Consultation on the Discount Rates for Personal Injury Awards

The UK Government has opened a consultation on the discount rate to be applied to personal injury awards, following a fall in the yield from Gilts.

Personal Injury compensation payments are normally paid in a lump sum. To reflect the fact that a prudent claimant would be expected to invest the sum received and thus generate a return, the Court adjusts the compensation figure to reflect this and ensure the injured party is not over-compensated.

The current method is to apply a 2.5% discount rate to the award, which was based on predicted yields from index-linked government stocks, or Gilts. However the decline in yields over recent years has led to injured parties complaining that the discount rate is set too high and a claimants’ lawyers group, the Association of Personal Injury Lawyers, had threatened a judicial review if a review was not carried out.

The current consultation will look at whether a ‘claimant investor’ should be deemed to use the minimal risk index-linked government stocks or alternatively a mixed investment portfolio which might provide greater returns but at greater risk.

Should the consultation conclude that the discount rate should be altered, this may have a significant impact on damages paid by insurers, particularly in high value claims where a seemingly small change will have a considerable effect.

Although the review is only in relation to the legislation in England and Wales, this could have a knock-on effect in Scotland. At the moment, although Scotland has separate legislation dealing with discount rates, they are currently set at the same level as in England and Wales. The discount rate has already been questioned in Scotland, and many commentators are suggesting that a change is likely to be in the pipeline.

For more information on this developing area of the law, please contact Lewis McDonald.