The Personal Injury Discount Rate

The Personal Injury Discount Rate

Personal Injury Blog

What is the Personal Injury Discount Rate?

The Personal Injury Discount Rate is used to calculate awards for future losses in personal injury claims.

Compensation in personal injury claims is intended to put the injured person in the position they would have been in, had they not suffered injury.

In most personal injury cases, including in claims for accidents at work, mesothelioma, asbestos related illness, medical negligence and vibration white finger, the injured person will receive a lump sum of compensation to cover their future financial losses.

This can include

• Loss of earnings,
• Housing / Accommodation costs,
• Future treatment costs
• Future care costs.

It is assumed that a Claimant will invest this money and receive a return on it.
A lump sum award means that the injured person will receive future losses not yet incurred, often many years before those losses will be incurred.

The lump sum is therefore adjusted to take into account the fact that the injured person can earn interest on the lump sum before it needs to be spent. This adjustment is made by applying a discount to the lump sum. The discount reflects the interest that would be earned on the lump sum payment based on safe investment within Index Linked Government Stocks and avoids the injured person receiving too much or too little compensation over the period they will suffer the losses.

Lawyers calculate the discount by applying what is known as “The Personal Injury Discount Rate” to the lump sum of compensation.

Who Decides the Discount Rate?

The Discount Rate is set by the Lord Chancellor.

Why is there Disagreement about the Discount Rate?

Until 20 March 2017 the Discount Rate had remained unchanged at 2.5% since 2001. In other words it was assumed that a Claimant could obtain a return of 2.5% on any monies invested and therefore lump sums were adjusted downwards to reflect this.

Claimant representatives have long criticised the fact that the rate had been kept at 2.5% while the rate of return on Index-Linked Government Stocks had gone down leading to injured people being under-compensated. This is on the basis that this would lead many claimants to “run out of money” before their care needs, accommodation needs, treatment needs etc had been fulfilled.

Following pressure from Claimant representatives the Government reduced the Discount Rate from 2.5% to minus 0.75% on 20 March 2017. Insurance Companies in turn have lobbied the government to increase the discount rate again. The current rate has led to insurance companies paying out more compensation to injured people than they would have done under the old rate to ensure that they are kept in the financial position they would have enjoyed, but for the injury.
Insurers argue that injured people do not always invest cautiously in Government Stock and may invest in including higher risk investments with higher rates of return which leads to the injured person being over-compensated . Therefore they argue that the 2.5% rate should still be used or should be set at a higher level.

So What Next?

The government have recently announced that they are carrying out a consultation into how the discount rate is calculated. It is widely expected that this will lead to the Discount Rate changing again, possibly to around 1%.
Whatever happens the rate must be set at a level which leads to those being injured due to no fault of their own receiving the full level of compensation they are entitled to put the injured person in the position they would have been in, had they not suffered injury.

At Thompson & Co. Solicitors we have a great deal of experience in advising injured people about the amounts of compensation they are entitled to recover as a result of an injury or illness and will calculate the amounts of compensation you may be entitled to for any future losses using the Discount Rate.

We advise clients from all over the North East of England including Sunderland, Durham, Newcastle, South Tyneside, Middlesbrough, Northumberland and North Yorkshire.

We advise clients on a No Win No Fee basis.

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