Legal Update: Discount rate review will increase cost of claims

Under Section 1(1) of the Damages Act 1996, the Lord Chancellor has the power to make an order prescribing "the return to be expected from the investment of a sum awarded as damages for future pecuniary loss in an action for personal injury". The return is commonly known as the ‘discount rate'. This figure is crucial in seeking to avoid over or under compensation. The multiplier is adjusted to allow for the net rate of return a claimant might expect to receive if a lump sum compensation payment is invested prudently. 

In the years that followed – and, in particular, after the financial crisis of 2007 and 2008 – the claimant lobby sought a further review. It was argued that the rate did not reflect the level of return which could actually be achieved, resulting in under compensation. In an article for the Law Society Gazette in December 2010, three academics opined that a discount rate of 1% should apply, which meant that 20-year-olds were being undercompensated by 49% to 51% and 30-year-olds by 42% to 44%.

The courts are empowered to use a different discount rate in exceptional circumstances. There have been no cases in England and Wales in which a different rate has been applied. The Scottish courts considered whether a lower rate ought to be used in the case of Tortolano v Ogilvie Construction in 2013 and reached the view that it was not an exceptional case; accordingly, if the claimant wished to have the rate changed, this had to be achieved via political processes or judicial review.

However in 2014, the Irish High Court reduced the discount rate to 1% in Russell v Health Service Executive, on the basis that yields from index-linked government stocks had dropped to zero since the financial crisis.

The lobby movement
The claimant lobby's efforts, and in particular those of the Association of Personal Injury Lawyers, which initiated judicial review proceedings, have prompted action.

Since 2010, two public consultations and the collection of opinions from an expert panel have taken place. A mandatory consultation with HM Treasury and the Government's Actuary Department is also now under way. The Ministry of Justice stated in December last year that an announcement on the result of the review would be made on 31 January 2017.

This resulted in the Association of British Insurers attempting to bring Judicial Review proceedings against the government, calling on it to complete the consultation and change the methodology applied before reaching such a decision. This attempt was unsuccessful, and permission to appeal the decision was refused. An application for interim injunction to stop the announcement was also rejected.

The Lord Chancellor Elizabeth Truss advised on 27 January that it will not be possible to announce the result of the review on 31 January 2017 as originally planned, as the review process has taken longer than anticipated. The Lord Chancellor said that she is committed to making an announcement in February. No date has been formally set and it, therefore, remains to be seen whether there will be further delay.

However, it seems likely that an announcement will follow in due course and the discount rate will be reduced to reflect current returns on investments, which will increase the value of claims for future losses and in turn the total cost of claims.