Personal injury practitioners are awaiting the outcome of the Government’s agreement to review the discount rate applicable to the calculation of personal injury awards.
The discount rate has been set at 2.5% since 2001. It is used to reduce the value of items of future loss or expense in injury claims on the basis that the injured person will have the benefit of investing that money now and only incurring the expenditure at some stage in the future. A discount is made so that individuals will not be over compensated for their losses in the future by making a profit on that investment.
At present, the court assumes that injured people are able to invest and receive an annual net rate of return on their investment of at least 2.5%. This is a much better rate of return than currently exists. As a result, it is argued that the discount rate is too high and that claimants have been under compensated for too long by applying too great a discount to awards. This means that injured people may find themselves in the position where they do not have enough money to pay for things in the future as the investment has not returned as expected.
The Lord Chancellor decided to review the current discount rate and publish his findings but so far this has been delayed. As a result, the Association of Personal Injury Lawyers (APIL) has been threatening to instigate judicial review proceedings.
If the Lord Chancellor lowers the discount rate, as is hoped, then in the many personal injury cases that involve future loss or expenses awards, individuals will see their damages increase and the risk of running out of funds reduce.
In the meantime, injured people who are currently negotiating settlements face a difficult decision – settle now on the basis of the current discount rate or wait for the review to ensure that, if rates are reduced, they are not under compensated. Personal injury practitioners must be alert to this issue and best protect their clients’ interests by either advising on deferring until the review has been concluded, and seeking an interim payment from the defendant in the intervening period, or negotiating as part of any settlement the option to return should the discount rate change.