Civil Liability Bill progresses amid continued uncertainty over the discount rate

Posted: 26/04/2018

The second reading of the Civil Liability Bill has just taken place in the House of Lords and, although there have been expressions of concern about the content of the Bill from several quarters, its passage appears to be progressing.

The first part of the Bill relates to road traffic accident whiplash claims but it is the second part of the Bill, covering a change in the way that the discount rate is calculated, that will be of particular concern to those who are claiming damages for catastrophic injuries and who have significant claims for future loss.

The principal of a damages award is to put an injured person back in the position he or she would have been in had the injury not occurred, as far as possible.

Where a claim is made for an ongoing loss, (such as loss of earnings), or for a loss which will arise in the future, (for example, relating to the purchase of equipment or the provision of therapy), consideration needs to be given to when that loss will arise and how long it will last.

When damages are awarded for future loss it has been assumed up until now that they will be invested in very low risk investments. This is because a claimants are financially dependent on their damages and should not be required to ‘gamble’ monies that will be needed to meet their needs as they arise. The discount rate (which is the assumed rate of return on those investments), was set at 2.5% in 2001 by the then Lord Chancellor. There was much criticism of this rate, which remained unchanged for 16 years because, in practice, it was not possible for claimants to achieve that rate of return by investing in very low risk investments and they were being under-compensated.

After the threat of judicial review and a series of consultations, the discount rate was changed by Liz Truss, in her role as Lord Chancellor, to - 0.75%, with effect from 20 March 2017, reflecting the view that very low risk investments were leading to a negative return, after inflation. The impact of this change was to increase the lump sum element of damages awards significantly, causing an outcry from those paying damages, largely insurers and NHS Resolution.

This has led to the proposed reform of the way in which the discount rate is calculated in the Civil Liability Bill, with the rate being set on the assumption that claimants will invest in ‘low risk’ rather than ‘very low risk’ investments. The Bill also proposes a requirement for the Lord Chancellor to set the discount rate every three years after taking independent, expert advice.

Alison Appelboam Meadows, a partner in the clinical negligence team at Penningtons Manches LLP, comments: “It is a shame that with a relatively recent change to the discount rate, to a level which more adequately compensates claimants for injuries they have sustained through no fault of their own, we now have uncertainty on the horizon. If the discount rate increases, there is a risk that, yet again, claimants will be under-compensated.”

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