Ministry of Justice unveils Civil Liability Bill to overhaul discount rate

Posted: 21/03/2018

This week the Ministry of Justice (MoJ) has unveiled the Civil Liability Bill  includes not only reforms to the personal injury sector, but also changes to the way the discount rate applied to clinical negligence and personal injury settlements is calculated.

In clinical negligence and personal injury cases, two types of damages can be sought: general damages to reflect injury itself, and special damages to reflect the losses and expenses a victim has incurred and will incur in the future as a result of the injury, for example to meet care needs and to reflect any anticipated loss of earnings. Special damages for future loss may be paid as a lump sum or as regular periodical payments. In the case of lump sum, it is assumed that the money will be invested until it is needed and that a return will be achieved. A discount is therefore factored into the future claim to reflect the assumed rate of return to be achieved to ensure a claimant is not over-compensated. This assumed rate of return is known as the ‘discount rate’. From 2001 to 2017 the discount rate remained at 2.5%, and was then reduced to -0.75% to reflect the fact that claimants were not receiving the returns expected and were at risk of a significant shortfall in financing their future losses.

In its announcement, the MoJ made clear that it believed it had evidence that the average real-world returns from investment decisions now “is very likely to be producing significant levels of over-compensation relative to the amount of compensation that would be expected to be produced under the 100% compensation principle” and that “the present system for setting the rate, which is based on a ‘risk free’ approach, tends to create excessively large awards of damages”. The Government's further response is expected to be published shortly, and may give further indication of what level the discount rate is likely to be set at under the new rules and how often it is likely to be reviewed going forward. An implementation date has not yet been confirmed, however given the unveiled legislation and the push on forming the personal injury and clinical negligence sector generally, the indication is that any change will be ready to come into force sooner rather than later.

Charlene King, associate in the clinical negligence team at Penningtons Manches, comments: “It is disappointing to see that this legislation will change the discount rate after only one year of it being set at -0.75%, when it remained stagnant for 16 years previously. It will be a dramatic U-turn and it is difficult to understand how there would be sufficient evidence to change the way the discount rate is calculated after only a short period of time. The rate must be set to meet the needs of seriously injured people, not to benefit the agenda of insurers. Unfortunately however, these further reforms are likely to excuse full compensation for individuals who have been harmed or injured through no fault of their own.”

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