Monday, 27 February 2017

MOJ announcement is Not about 'more' - it is about right!

Today was one of those peculiar days when a piece of news sent some lawyers rushing to their laptops to share one of the most exciting developments in recent years. Some were happy, some were angry but nobody ignored it. It was one of those announcements that was of great interest to lawyers, insurers and possibly accountants. The rest of the world would happily have let it pass them by. They would probably wonder what the fuss was about.

This was the news that the discount rate on damages is to be reduced from 2.5% to -0.75%.

It has led to some shockingly poor reporting from some quarters – particularly the BBC. It is not clear whether the misleading stories are based on a one sided sympathy for insurance companies or whether it is simply a lazy way of reporting a story that is important if not well understood.

It looks like a story about people getting more damages and our car insurance premiums going up. In fact it is all about bringing common sense to a formula that has been used to reduce compensation payable to victims of the most serious injuries.

So what is it all about? Here is a very oversimplified example.

Alan, who is 45, has an accident at work. He is so badly injured that he will never work again. He earns £20k a year and would have worked to 65. So he has lost 20 years earnings at £20k. But if he wins his case he does not simply get 20 x £20k - £400k. Because that would not be fair on the insurers who pay the damages. Alan would be receiving money now that he would not otherwise have earned for many years. If he was to put that money on deposit, it would earn interest and he could end up with a lot more that £400k in 20 years time. So the number of years that he actually receives is calculated by reference to what his money might be worth at that time. Under the current rules the assumption has been that the money would earn 2.5% per annum. A victim is assumed to place the money in sensible, safe investments. This significantly reduces the amount of any lump sum that the insurers pay out. The £400k will be discounted to less than £350k - the idea being that he ultimately ends up with his £400k. There are complex tables used by lawyers to help with the maths.

So far so good, so long as compensation earns 2.5% per annum, the rate that we have had for 16 years. But in reality we have not had interest rates of that sort of level for years. The current Bank of England Base Rate is 0.25% per annum. It hasn’t been 2% since 2008. So Alan is in fact worse off if the payment he receives would not get him to £400k in 20 years. This is why the rules have had to change. And this is why the rate announced today, is the right one.

In Alan’s case we have talked about earnings. The issue is even more important for victims who need to be looked after for many years. Let’s say Alan is so badly disabled that he needs constant care for the rest of his life. If the amount of compensation is not calculated properly, the money could run out in the future with catastrophic consequences. In fact it isn’t as simple as that but you get the point!

The differences will be significant. This table from NESTOR is helpful. Under the current rules £100k a year for 10 years will cost defendants £886,000.00. When the new rules come in on 20th   March they will pay £1,038,000.

But today’s announcement is not about people getting more money. It is about victims getting the right money. Insurers and their media friends complain about the cost. But in fact, victims have been under compensated for years.

You will not often hear me support the current government. But on this issue that have it right and have removed an injustice that has affected victims of negligence for years.

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