David Marshall, Partner
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The Courts Act received royal assent in November 2003. Amongst the multitude of provisions relating to criminal justice are two sections which are intended to produce a fundamental change to the system of damages for personal injuries. Put briefly, Section 100, by way of amendment to the Damages Act 1996, provides that a Court may impose an order for periodical payments for future loss. Section 101 provides for these to be adequately secured, in particular by amendments to the Financial Services Compensation Scheme.
Structured settlements have been available in appropriate cases for many years - so what is new? Up until these sections come into force (which is expected in the autumn of 2004) neither party can insist upon the damages claim being satisfied of by way of a regular stream of payments until death. Unless the other side agree to a structure, a lump sum has to be ordered. And many structured settlements have been ‘top down’ – taking the lump sum and purchasing an annuity with it – rather than ‘bottom up’ payments reflecting the cost of specific needs. The Department for Constitutional Affairs made it clear in prior consultation that they see the new periodical payments order as a bottom up mechanism to provide for needs for life. Lord Irvine said "This should help ensure that injured people receive the compensation to which they are entitled for so long as it is needed, without the worry of the award running out if they happen to live longer than was expected."
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 using a multiplicand reflecting the present day value of the loss and a multiplier 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.
However, there remain issues of principle which mean that periodical payments will be a problematic remedy. Although the government stated during the course of consultation "indexing can make allowance for the effects of inflation under the various heads of damage", in the course of debate in Parliament the government accepted amendments which provided that normally the appropriate index for increases in periodical payments will be the Retail Prices Index. So far as payments for care are concerned this is a significant problem. As was highlighted in the 2003 Court of Appeal decision in Sheppard v Stibbe, increases in care costs are rising well ahead of rises in retail prices. 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, the multiplier, following the House of Lords decision in Wells v Wells and the subsequent setting of the discount rate by the Lord Chancellor at 2.5% allows for investment in gilts. Injured people receive a lump sum and, although they should not need to take additional risks to make up shortfalls in their anticipate returns, they do at least have that option. With periodical payments that option will be severely limited because they will not have such a substantial lump sum available for investment. Also the fact that the current system does not work well is not a good a reason for introducing a new system with the same flaw. It might also be argued that the new Act does make provision for the Court to order a linkage to a different index if it considers it appropriate. However, similar powers apply to the discount rate to be applied in calculations of lump sums under the Damages Act 1996. And as became clear in Sheppard v Stibbe, the Court is unwilling to depart from the rates approved by the Lord Chancellor. As Andrew Dismore MP said in the Commons Debate on the Bill "We are back to where we started. It is a circular argument".
The other concern of principle relates to the concept of reviewable periodic payments. Originally, the government touted this as a new mechanism to ensure that damages are not a once and for all remedy. With the sole limited exception of provisional damages, the Judge awarding a lump sum is obliged to guess at future contingencies and make an award at trial as best as he can. The government believed that the new system of periodical payments could be tailored flexibly to allow these to go up or down as may be appropriate as circumstances did in fact change. However, the draft Order that has been recently unveiled for consultation reveals a proposed regime which is very similar to provisional damages, limiting the effect of the new regime to very similar limited circumstances. It will only be significant medical deteriorations or improvements foreseen at the time of the original order which are susceptible to variation. Of course, reviewable periodical payment orders were strongly opposed by insurers who feared claims remaining on which their books might never be closed, but it does appear to have been a radical opportunity missed.
As well as concerns of principle, 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. 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). It is possible that a market will be created by increased demand, but the signs are not hopeful.
It is also unfortunate that no draft Civil Procedure Rules or Practice Directions have yet been published. The discretion as to whether to order periodical payments needs to be rule based, but practitioners have no idea what the rules will be. Judges need guidance and training. There is great risk of negligence and/or injustice if periodical payments are to be ordered where they should not be or indeed are not ordered where they should be. Questions such as the weight to be given to the claimant’s (or defendant’s) wishes, the extent to which there must be a contingency lump sum in addition, the effect of findings of contributory fault or reductions for litigation risk are all complex and will need careful thought in each case. Assuming that RPI will be the normal index, an expert financial report weighing up the downside of likely income shortfalls against the upside of removing life expectancy uncertainties will presumably be necessary in most cases. Solicitors are not financial advisers and will not be in a position (either in practice or in law) to provide investment advice without expert advice. Judges could do so legally, but would be ill-advised to do so in the interest of justice for the individual claimant before them. There is a clear case here for widespread, open consultation before implementation. Instead the whole process seems veiled in secrecy and it appears likely that final versions will be produced immediately before implementation. I hope that I am wrong, but I strongly suspect there will be another fiasco like that of the Regulations and Rules supporting the funding changes implemented in the Access to Justice Act; but with far worse consequences as here we are talking about compensation for the most severely injured claimants, and not costs.
It is not too late for necessary action. The government needs to explicitly restate the principle of ‘full compensation’ in tort and accept that here this means proper linkage of periodical payments to an appropriate index. It is also essential that in such a novel arena rule-makers consult widely so as to ensure that we all end up with a workable system that is fair to both claimants and insurers. If not, an opportunity to modernise our compensation system for the 21st Century will have been squandered.
For further information email David Marshall or call 020 7940 4000.
