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Insight

The law must not force claimants to gamble crucial compensation

Parliament has been asked to consider changing the very practical system operated by the Lord Chancellor to say how lump sum compensation should be calculated.

Parliament has been asked to consider changing the, in my mind, very practical system operated by the Lord Chancellor to say how lump sum compensation should be calculated, taking account of how that money is invested by the person receiving it.

If you are unlucky enough to suffer catastrophic injury because of medical negligence or a work or traffic accident, lawyers running a successful claim will work with medical experts to calculate how much it will cost to provide the medical and other care to that person for life –which then dictates how much money is awarded.

The purpose of the law here is to provide an injured claimant with the financial resources to put them back in the position that they would have been without the accident. They might now need 24-hour care, a hydrotherapy pool, funds to replace their lost earnings, or an adapted house.

A difficult, sensitive and vital task as part of that claim is working out what a person's life expectancy will be – underestimate it and you leave a person stranded when the money runs out; overestimate it and arguably you provide the claimant's estate with a "windfall".

It the past, the law has considered it acceptable that the final sum awarded – say, £1million - is invested in the safest possible way, to ensure the claimant gets the funds they need for each and every year of their remaining life.  The safest investments provide low rates of return – it is a "quid pro quo". In 1999 the House of Lords decided this was the right way of calculating compensation. They said that using higher return investments exposed to seriously injured claimants to unacceptable financial risk.

Twenty years ago, when the economy was doing better than now, that percentage of return (the "Discount Rate") was about 3.0%. In other words, the Claimant must make 3.0% return on capital invested to receive the annual sum they the court said they deserved.

Clearly, as the economy faltered, this figure has become unattainable, putting claimants at real risk of running out of money or not being to pay for the care they need. It also potentially forces a claimant to make higher risk investments than are safe.

In February this year, that discount rate was finally reduced to the more realistic level of minus 0.75% to reflect the economic reality of what a person will actually make on their investment. The Lord Chancellor made that decision after looking carefully at the evidence about real rates of return. She has this power under the Damages Act 1996.

Parliament is now being asked to introduce reforms to compel claimants to use riskier investments even though the House of Lords  has already said that a "risk free" approach is reasonable for such claimants, who need high levels of care and support for the rest of their lives.

One of the important changes proposed in the draft legislation is to give the current and subsequent Lord Chancellor the framework to review the rate "regularly and fairly". This will hopefully mean that we will not ever again have to wait for the overhaul of a rate that clearly does not reflect the reality of the economy, which has generated severe hardship for claimants unable to achieve such a high return, or who were forced to take too high a risk and ended up losing money or who were simply never awarded enough to meet their lifelong needs.

Whether Brexit and other pressing political problems scupper the passing of these reforms remains to be seen, but it's worth saying here that the sums in question are not some kind of windfall or 'extra' money that people invest by choice. They are usually a person's lifeline, without which their quality of life is devastated and access to care is diminished.

The insurers who represent the negligent employers and drivers, the ones who have caused the injuries, are saying that the innocent injured should shoulder the risk of stock market investments to pay for their lifelong care needs rather than (as at present) investing in guaranteed Index Linked Government Stock.

Hopefully, when Parliament does get around to considering these reforms, it will acknowledge the enormity of the law's power to manipulate the financial lifelines of those people who need it most.