The discount rate and professional negligence claims

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Background to discount rates

When assessing damages in personal injury and clinical negligence claims there is often an element of future loss (such as future medical treatment or accommodation needs) that needs to be taken into account when calculating lump sum compensation.  As the Claimant is receiving all of the funds straight away a discount rate (often known as the Ogden rate) is often applied to the sum actually awarded that means a set sum will be achieved in the future (by a given date) if that money is properly invested.  This is done to ensure that a Claimant does not receive more than they would otherwise be entitled to.

Under the Damages Act 1996, section 1(1) the discount rate may be prescribed by an order made by the Lord Chancellor in an action for personal injury. The Lord Chancellor set the rate at 2.5% in 2001 - it had previously been conventionally set at 4-5% in the 1970s and 1980s and then at 3% by the House of Lords (in Wells v Wells).  The discount rate is linked, by law, to returns on the lowest risk investments – typically Index-Linked Gilts and the yields on these investments has fallen dramatically since 2001.

Recent change in the discount rate

Until recently no further rate has been set and therefore any personal injury case in England and Wales had a set 2.5% discount rate, notwithstanding a multitude of evidence that such returns in recent economic climate would be unachievable.  There was an ongoing concern, therefore, that seriously injured claimants were being undercompensated as a result of the discount rate.

On 27 February 2017, the Lord Chancellor made the decision to lower the Discount Rate from 2.5% to minus 0.75%.  This new discount rate took effect from 20 March 2017 and will have a dramatic effect on the calculation of future losses owing to personal injury claimants.

To give an example, in order to cover a £100,000 damages award to a claimant a defendant (or their insurer) would need to pay out:

  • Under the old 2.5 % rate - £97,500;
  • Under the new -0.75% rate - £100,750.

On 30 March 2017, the Ministry of Justice announced a consultation of the discount rate regime.  The consultation will be addressing:

  • What principles should guide how the rate is set?
  • How often should the rate be set?
  • Who should set the discount rate?

Lawyers and insurers have been given until 11 May 2017 to provide their views as to how the personal injury discount rate is set.  We will, therefore, be keeping a close eye on how matters progress.

Under-settlement of personal injury claims

Immediately after the Lord Chancellor's recent announcements, there was a flurry amongst personal injury and clinical negligence practitioners to review any offers of settlement either made or received in light of the drastic change in the discount rate.  In particular, these lawyers needed to urgently identify any offers which been put forward that were now drastically undervalued in light of the dramatically lower discount rate.

This was also a more acute risk in situations where a Part 36 offer had been made as only explicit withdrawal or time limited offers are off the table – otherwise, they are open for acceptance by the other side at any point in the future.

This begs the question as to whether there are situations in which offers have been accepted around this period without due consideration being given to the recent change in the discount rate.  If there is lump sum compensation offer made or being considered for acceptance around this time which has an element of future loss, you would expect a reasonably competent lawyer to:

  • Review whether the recent change in the discount rate has any bearing upon the offer being made/accepted; and
  • Provide advice to the client if they do consider that the recent changes in the discount rate impact upon any offer so that the client can make an informed decision as to whether the offer should be accepted/withdrawn, as appropriate to the circumstances of a particular case.

In the absence of both elements a conclusion could be reached that the lawyer was in breach of their professional duty.  This would not be a new phenomenon – we discussed the issue of recycled claims in our previous article regarding a Court of Appeal decision from 2015 which can be accessed here.

There was a growing awareness amongst personal injury professionals from around November 2016 onwards that a change in the discount rate was on the horizon.  Any offers made and/or accepted during this period could, therefore, be open to scrutiny.

As with all professional negligence claims, a prospective claimant would then need to show that such breach of duty has caused them to suffer loss – this loss could, for example, be calculated by reference to the amount the Claimant would have received had the offer been recalculated by reference to the new discount rate.  There is, of course, the argument that could be put forward by the defendant that they were only accepting the offer as it was so low for other reasons (not linked to the discount rate).  Ultimately, the prospects of success of any under settlement claim such as this will turn on a careful analysis of the particular facts of the individual case.

Relevance to other professional negligence disputes

In practice, we come across cases where there is an element of future loss which is yet to be incurred.  For example, there may be a future tax liability which would not have been incurred had the professional in question not breached their professional duty of care.  In situations such as these, therefore, the issue will arise as to how credit should be given to the claimant for the accelerated receipt of the compensation.

In other words, does the discount rate apply? Professional negligence claims do not fall explicitly within the scope of the Damages Act 1996. Accordingly, we need to look to the relevant case law for an answer.  However, guidance from the Court on the point is far from certain.

Against the application of the discount rate in professional negligence claims is the Privy Council matter of Helmot v Simon [2012] UKPC 5.  In this case the Privy Council considered a personal injury claim brought by a resident of Guernsey. Since the Damages Act 1996 was not part of Guernsey law, the Lord Chancellor’s fixing of the discount rate did not apply to this Claimant.

In applying the principle of full compensation, the Privy Council took account of the evidence it had heard and approved the Guernsey Court of Appeal’s assessment of discount rates at 0.5% for future losses other than earnings and -1.5% for future loss of earnings. Providing evidence was obtained, there would be a reasonably strong argument that the discount rate did not apply.  In light of the recent change in the discount rate, it is more likely now that a defendant would seek to advance an argument that it is case specific evidence, and not the relevant discount rate, that would apply.

However, more recent case law has shown that there is a risk that the Court would refuse to take such a step.

In LHS v First-Tier Tribunal (Criminal Injuries Compensation)[2015] EWHC 1077 (Admin), Jay J in the Administrative Court considered an application for judicial review by a claimant whose discount rate had been set at 2.5%. The only issue by the time of the First Tier Tribunal hearing in this criminal injuries case had been what the appropriate discount rate was. It was common ground between the applicant and the CICA that the Damages Act 1996 did not directly apply to awards made under the Criminal Injuries Compensation Scheme 1990.  The applicant had provided expert evidence to the FTT as to what the discount rate should be if unconstrained by statute: 0% on price-related losses and -1.5% on earnings-related losses.  However, the First Tier Tribunal concluded that it should apply the rate set by the Lord Chancellor.

Jay J found for the First Tier Tirbunal. In his Judgment, he stated that the applicant’s best point was the argument (relying on Helmot v Simon) that there is no basis in principle for allowing statute to seep into areas of the common law to which it was not expressly applicable. If statute was properly excluded from consideration, the exercise mandated by the Privy Council in Helmot v Simon must be undertaken. Jay J held, however, that the objective of the Criminal Injuries Compensation Scheme meant that the compensation should be at a similar level to the victim in a civil claim and that the only means of achieving this outcome would be to apply the Lord Chancellor’s discount rate.

This case does, therefore, indicate that the court may seek to achieve regularity across civil claims in England and Wales. There is, therefore, an arguable case that the new -0.75% discount should not apply where the discount is not directly prescribed by the Damages Act. The only similar case under English law since Helmot v Simon held that the Damages Act applied to a non-personal injury case, favouring consistency and legal certainty. This indicates that a similar approach may well be taken to a professional negligence claim.

It would appear, therefore that a case could be made either for the discount applying to professional negligence claims or that case specific evidence of the relevant discount should be considered.  The preferred method will likely stem from consideration as to which party is being represented and whether a lower or a higher discount is preferred.

If you have any questions about the discount rate and personal injury claims please contact our team who will be happy to answer your questions.