The Claimant was injured in an accident in the course of his employment and sued his employers. Liability was admitted. He suffered a stroke as a result of the accident and, as a consequence, was a protected party. There was an anonymity order.
The Claimant was injured in an accident in the course of his employment and sued his employers. Liability was admitted. He suffered a stroke as a result of the accident and, as a consequence, was a protected party. There was an anonymity order.
At a JSM a settlement was reached which included a substantial lump sum and PPOs. All that remained was court approval. Then the problems began.
The Claimant’s financial expert advised that the employers’ liability insurance had an indemnity limit of only £10 million-an inadequate sum in this day and age and, depending on how you calculated the value of a PPO, an inadequate sum to ensure that the payment of the PPOs was reasonably secure-something about which the court had to be satisfied before it could order a PPO.
So how do you value a PPO? You can’t just apply a multiplier to it because that defeats the whole point of it i.e. ensuring that it doesn’t run out before the claimant dies. It seems clear that the proper approach is to gross up the total payments that the insurer is likely to have to pay. Given that PPOs are inflation proofed, the amount they will have to be paid depends upon the rate of future inflation and the Claimant’s life expectancy-both of which are unknown. You can find average life expectancy at any given age from the tables but in an individual case it is virtually certain that the average will be too long or too short.
The only case I am aware of which helps is Kotula v Eastern Power Networks PLC, decided on 9th November 2012 by Irwin J. The relevant part of the case is not on bailii, nor reported anywhere as far as I am aware. Irwin J accepted that the value of a PPO had to be calculated by the aggregated mathematical sums of all the payments anticipated and these should be assessed at an inflation rate of 6-7% cumulative. He thought that gave a “decent margin of safety” so that a Judge can be satisfied that the PPO is reasonably secure.
When one applied that approach to this Claimant, it was apparent that, after deducting the lump sum and the Defendants’ costs liability from the £10 million, the money would run out at around the Claimant’s life expectancy as shown in the relevant tables. But there was, of course, a 50% chance that he would live longer than that. So the PPO was not reasonably secure.
The only way to satisfy the court that the PPOs would be reasonably secure was for the Claimant to swap part of the PPOs for an increased lump sum. Because the payment of a lump sum does not involve any inflationary increase, increasing the lump sum and reducing the PPO had the effect of reducing the total amount to be paid by the insurer and therefore extending the period during which the remaining PPO could be paid without exceeding the indemnity. The increase in the lump sum had therefore to be renegotiated with the insurers.
Of course the Claimant could have looked to the Defendants themselves for payment of the PPOs after the indemnity sum was exhausted, but that would be many years hence and who knows whether the company would still exist in its present form and whether it would be practicable for the Claimant to trace and enforce payment directly by them.
An interesting footnote to the case was that the financial expert suggested that in considering whether the PPO was reasonably secure, consideration might be given to whether the lump sum, even at a discount rate of -0.75% would last the Claimant’s life expectancy. His conclusion was that to achieve the same security as a PPO, the Claimant would need to get a return of 6.68% on his lump sum (on the assumption that he was paying only 20% tax, and it is not possible currently for a low risk investor to gain that level of return.
Article by: John Foy QC
This week’s Dekagram is all about cancellations and delays – what happens when a package holiday is cancelled, what happens when a flight is delayed due to the behaviour of a passenger. Both sets of circumstances are giving rise to increasing numbers of claims, in…
Deka Chambers is delighted to announce that the King has appointed Eleanor Mawrey and Jennifer Oborne as Recorders on the advice of the Lord Chancellor, the Right Honourable Shabana Mahmood MP and the Lady Chief Justice of England and Wales, the Right Honourable the Baroness…
Edward Lamb KC spoke to The Bar Council of England and Wales about how his pro bono week helped him in his application to take Silk: Edward Lamb KC’s practice includes the most important private children cases with complex cross jurisdictional issues, inflicted non-accidental catastrophic…
Deka Chambers: 5 Norwich Street, London EC4A 1DR