What is the discount rate and why it is important?
The discount rate (also known as the real rate of return) is the calculation used by courts to determine the size of an award which is necessary to compensate a person in respect of damages for future loss. This is an issue that arises in cases of catastrophic personal injury, where the size of the award is such that the plaintiff would be over compensated unless a discount was applied.
The real rate of return is the actual investment return that the investor is assumed to obtain should he invest a lump sum. The higher the real rate of return when applied to a lump sum, the lower the amount that needs to be invested to achieve a certain target value. In the context of awards of damages for personal injury claims, the real rate of return has an impact in those cases where damages for future loss needs to be invested on behalf on an injured plaintiff.
In the case of Gill Russell –v- the HSE the Court of Appeal decided that the real discount rate for the cost of future care was 1% and that a rate of 1.5% should be applied to all other claims for future pecuniary loss. The figure that had been used before then was 3%.
To illustrate the impact of that change, the minor plaintiff in that case was awarded €13m and had the old rate been used, the award would have been €9m. At the time, it was reported that the State Claims Agency estimated that the cash cost of meeting such negligence claims involving serious injury would rise by €100m per annum as a result of the new formula.
As matters stand, the rate is determined by the courts in relevant cases. There is a specific provision which was introduced by the Civil Liability and Courts Act 2004 which allows the Minister for Justice to determine the discount rate but to date the Minster has not done so.
Why is this consultation happening now?
The Cost of Insurance Working Group (CIWG) was established in 2016 to examine the costs of insurance and to determine what actions the government might take to address the various elements of those costs. The CIWG has undertaken 2 main research initiatives being (i) an examination of the motor insurance sector and (ii) an examination of the employer and public liability insurance sectors.
In its report on the cost of motor insurance, the CIWG made a series of recommendations, one of which was that an examination of the discount rate be undertaken and that following that examination, that a public consultation be carried out on the issue. The consultation recently announced by the Minister for Justice leads on from that recommendation.
What is the Minister asking?
The Minister is requesting views on two key issues as they relate to the discount rate as follows:
- In determining the discount rate, should it be up to the Judiciary to decide on the appropriate rate on a case by case basis or should the Minister be tasked with setting the rate and reviewing it thereafter?
- Is there a need to update the investment strategy that a plaintiff is assumed to take in determining the discount rate? Currently the plaintiff is assumed to take a very risk averse investment strategy and that is a position which is shared in the UK.
Interestingly, this is also a live issue in Northern Ireland where the Department of Justice (Civil and Justice Policy Division) are undertaking a public consultation on a possible new legal framework for setting the personal injury discount rate in Northern Ireland.
Any submissions to the consultation must be made by 05 August 2020 and can be addressed to: email@example.com
If you have any queries, or would like any further information, please contact Killian O'Reilly or your usual contact in Fieldfisher.
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