The Discount Rate in Personal Injury Claims Explained
10 March 2017
There has been a lot in the news lately about the fact the Lord Chancellor has finally bitten the bullet and changed the Discount Rate in personal injury claims. So what exactly is the Discount Rate, and what does it mean if you're claiming compensation for personal injury?
Compensation in personal injury claims is intended to put the person making the claim (called the Claimant) in the position they would have been, had they not suffered injury.
In some cases a Claimant will receive a lump sum of compensation to cover their future financial losses, such as lost earnings, further treatment and future care needs. A Claimant is expected to invest this money and receive a return, which they can then use for their future needs.
The Discount Rate reflects the likely rate of return on the investment.
The rate had remained unchanged since 2001, but on 20 March 2017 it's set to be reduced from 2.5% to -0.75% (that is minus 0.75%).
The fact the Discount Rate has been reduced reflects the fact that Index-Linked Government Stocks (ILGS) have dropped since 2001. This means that organisations paying out compensation settlements will now have to pay more to ensure Claimants are returned to the financial position they would have enjoyed, but for the accident.
The Discount Rate is set by the Lord Chancellor. The fact that it has been kept at 2.5% whilst yields from the relevant Index-Linked Government Stocks (ILGS) have slid has attracted strong criticism.
A study published in the Law Gazette 5 years ago considered the case of a 17-year old boy claiming for serious head injuries. It concluded that the Claimant could have been under-compensated by as much as 50%. The compensation 'gap' would of course have profound implications for the family that has been left with lifetime caring duties.
Practically, now the new Discount Rate has been set, Claimant and Defendant Solicitors have been carefully reviewing cases that will come to trial after the 20 March 2017, as future loss calculations in such cases are likely to require an amendment.
Similarly, offers to settle a personal injury claim have been checked to ensure no undervaluation has occurred, and have been withdrawn where appropriate. Schedules of Loss, which set out everything the Claimant has lost, will also need amending.
A further consequence is that insurers may prefer to make Periodical Payments Orders to the Claimant, rather than paying a single lump sum compensation award.
The UK Government says it will now launch a Consultation as to "whether there is a better or fairer framework for claimants and defendants". Insurers have opposed the reduction, so with the Government pledging to bring forward "any necessary legislation at an early stage", we recommend that you watch this space.
At Co-op Legal Services most claims can be dealt with on a No Win No Fee basis.