A new process for calculating Scottish personal injury awards has taken a step closer to becoming law. The Damages (Investment returns and periodical payments)(Scotland) Bill was introduced to Scottish Parliament on 15 June 2018 with the aim of creating a clearer, fairer and more credible way of setting the personal injury discount rate. Evidence was heard by the Economy, Energy and Fair Work Committee in October and earlier this month, which gave parties representing interests either side of the pursuer/defender divide an opportunity to share their thoughts on the calculation of the personal injury discount rate and Periodical Payment Orders.
What is the Personal Injury Discount Rate?
The personal injury discount rate is a factor which adjusts lump sums awarded in personal injury claims. It is applied to the portion of the lump sum which relates to losses not yet incurred, such as future loss of earnings or care costs. It is intended to reflect the interest or other return a pursuer could receive for investing the payment until the losses are incurred.
Background
Historically the Courts decided the appropriate figure and until 1999, it had generally been between 4% and 5%. The Damages Act 1996 gave the Lord Chancellor the power to impose a uniform rate in England and Wales and Scottish Ministers the power to do so in Scotland.
In the case of Wells v Wells [1999] it was noted that a pursuer should not be considered an ordinary investor and should instead be considered "cautious and conservative." (Lord Steyn) Ultimately it was held that the discount rate should be calculated on the basis that pursuers will invest their damages in Index Linked Government Securities (ILGS). The Court urged the Lord Chancellor to make an order fixing the discount rate.
Orders followed; in England and Wales in June 2001 and in Scotland in February 2002. The discount rate was fixed at 2.5% north and south of the border. The rate was calculated with reference to ILGS and the Lord Chancellor explicitly accepted the reasoning in Wells v Wells. In turn, Scottish Ministers accepted the Lord Chancellor's reasoning. At that time Scottish Ministers commented that financial markets in England and Scotland were the same and there was no need for a different rate in Scotland.
The current rate
Following the financial crisis in 2007 and 2008, pressure was placed on the Lord Chancellor to change the rate. In November 2010 Kenneth Clarke, Lord Chancellor at the time, agreed to carry out a review.
Consultations were issued in 2012 and 2013, and in 2015 a panel of three experts was appointed to provide a report. No reports were published until March 2017.
The rate was changed to -0.75% in England and Wales on 20 March 2017 and in Scotland on 28 March 2017.
At the same time it was announced that there would be a review of the legal framework under which the rate was set. The Lord Chancellor confirmed that the rate would continue to reflect the aim that damages should amount to no more and no less than the loss suffered.
Review of the legal framework
In March 2017 the Ministry of Justice and the Scottish Government consulted jointly on the means by which the discount rate should be set. The Ministry of Justice published a report summarising the responses to the consultation in September 2017 the Scottish Government accepted that analysis.
A key message from the consultation was that ILGS are not a risk-free investment and that no-one would be advised to invest solely in them.
England and Wales
The Civil Liability Bill entered the House of Lords on 20 March 2018. In part it seeks to change the framework for calculation of the discount rate. As first drafted it would require the Lord Chancellor to consider a pursuer a low risk, rather than very low risk, investor. The Lord Chancellor would be obliged to consult with the Government Actuary for the first review and with an expert panel thereafter. The rate would be reviewed at least every three years.
In the House of Lords the review period was changed to five years.
By amendment, provisions were added in the House of Commons which would allow regulations that obliged insurance companies to provide information about the financial impact of claims on policy premiums charged. The ABI has confirmed that insurers are committed to passing on the benefit of lower claims costs to customers and welcome the opportunity to demonstrate this.
Scotland
The Damages (Investment returns and periodical payments)(Scotland) Bill was introduced to the Scottish Parliament on 15 June 2018.
The Bill sets out new framework for calculation of the discount rate.
Unlike the proposed regime in England and Wales, the Scottish system would oblige the Government Actuary to fix the discount rate.
The Bill also proposes powers to pass regulations which would specify the notional portfolio in which a pursuer would be assumed to invest and which change the "standard adjustments". The standard adjustments are proposed to reflect the impact of taxation and cost of investment advice and management and as "the further margin involved in relation to the rate of return". The further margin is applied to guard against the risk of under compensation. As drafted, the Bill fixes the standard adjustments at 0.5%.
Periodical Payment Orders
Periodical payment orders (PPOs) provide for damages to be paid in instalments, rather than in one lump sum. The payments continue for the whole of the period of loss, often the pursuer's life, and so avoid the risks related to life expectancy.
At present a PPO can only be put in place if both the pursuer and defender agree. The Bill proposes that the Court is given the power to impose a PPO. This would reflect the current position in England, Wales and Northern Ireland.
The Bill also sets out the circumstances in which a PPO can be varied. Those responding to the Bill have expressed concern about the possibility of parties being brought back to court vexatiously and unnecessarily and also about who would bear the cost of any variation.
The current procedural position
The Economy, Energy and Fair Work Committee is charged with considering the Bill. A call for written evidence was issued on 22 June with a deadline of 7 September.
In the past three weeks, the committee has heard oral evidence in relation to the Bill. There have been three evidence sessions with evidence at the first given on behalf of; the Association of Personal Injury Lawyers, The Faculty of Advocates and Thompsons Solicitors and by Victoria Wass, economist. At the second session, evidence was given on behalf of; the NHS, the Association of British Insurers, the Forum of Scottish Claims Managers, and the Forum of Insurance Lawyers. The final evidence session took place this week, when Ash Denham - the Government Minister responsible for the Bill - gave evidence along with government officials who worked on the Bill.
The Committee will now prepare a report to be submitted to the Scottish Parliament, which is expected to vote before 21 December 2018 as to whether or not the Bill should proceed.
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