Lord Chancellor slashes discount rate but acknowledges there may be repercussions for the NHS

Lord chancellor, Liz Truss, has finally announced that the discount rate applied to personal injury compensation payments will be slashed from 2.5 per cent to minus 0.75 per cent with effect from 20 March, 2017. The news was welcomed by campaigners for personal injury claimants who have long lobbied for change; however, the change was heavily criticised by the Association of British Insurers (ABI).

The Association of Personal Injury Lawyers (APIL) has campaigned for a number of years that the 2.5 per cent rate, set by the then lord chancellor, was too high and penalised claimants. More than 4 years after closing a consultation on the issue, the Ministry of Justice confirmed that it would make an announcement on the new discount rate, set to calculate deductions from injured people’s compensation to reflect the interest the payments are assumed to have earned, in December last year. However, that decision was delayed and the legality of altering the discount rate was then challenged unsuccessfully in the High Court last month by the Association of British Insurers.

Announcing her decision Ms Truss acknowledged that the new rate will undoubtedly have a significant impact on insurers, and a knock-on effect on public services, like the NHS, which has large personal injury liabilities. However, she believed it was her legal responsibility and the right thing to do.

The lord chancellor said the law makes clear that claimants must be treated as risk averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or occasionally for the duration of their life. She added that compensation awards using the rate should put claimants in the same financial position they would have been in had they not been injured, and that that award should include loss of future earnings and care costs.

‘The law is absolutely clear – as lord chancellor, I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set,’ she added.

The government has also confirmed that chancellor Philip Hammond will meet with the insurance industry later on today to discuss how it will manage the change, and that it is committed to providing ‘appropriate funding’ to the NHS Litigation Authority to cover both the changes to hospital clinical negligence costs and any additional costs for GPs.

It also announced that it will open a new consultation in the coming weeks to consider whether there is a better or fairer framework for claimants and defendants, with any necessary legislation to be brought forward at an early stage. It is expected that the consultation will consider all the options for reform; including whether the rate should be set by an independent body in the future, whether more frequent and regular reviews would improve predictability and certainty for all parties and whether the current methodology is appropriate for the future.

Ms Truss’ announcement drew an angry, yet predictable, response from the insurance industry. Huw Evans, director general of the Association of British Insurers, said the decision was ‘crazy’ and warned there will ‘inevitably’ be increases in motor and liability premiums, adding:

‘Cutting the discount rate to minus 0.75 per cent from 2.5 per cent is a crazy decision. Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK. We estimate that up to 36m individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year.’ 

‘To make such a significant change to the rate using a broken formula is reckless in the extreme, and shows an utter disregard for the impact this will have on consumers, businesses and the wider operation of the insurance market.’

However, the Association of Personal Injury Lawyers welcomed the announcement and said the reduction in the rate was long overdue. In response to Ms Truss’ announcement the organisation said:  

‘We hope this decision marks a long overdue turning point towards treating injured people fairly and with understanding.’ said the organisation.

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