Court of Appeal Judgment on indexation involving four NHS cases, Thompstone, De Haas, Corbett and RH was handed down today. In each case liability had been admitted and all four severely injured Claimants sought a Periodical Payment Order (“PPO”) pursuant to s2 of the Damages Act 1996 with annual increases to be calculated in accordance with an earnings related index and not the Retail Prices Index (“RPI”). All four cases were managed by the NHS Litigation Authority.

Trial judges in Thompstone, Corbett and RH exercised their discretion pursuant to s2(9) of the Damages Act 1996 disapplying the RPI and index-linking the PPO to ASHE 6115, to ensure full compensation for the Claimant would be achieved (“the 100% recovery principle”). The Appeal in De Haas related to the form of award and whether the trial judge applied the correct legal test. 

Appellants argued (i) adopting an earnings related measure would lead to two ostensibly parallel systems of compensation (lump sum & PPO) producing different outcomes; (ii) ASHE 6115 was an inappropriate measure and lacked proximity to the Claimants’ carers earnings; (iii) only form of modification permitted by s2 (9) of the 1996 Act is modification of the RPI itself; and (iv) the principle of “Distributive Justice” taking into account the significant costs of an earnings related measure to the NHS and patient care should apply.

Court of Appeal dismissed all four appeals on all issues and upheld the trial judges’ decisions. The Court of Appeal made it clear it considered ASHE 6115 an appropriate index and stated:

“We hope that as a result of these proceedings the National Health Service, and other Defendants in proceedings that involve catastrophic injury, will now accept that the appropriateness of indexation on the basis of ASHE 6115 has been established after an exhaustive review of all the possible objections to its use, both in itself and as applied to the recovery of costs of care and case management. It will not be appropriate to reopen that issue in any further proceedings unless the Defendant can produce evidence and arguments significantly different from, and more persuasive than, that which has been deployed in the present cases. Judges should not hesitate to strike out any Defences that do not meet that requirement.”

Court of Appeal has granted the Appellants permission to Appeal to the House of Lords and further developments are awaited. A hearing before the Committee of the House of Lords is unlikely to be heard before end 2008 or early 2009.

What does the Judgment mean for Defendants?

Defendants should proceed on the basis that Courts will now adopt ASHE 6115 as the measure to calculate annual increases of any PPO involving a significant future care claim. Defendants are currently unable to purchase annuities index linked to ASHE 6115. The insurance market will need to respond to the Judgment and produce ASHE 6115 linked annuities for those unable to self fund PPOs. Insurers and other Defendants who have the ability to self fund will need to make appropriate arrangements to facilitate ASHE 6115 linked PPOs.

It is estimated the additional costs to the NHS alone could be in the region of £1.6billion.

No one can predict the long term differential between ASHE 6115 and RPI. Between 2006 and 2007, for example, the average increase of ASHE 6115 (percentiles 60-90) was 5.78% whilst RPI increased at 4.53% - a differential of 1.25%.

By way of illustration, a claim where the future care head of loss is £100,000 pa with the Claimant surviving a further 50 years a “rough and ready” method of calculating the additional potential costs (assuming a differential of 1.5% between RPI and ASHE 6115) is to adopt a discount rate of say 1% (multiplier of 39.39) as opposed to a discount rate of 2.5% (multiplier of 28.72), which produces a care claim of £3,939,000 compared to £2,872,000. This produces an increase in lump sum terms of £1,067,000 (37.15%).

Compensators should review their reserves on all cases where there is a significant future care claim as a PPO may be sought or ordered by the Court.