with this as it meant they had to pay out more in compensation. They argued that claimants were now being overcompensated and that this would increase the burden on taxpayers where the NHS was paying and insurance premiums where insurers had to pay out.
The government accepted that a closer review was required and set the groundwork for this in the Civil Liability Bill 2018. It was then a waiting game as to what the new rate would be.
The new discount rate
In the wake of massive cuts in legal aid and other changes in the way in which clinical negligence claims are funded (which it is fair to say did not go the claimant’s way), claimant solicitors were not optimistic about what the new rate would be.
However, the new discount rate of -0.25% announced by the Lord Chancellor on 15 July 2019 was welcomed as it still reflected a fair and balanced approach to the calculation of compensation. The ABI however is not happy and has denounced the rate as unfair. They argue that higher compensation pay outs will mean higher premiums and taxes, but appear not to appreciate that the gentleman above would now only receive £870,000 for his lost earnings, which is less than before the rate changed and is much more in keeping with his actual loss.
Amidst all of the figures which fly about in the context of negligence claims, it is to be applauded that the government has recognised that there are real victims behind the figures in the media, who deserve just compensation for their injuries. It is hoped that this recognition will continue when the discount rate is reviewed again in five years’ time.
In the meantime, it is unfortunate that out of something positive has come more scaremongering and criticism of claimants and their solicitors. We agree that insurers and the NHS should not have to pay out huge sums in compensation, but not because of the cost of it. We agree because cases of negligence should not be happening and this is why we campaign for lessons to be learned from mistakes that have been made to prevent the same from happening to someone else in the future.