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News | Fri 5th May, 2017
I am Grahame Aldous QC. I specialise in catastrophic injury personal injury and clinical negligence claims. I act for both claimants and defendants and their insurers. I have extensive practical experience of advising and representing parties in claims involving discount rate issues. I am the editor of the APIL Guide to Catastrophic Claims, of the chapter on Managing Damages in Kemp & Kemp Personal Injury Law, Practice and Procedure and have previously edited the publication ‘Clinical Negligence Claims’. I am also a former Vice-Chair of the Bar Council Equality and Diversity Committee and am a member of the Judicial College Panel of Experts on Equality and Diversity. I was the author of the joint PNBA/PIBA submission to the major Department of Constitutional Affairs consultation on the law of damages in 2007, but I make this submission as a personal submission.
I have limited my response to those points where I feel best able to assist.
Q1: Do you consider that the law on setting the discount rate is defective? If so, please give reasons.
A1: Yes, the system is defective. It allows political interference in the setting of the discount rate as a result of which the discount rate has not been set at an appropriate rate by an independent quasi-judicial body as intended when the Damages Act was passed. This failure has led to the unnecessary fuss over the recent change in the discount rate.
Q2: Please provide evidence as to how the application of the discount rate creates under- or over-compensation and the reasons it does so.
A1: Any lump sum award for future losses will either be too little or too much, by definition. The Problem with the discount rate is that has been set too low to afford full compensation on the assumptions that the courts considers it appropriate to make about the uncertainties of the future. On that basis it has produced under-compensation for a number of years. As the House of Lords held in Wells v Wells, and the Privy Council affirmed in Helmot v Simon, in order to provide full compensation a discount rate should be set on the basis of returns achievable without assuming that the damages should be placed at risk. The best way of doing this is to consider the rates of return on ILGS. This is not to assume that all damages will be invested in ILGS, but the returns give the best way to assess the risk free amount that will represent full compensation.
In Wells v Wells the House of Lords did not adopt the return on ILGS on the assumption that claimants invested their damages in such investments. They had evidence that that was not the case in practice, including evidence from the Court of Protection. They adopted the return on ILGS because it gave the best means of assessing the loss that the Claimant had suffered as a result of the actions of the tortfeasor, namely the cost of funding future losses. A claimant may choose to invest his damages in a way that attracts a risk, but that is his choice. In assessing his damages on a full compensation basis the House of Lords, after extensive argument, held that the method of calculation needed to be based on the best assessment of a risk free return, even if the claimant might in fact decide to take some risk with his damages. Before the Ogden Tables and Wells v Wells multipliers had been capped at 18 for no good reason than that was regarded as ‘the norm’ and judges thought there should be some limit or cap on what was awarded. The House of Lords made plain that the idea of a cap on the multiplier just because a proper calculation produced a high figure had no place in a proper system of achieving full compensation for victims of tortious conduct. That still applies today.
Q3: Please provide evidence as to how during settlement negotiations claimants are advised to invest lump sum awards of damages and the reasons for doing so.
A3: Claimants who rely on their damages to pay for their care for life would ideally invest without risk. Ideally we would all invest without risk and achieve the returns we want. Claimants are in a special position though. They need to fund their personal care. The sort of care that we are dealing with here is mainly the very basics of life. The care that is provided includes matters such as sucking out the windpipe to allow a paralysed person to breathe, turning an injured person at night to prevent bedsores that can become infected and cause agony and serious illness in someone who is already injured, attending to toileting and other intimate functions. Without it they may suffer and/or die. It is understandable that they and their loved ones worry about it. Their loved ones are generally the ones who step up to shoulder the responsibility of organising and in default often providing care. They do not ask to do so. They do so because it is needed and there is no one else to do so. They have no claim apart from any claim that the claimant may be able to make for the gratuitous care that they provide, a claim that will be discounted by about 25% to reflect the fact that it was provided gratuitously by the family. They do not always get it right, but they generally do their best. If they get it wrong then they are at risk of not recovering the costs that have been incurred.
In this situation damages may in fact be invested in a form that involves some risk in order to try and achieve a better return for a number of reasons.
Families often put their own savings and the equity from their own homes into assisting with such purchases, without thought of return or any compensation for their own losses.
The deficiencies in the Roberts v Johnson method of calculating accommodation cost losses that are acknowledged in the consultation paper mean that an award will not include the capital cost of providing the accommodation that is needed. In other situations where a tortfeasor’s action gives rise to the occupation of property then compensation is paid at the market occupation rent or mesne profits rate. That is generally not done in personal injury cases, or not yet as a matter of course, by reason of the Roberts v Johnson approach despite its deficiencies. Whilst the Roberts v Johnstone approach is notionally based on the cost of financing capital expenditure, the approach assumes that the cost of financing capital is the reciprocal of the return on investing capital that the discount rate is based on. In practice this is clearly not the case. A method that allowed a proper costs of financing to be assessed would improve matters. As things stand, however, the Roberts v Johnstone approach is flawed, and widely recognised as such. For this reason money has to be ‘borrowed’ from other heads of loss to provide capital. The heads normally ‘borrowed’ to fund the provision of accommodation include heads such as past gratuitous care provided by the family, loss of earnings by the claimant and the award made for pain, suffering and loss of amenity. The use of this last head means that the award made to compensate for the injury itself irrespective the financial losses is normally called upon to provide the financial package that is required to provide ongoing accommodation and care. Where these heads are insufficient then the award made for care may have to used, at least in part, to meet immediate capital costs. In order to make up for the use of the heads of loss to meet capital needs claimants may have to accept some investment risk to try and ‘repair’ their finances and provide the funds they need as well as to try and provide some ‘buffer’ for a rainy day. This may mean that if their investments work out well and if the assumptions made prove optimistic then when they die they may not have spent all their finances and there may be some money left to pass to the family, generally those who have made to sacrifices to try and make good the consequences of the tortfeasor’s actions. This is hardly a ‘windfall’ and it is not at the expense of the insurer who provided the damages. It what most of us try to do to plan our futures when we do not know how long we will live or what might happen along the way. It does not mean that the damages were too generous to start with.
Q4: Please provide evidence of how claimants actually invest their compensation and their reasons for doing so.
A4: See A3.
Q5: Are claimants or other investors routinely advised to invest 100% of their capital in ILGS or any other asset class? Please explain your answer. What risks would this strategy involve and could these be addressed by pursuing a more diverse investment strategy?
A5: See A3.
Q6: Are there cases where PPOs are not and could not be made available? Are there cases where a PPO could be available but a PPO is offered and refused or sought and refused? Please provide evidence of the reasons for this and the cases where this occurs.
A6: There are cases where there is insufficient security of a funder for a PPO to be made. Examples include cases where there is a limit on the insurance cover available, where there is no insurance cover, where the defendant and/or insurer are based abroad and there is insufficient protection against insolvency, or where the funder is in a special category such as the MPS or MDU and does not qualify as a sufficiently secure funder. In other cases there may be a very high degree of discount for contributory negligence but a need to fund capital expenditure such that in practice a lump sum has to be sought. Until recently insurers have preferred not to agree to PPOs as a lump sum was much cheaper for them. For earnings related future costs (such as carers) the -0.75% discount rate is still cheaper than an earning indexed PPO and so there is still reluctance to offer PPOs in some cases. If PPO is an option then it will be very rare that a Claimant would reject it, even if they wish to have a clean break from the defendant and their insurers. The need for a secure income drives them to a PPO.
Q7: Please provide evidence as to the reasons why claimants choose either a lump sum or a PPO, including where both a lump sum and a PPO are included in a settlement.
A7: See A6.
Q8: How has the number of PPOs changed over time? What has driven this? What types of claims are most likely to settle via a PPO?
A8: See A6.
Q9: Do claimants receive investment advice about lump sums, PPOs and combinations of the two? If so, is the advice adequate? If not, how do you think the situation could be improved? Please provide evidence in support of your views.
A9: Yes they do. The rules require the court to consider the IFA advice that has been given when they are asked to approve settlements on behalf of children and protected parties. If the discount rate kept pace with the indexation available on PPOs (effectively by adopting the Helmot v Simon approach) then the advice offered would give a better choice to claimants about how to structure their settlement so as to secure their future.
Q10: Do you consider that the present law on how the discount rate is set should be changed? If so, please say how and give reasons.
A10: The intention behind the prescribed rate under the Damages Act was to take the politics out of setting the prescribed rate and to provide a mechanism for regular adjustments in line with actuarial changes. In fact it has operated in a completely different way and become a politicized matter with significant delays. The tensions that resulted in and around the announcement of the change to take effect on 20th March 2017 are the result of the Damages Act not being applied as intended. What is needed is a return to regular small changes in line with actuarial changes rather than the distortions caused by allowing the prescribed rate to get significantly out of kilter with the market. There is no ideal time to make a change, but PPOs are usually assessed each December and that would be as good as any time to make an annual adjustment.
Q11: If you think the law should be changed, do you agree with the suggested principles for setting the rate and that they will lead to full compensation (not under or over compensation)? Please give reasons.
A11: No. I do not agree that the discount rate should be set on the basis of a return on a mixed risk based portfolio. This will place even greater strain on severely injured claimants and their families and reduce the options for them to plug any gaps in the compensation that has been awarded. It will effectively be asking the taxpayer, as carer of last resort, to underwrite the insurance provision that is paid as compensation, rather than expecting insurers to meet the costs they have issued policies to meet.
Q12: Do you consider that for the purposes of setting the discount rate the assumed investment risk profile of the claimant should be assumed to be:
Please give reasons.
A12: Risk-free as per Wells v Wells, for the reasons set out above.
Q13: Should the availability of Periodical Payment Orders affect the discount rate? If so, please give reasons. In particular:
A13: If a PPO is not available then the argument for a risk-free discount rate is even stronger. There may, however, be good reasons why a PPO is not appropriate even where a PPO could be made (see above). A rejection of a PPO does not necessarily indicate a higher risk appetite. Claimants do not go for lump sums because they want to play the market, and no court would approve a settlement on any such basis if they were asked to.
Q14: Do you agree that the discount rate should be set on the basis that claimants who opt for a lump sum over a PPO should be assumed to be willing to take some risk?
If so, how much risk do you think the claimant should be deemed to have accepted? Please also indicate if you consider that any such assumption should apply even if a secure PPO is not available. Please give reasons.
A14: No. See A13.
Q15: Do you consider that different rates should be set for different cases? Please give reasons. If so please indicate the categories that you think should be created.
A15: There is a strong case for one discount rate for RPI linked expenditure and a different discount rate for earnings related expenditure. This was the approach approved by the Privy Council in Helmot v Simon.
There is no real justification or need to distinguish between types of case or set an arbitrary level of claim at which the discount rate might change. To do so would simply lead to even more arguments around the margins. Losses calculated using the discount rate are, by definition, only those for ongoing future loss. Thus they only apply where the court has held that the injury is serious enough to have ongoing financial consequences. It has no application to short term injuries that get better with no residual consequences, or to the low value claims and/or whiplash where issues of proportionality have been debated recently. We are not, therefore, dealing with a situation where a claimant finds that they get an undue ‘windfall’. We are dealing with cases where the court has held that there is a real ongoing loss that needs proper compensation.
Q16: Please also indicate in relation to the categories you have chosen whether there are any special factors that should be taken into account in setting the rate for that category.
Q17: Should the court retain a power to apply a different rate from the specified rate if persuaded by one of the parties that it would be more appropriate to do so? Please give reasons.
A17: Yes. There will be cases where in order to do justice some different order is required. For example a claimant who will be cared for abroad in a quite different economic setting might have very special factors that would affect the discount rate. The courts have shown that they are not going to abuse a discretion to nullify the benefits of a prescribed discount rate.
Q18: If the court should have power to apply a different rate, what principles should apply to its exercise?
A17: where the justice of the case by reference to the specific features of the case means that it would be reasonable to do so.
Q19: Do you consider that there are any specific points of methodology that should be mandatory? Please give details and reasons for your choice.
A19: No. If the courts have reached the point of considering that they should adopt an approach that is not the prescribed rate then they are in the best position to, and quite capable of, adopting the best methodology to meet the needs of the case.
Q20: Do you agree that the law should be changed so that the discount rate has to be reviewed on occasions specified in legislation rather than leaving the timing of the review to the rate setter? If not, please give reasons.
A20: Yes. See A10.
Q21: Should those occasions be fixed or minimum periods of time? If so, should the fixed or minimum periods be one, three, five, ten or other (please specify) year periods? Please give reasons.
A21: At least every 15 months, so that they are in practice reviewed (though not necessarily changed if the underlying conditions have not changed) at least once a year. See A10.
Q22: When in the year do you think the review should take effect? Please give reasons.
A22: There is no right or wrong time. PPO reviews occur every December based on ONS data published each November. November/December would be sensible times to issue a discount rate review.
Q23: Do you agree that the rate should be reviewed at intervals determined by the movement of relevant investment returns? If so, should this be in addition to timed intervals or instead of them? What do you think the degree of deviation should trigger the review?
A23: If there is a provision for at least every 15 months then the setter will have an incentive to keep shocks to a minimum and so changes based on sudden deviations could be left to the sense of the setter as not every deviation will warrant a change in a rate that looks at 3 year averages and the long term.
Q24: Do you agree that there should be a power to set new triggers for when the rate should be reviewed? If not, please give reasons.
A24: This sounds like an over-complication. See A23.
Q25: Do you consider that there should be transitional provisions when a new rate is commenced? If so, please specify what they should be and give reasons.
A25: Only if they assist simplicity rather than complication.
Q26: Do you consider that the discount rate should be set by:
A26: A panel of experts. It should be essentially an actuarial question and should avoid members representing the interests of parties such as the ABI or claimants. The treasury should be hands off as with the Bank of England Monetary Policy Committee.
Would your answers to the questions above about a panel differ depending on the extent of the discretion given to the panel? If so, please give details
Q27: Do you consider that the current law relating to PPOs is satisfactory and does not require change? Please give reasons.
A27: PPOs are gradually gaining the confidence of those involved. There can be problems in a few cases, but I would resist the temptation to introduce a new raft of rules as that will simply put back the acceptance of PPOs.
Q28: Do you consider that the current law relating to PPOs requires clarification as to when the court should award a PPO? If so, what clarification do you consider necessary and how would you promulgate it?
A28: No, leave it alone for now. See A27.
Q29: Do you consider that the current law relating to PPOs should be changed by creating a presumption that if a secure PPO is available it should be awarded by the court? If so, how should the presumption be applied and on what grounds could it be rebutted?
A29: No, leave it alone for now. See A27.
Q30: Do you consider that the current law relating to PPOs should be changed by requiring the court to order a PPO if a secure PPO is available? If so, what conditions should apply?
A30: No, leave it alone for now. See A27.
Q31: Do you consider that the cost of providing PPOs could be reduced? If so, how.
A31: The drafting of orders is unnecessarily complicated. The machinery of indexing could be contained in an annex to the rules so that it can be incorporated by reference rather than reinvented in each case.
Q32: Please provide details of any costs and benefits that you anticipate would arise as a result of any of the approaches described above.
A32: About £20,000 in each case.
Q33: Please provide any evidence you may have as to the use or expected use of PPOs in the light of the change in the rate and more generally.
A33: See A6.
Q34: Do you agree with the impact assessment that accompanies this consultation paper? If not, please give reasons and evidence to support your conclusions.
A34: No. It is plain that removing risk-free assumptions as the basis for full compensation would have a dramatically adverse effect on the most vulnerable people in society and would do so in order to benefit those who have injured them and their insurers. That is not reflected in the impact assessment.
Q35: Do you think we have correctly identified the range and extent of effects of these proposals on those with protected characteristics under the Equality Act 2010?
A35: No. See A34.
Q36: If not, are you aware of any evidence that we have not considered as part of our equality analysis? Please supply the evidence. What is the effect of this evidence on our proposals?
A 36: See A34.