Lea Brocklebank warns of three recent developments that augur increased liabilities for the insurance industry in 2007

After an unimpressive start, the significance of periodical payments as an alternative means of delivering compensation for future loss claims now seems assured. The problem for insurers, however, is that periodical payments are potentially much more generous to claimants and consequently more expensive than the conventional lump sum award they replace.

We are likely to see a more robust approach adopted by the courts when exercising its duty under s 2.1 Damages Act 1996. The courts will be more likely to impose periodical payments, even against the expressed wishes of the parties, where this is deemed to meet a claimant's needs better (as distinct from their 'wants'); the case for traditional lump sum awards of future loss is now much weaker.

This development follows two High Court rulings that have had the effect of bolstering confidence in the long term purchasing power of periodical payments. It has also advanced the cause of the government's new periodical payments compensatory mechanism for personal injury claims.

The relevance of indexation to the success or failure of periodical payments as a compensatory measure was flagged by Sir Michael Turner in Flora v Wakom (Heathrow) Ltd (2005) and later endorsed by Lord Justice Brooke, in the Court of Appeal.

The periodical payments mechanism was acknowledged to be at risk of becoming a rarely used, esoteric oddity (as had been the fate of its predecessor, the structured settlement) unless future payments were adequately inflation proofed.

In Thompstone v Tameside and Glossop Acute Services NHS Trust (2006) the key issue was whether the periodical payments for future care should be linked to the retail prices index (RPI), which is the default position under s2 (8) Damages Act (1996), or whether it should apply a more appropriate –more generous – index applying the disapplication or modification permitted by s2 (9).

Justice Swift found that if a claimant's payments for future care were linked to the RPI, he "would be left unable to meet the cost of his annual care needs, an outcome which was recognised in Wells v Wells. (1999) as being particularly serious".

She followed the guidance set out in Flora and indexed the claimant's payments for future care to the Assistants and Home Carers 80 (ASHE 6115) index.

On a more positive note, it could have been much worse. The ASHE 6115 is much less generous than the average earnings index that had also been mooted. Indeed, the new ASHE 6115 rates, that were published during the course of the trial, actually show a lower rate of increase than the RPI.

Even so, the trend from past years suggests that the ASHE 6115 will produce a higher than RPI rate of increase over the long term.

Thompstone is not a case of 'RIP for the RPI', nor is this the case for the other alternative inflation proofing mechanisms. These may well be appropriate for different heads of future loss. Justice Swift was careful to observe that her findings were confined to the particular facts of the case before her.

Indexation is likely to be reviewed by the House of Lords before long. Even so, and whatever the legal niceties of the arguments on either side, the introduction of periodical payments is a reform that the Department for Constitutional Affairs, the Treasury and the NHS have all set much store by.

The reform will fail if there is no accurate inflation-proofing mechanism, to guarantee the purchasing power of the payments in future years. It seems highly unlikely that this will be allowed to happen and so there are strong grounds for supposing that periodical payments are here to stay.

The implications for insurers are profound. The cost of shoring up the inflation-proofing mechanism will be borne by compensators. Inflation-proofing future income streams, as any pension advisor will tell you, does not come cheap.

Compensating future loss by means of periodical payments is potentially far more expensive to fund, more involved and costly to administer, than the conventional lump sum award.

A £2bn insurance industry-wide price tag has been mooted and it won't be long before the impact from the Flora and Thompstone judgments is felt by many liability insurers. Ultimately, this will be reflected in higher premiums.

The second development concerns the Health and Social Care (Community Health and Standards) Act 2003.

New guidelines await parliamentary approval. This Act allows NHS charges clawback provisions, that previously only applied to road traffic claims, but will be extended to virtually all personal injury cases.

Where claimants have attended hospital, NHS charges will have to be paid, not only in motor claims but also in the majority of personal injury cases.

In addition, ambulance charges will be recouped by ambulance trusts in personal injury claims, where the claimant has been taken to hospital by ambulance. The cost of ambulance trips is currently set at £159 for each ambulance journey.

At the moment NHS charges are paid depending on how long the claimant is in hospital, with the maximum recoverable sum set at £37,100 per claim. Insurers again need to scrutinise their reserves in serious injury cases. Presumably it will not be long before the impact is felt.

On a more positive note, insurers will be interested to learn that for the first time the clawback can be reduced when contributory negligence is agreed between the parties, in certain specified circumstances, including when there is a court order that reflects an agreement apportioning liability, or where the judge makes an apportionment following a hearing.

Clearly there will be cost implications for smaller value cases and insurers will wish to consider whether it is worth going to the expense of allowing proceedings to be issued simply to gain the court's approval. However, in cases where the NHS charges are significant, time taken agreeing contributory negligence and seeking the court's approval will pay dividends.

The unreported costs ruling in Hutchings v The British Transport Police (2006) is the third development. Hutchings was an appeal on a preliminary ruling by a district judge who refused some very extensive Part 18 'requests for information' by the defendant on the grounds that they constituted a blatant fishing expedition of the kind previously deprecated by Judge Dyson, Lord Justice Brooke and Senior Costs Judge Hurst in the Court of Appeal ruling in Garrett and Myatt (2006) – see para 79.

The upshot was that Judge Hurst ruled that the defendant's appeal (which sought to present a much more limited list of six questions) was upheld in part only, to permit the following three questions being put:

• Does C have insurance?

• With whom?

• Does C have any legal expenses insurance?

The ruling will not preclude the defendant from raising additional questions at any subsequent detailed assessment hearing. Even so, this constitutes a significant curb on a paying party's right to investigate an opponent's before-the-event insurance inquiries.

Furthermore, the judge observed that successful cost challenges of this kind under the new regime will only be relevant to the success fee and any after-the-event insurance premium.

Accordingly, successful costs challenges, relating to the new simplified conditional

fee agreements, are unlikely to produce such dramatic results as pertained under the old regime. IT

Lea Brocklebank is a partner at Bond Pearce and president of Foil