Neil Harris, insurance manager of Broker Direct, welcomes the Lord Chancellor's review of damages
Earlier this year the Lord Chancellor's Department issued a Consultation Paper on damages, inviting interested parties to comment on the discount rate used in calculating the amount of personal injury awards, and the use of structured settlements.
The department is considering the responses it received. The conclusions – expected in October – could have far-reaching effects on insurers, on premiums, and on personal injury claims handling and settlement. What changes will the Lord Chancellor recommend? The fundamental issue is whether or not courts should impose settlements comprising in whole or in part an income stream instead of the conventional lump sum.
The Association of British Insurers' view is that such powers should not be given to the courts. Many practitioners and individuals within the insurance sector believe that the ABI stance is inappropriate, and that the basis of compensation at law should be changed. Such a change would introduce better, more appropriate, more cost-effective compensation, and eliminate some of the major inequities and iniquities of the lump sum system.
In particular, wherever the losses or costs to be compensated for take the form of ongoing periodic losses – such as loss of future earnings and increased cost of living – the courts could be required to order compensation based on an appropriate stream of periodic payments for an aptly defined period. Structured settlements are very tax-efficient: the income is exempt from tax. The income stream awarded should equate to the entitlement to compensation assessed on a net of tax basis.
The Lord Chancellor's Department will consider the calculation of damages and the forms that damages take in the context of, first, the objectives of compensation and, second, the process whereby compensation is obtained. The objective of compensation is that of securing the best future quality of life (i.e. minimum dependency and maximum prospects) that is realistic, practicable, and affordable; and thereafter providing appropriate financial compensation for residual suffering, losses, and cost.
The “lump sum” – and the professional obligation upon claimants' solicitors to maximise it – is an effective barrier to achieving this objective of the compensation system. In practice it discourages both claimants and their representatives from engaging in positive and cost effective efforts to improve outcomes first and secure financial compensation later. This also relieves defendants of any obligation to engage effectively in improving future prospects for the injured party.
This current review of damages should place damages within a wider compensation setting, and put much greater store on the initial responsibilities of the parties to engage constructively and positively to improve outcomes.
In many cases, assessment, and medical and vocational rehabilitation programmes, will yield a net benefit, in terms of the overall losses to be compensated for (the cost of improving outcomes will reduce substantially the required damages for residual losses).
Claimants' solicitors should be required to notify defendants, immediately upon engagement, of the medical position and current prognosis. They should facilitate such examinations and assessment as are reasonable and appropriate, to justify the cost of a programme to improve outcomes.
Claimants should be penalised in damages, if they fail to participate in appropriate assessments and programmes.
The “lump sum” and the (still) adversarial process which the “lump sum” perpetuates are frustrating the aims of the system. Imposing structured settlements in pre-defined circumstances will foster a better focused compensation environment and a more effective compensation system.
Early intervention and co-operation between both parties can lead to an early start to rehabilitation and effective claim investigation, evaluation, and negotiation, even before the medical position stabilises.
The resultant improvement in individual outcomes, and reduced ultimate cost upon society (through insurance premiums and the NHS spend), are key measures of the success of the compensation system.
If the basis of compensation for continuing losses is shifted from the lump sum to a structured settlement, the other consultation issue – the discount rate – becomes fairly academic, as there will be no sum to be discounted. Such a simple resolution of a hitherto contentious and intractable matter is now within our grasp.