David Marshall, Partner
Email David
Personal Injury update
What may well turn out to be the most important change in decades to the way compensation is awarded occurred on 1 April 2005. The periodical payments order provisions of the Courts Act 2003 (which amends the Damages Act 1996) came into effect, together with accompanying changes to the Civil Procedure Rules.
Structured settlements (where all or part of the damages award is paid by a tax free annuity instead of a lump sum) have been available for many years but, up until now, neither party to litigation could insist upon this, nor could the Court impose it against the wishes of one or indeed both parties. Unless the other side agreed to a structure, a single lump sum payment had to be ordered.
On the face of it, periodical payment orders for future loss are attractive. The main disadvantage of a lump sum is that it will inevitably be the wrong sum. The future loss element will have been calculated by multiplying the present day value of the loss (e.g. present day earnings, with an allowance for future promotions, or the anticipated cost of care from an expert's report) by a 'multipler' calculated using life expectancy tables and assumptions about investment returns. However, life expectancy is the key driver and as no one will live precisely to the estimated date of their death the lump sum will either be too little or too much. Periodical payments remove this uncertainty and are particularly appropriate in cases where there is genuine doubt as to whether a claimant's expectation of life is significantly impaired.
The Court must now in all cases consider making orders for periodical payments for future loss and may now order periodical payments instead of a lump sum for future loss without the consent of the parties. The Court may also order periodical payments in respect of any other head of loss, but only with the consent of the parties. The Court is to have regard to all the circumstances of the case and in particular the form of award which best meets the claimant's needs. In exercising its discretion, the Court shall consider the scale of the annual paayments taking into account any deduction for contributory negligence, the form of award preferred by the claimant (including the reasons and the nature of any financial advice received) and the form of award preferred by the defendant.
The Order can have built into it when it is made any anticipated future changes in the amount of the annual payments (e.g. to take account of a likely future promotion in, say, five year's time or a likely change to the care regime, say when the family carers become too old to be likely to be able to cope). This is not to be confused with 'reviewable periodical payment orders' which are also introduced. These are orders which allow either party to return to Court perhaps years later for a variation to the Order, but only where there is a significant medical deterioration or improvement in the claimant's condition which can be foreseen at the time of the original order and where the court provides for the possibility of variation in that order.
The Court may only order periodical payments if the Court considers that the payments are 'reasonably secure'. This includes orders against government departments, and where there is a ministerial guarantee and where payments are protected by the Financial Services Compensation Scheme (which steps in to bail out failed insurers).
However, periodical payments will normally be linked to the Retail Prices Index (RPI). If one assumes that the healthcare costs index is rising at, say, 8% per annum compared to RPI at, say, 3% per annum, it is not difficult to calculate that the periodical payment for care will soon be inadequate to pay for the care regime ordered by the Court if it is indexed to RPI. It is, of course, argued that this is no different to the position under the current system of lump sums where the discount rate used to calculate the multiplier is also underpinned by RPI. However, injured people do have the option of seeking to make up shortfalls by investment and this will be limited with periodical payments, because they will not have such a substantial lump sum available. It might also be argued that the Court is empowered to order a linkage to a different index if it considers it appropriate. However, similar powers currently apply to the discount rate to be applied in calculations of lump sums and the Court of Appeal has made it clear that it is unwilling to depart from the rates approved by the Lord Chancellor.
There are serious practical concerns about the new regime. It has perhaps been unfortunate timing that a fundamental shift from lump sums to annuities has been introduced at a time when the annuity market is in such a bad way. It seems that most uninjured people do their best to avoid taking annuities wherever possible in their personal pension provision, and yet annuities are potentially being forced upon injured people (who arguably require even more flexibility than the uninjured) for even longer time periods. There are few providers in the annuity market who are interested in providing appropriate products, particularly on unimpaired young lives where the claimant might live for seventy or more years. The government will self fund and presumably welcomes the reduction of the annual cash drain of significant clinical negligence awards. Insurers had expected to purchase annuities in the market, but more are now expected to self fund which is not necessarily ideal from either their point of view or from that of the claimant (who is linked for life to the insurer of the wrongdoer).
Advising clients who prefer a lump sum on a Part 36 offer which is based on periodical payments will become more problematic as success or failure will be determined on which a Judge feels is more favourable to the claimant, likely to be a much more subjective decision than whether the claimant has done better or worse than a lump sum offer.
There has been little judicial training and practitioners are as yet unclear what Judges will actually do in practice. But there is no doubt that, for all their potential benefits, there will be considerable debate as to whether these new provisions will effectively deliver adequate compensation to injured people.
For further information email David Marshall or call 020 7940 4000.
