Courts seek alternatives to lump sum payments

Structured settlements are an unpopular choice. They provide the claimant with security that they will receive a flow of payments, but take away the flexibility of a lump sum award.

Going back to basics, the purpose of an award of damages is to place the claimant, as far as possible, in the financial position he was in before the accident. In cases of long term disability, are lump sum awards the best way to achieve this?

The claimant will almost certainly receive too much or too little, in particular in cases where there is disagreement as to life expectancy.

The judgment in Wells v Wells marked a change in the courts' attitude to the calculation of damages in favour of claimants. The House of Lords took the view that courts should assess future losses on the basis that claimants are entitled to take a cautious approach to investment.

Cautious approach
The award should reflect the risk carried by the claimant as an individual investor (as opposed to the risk carried by investors generally at a collective level). This more cautious approach was followed last year when the discount rate was reduced to 2.5%.

Three years on from Wells, the Master of the Rolls has set up a working party, which is due to make recommendations by March this year, to look at increasing the use of structured settlements.

Also the Chief Medical Officer is considering options for clinical negligence claims, including greater use of structured settlements. The number of high value clinical negligence settlements, which are ultimately funded by the taxpayer, makes this a high profile issue.

Taken to an extreme, to achieve accurate compensation of a claimant it would require an ongoing review of the claimant's needs, by way of an indemnity system of compensation or a reviewable structured settlement.

Administration costs
This would require a significant revision and extension of the courts' present powers. Such a system would further encourage the use of rehabilitation, which might reduce insurers' outlay, but would involve uncertainty and substantial administration costs.

It is not an attractive option.

A middle course would be the bottom up form of structured settlement favoured by the Master of the Rolls. These use as the starting point the amount of money the claimant needs each year.

In the US, where structured settlements have been a feature of claims awards for about 20 years, bottom up structured

settlements are relatively common. Many more structured settlements are entered into there than in this country and they are used in a much broader range of cases.

The National Structured Settlements Trade Association reported a 25% increase in premiums in 2000 from the previous year and has predicted that a high level of growth will continue. This demonstrates that demand and competition works.

The future
Unless demand for structured settlements rises, competition in the life assurance market will not increase. But if rates do not become more competitive, demand is likely to remain static.

For the future, much will depend on judicial and political pressures for a more fundamental change to the system.

In Wells, Lord Steyn called for courts to be given the power to make awards for periodic payments.

This approach could be attractive to government, given the benefits of staged payments in clinical negligence claims.

Such a move would be likely to meet with resistance from claimants and insurers. However, it is arguable that the basic purpose of an award of damages is met more closely by a structured settlement than by a lump sum award.

While structured settlements are still in their relative infancy it is unlikely that courts will be given power to impose them.

The road to acceptance
The courts have already shown a change in attitude to the investment behaviour to be expected of claimants.

The more cautious claimants are expected to be, the more attractive the rates available from structured
settlements become.

The working party may well recommend that, in appropriate cases, parties should confirm to the court they have considered a structured settlement.

In the short term this is unlikely to result in a significant change in behaviour, but the amount of information available to litigants and their representatives would inevitably increase.

Sally Chalmers is a personal injury solicitor at Davies Lavery