By Charles Foster
The Lord Chancellor recently announced that the discount rate under the Damages Act 1996 would be decreased from 2.5% to minus 0.75%. This sounds dull. In fact it is financially tectonic, and raises some important ethical questions.
In the law of tort, damages are intended to put a claimant in the position that she would have been in had the tort not occurred. A claimant who, as result of negligence on the part of a defendant, suffers personal injury, will be entitled to, inter alia, damages representing future loss of earnings, the future cost of care and, often, private medical and other treatment.
Where damages are awarded as a lump sum, there is a risk of over-compensating a claimant. Suppose that the claimant is 10 years old at the time of the award, and will live for 70 years, and the future care costs are £1000 a year for life. Should the sum awarded be £1000 x 70 years = £70,000? (70, here, is what lawyers call the ‘multiplier’). It depends on the assumption one makes about what the claimant will do with the lump sum. If she invests it in equities that give her (say) an annual 5% return, £70,000 would over-compensate her.
In the case of Wells v Wells1, the House of Lords decided that, to avoid the risk of under-compensation, claimants should be treated as risk-averse investors. It should be assumed, said the House, that the discount rate should be fixed by reference to the return on index-linked gilts – Government securities. The rate was 2.5% from 2001 until February of this year. The reasons for the change to minus 0.75% are here.
The multiplier for pecuniary loss for life for a 10 year old male claimant with a normal life expectancy has risen from 34.08 to 108.32. A leading firm of solicitors has estimated that in cases where there is continuing loss of a sort typical in major personal injury/clinical negligence cases, the value of a claim for claimants aged 10-20 years with a normal life expectancy will increase by 100-200%: a claim previously valued at £5 million will be £10-15 million.
Insurers are predictably distraught, and have said that we are all victims of the change, since premiums will have to rise in order to pay for the larger awards of damages.
Of greater ethical interest is the situation of claimants who sue an NHS body. NHS bodies are effectively self-insuring. The £20 million settlement in favour of a child whose cerebral palsy was caused by obstetric negligence comes out of the pot used to pay doctors and to buy drugs.
Once a court awards a lump sum of damages to a claimant, the claimant can do what she likes with the money. She does not have to spend it on the care (for example) for which it was given. There is nothing to stop her investing it in riskier but potentially higher-yielding equities. If her investment strategy pays off, giving her more than the index-linked gilts that the court assumed she would buy would have given, she does not have to account to the defendant for the difference: it is a windfall. This means that in an NHS case the NHS has overcompensated the claimant. The NHS may in fact be hit twice: it may have given the claimant £x for private medical treatment, but the claimant may get the treatment on the NHS – keeping the money. That is plainly wrong. But other ethical questions are rather harder.
The governing philosophy of Wells v Wells is that claimants have already been unlucky in being injured. They should therefore not be required to take any more chances – and in particular they should not be required to take their chances on the open investment market.
Is this right? Why should one bout of bad luck entitle claimants to value a claim on the basis of an investment policy that would not be endorsed by the overwhelming majority of financial advisers – at least in relation to funds that are not tied to medical or care needs? Is the principle of full compensation so important that it should require the courts and society to turn a blind eye to over-compensation? If it should require that blind eye in some cases, is it not importantly different in NHS cases? There there is the certainty that over-compensation of a claimant will result in compromises in the care of other patients. Are those compromises not a high price to pay for the principle? In an age of brutal health rationing, shouldn’t claimants pay the price of a slim chance of under-compensation in order to discharge their communitarian obligations to the patients whose care is affected by big damages payments? And in any event, shouldn’t there be more rigorous policing of the use that claimants make of their damages? If they’re paid an index-linked gilts-based sum, shouldn’t they be required to put the money into gilts – so at least giving society (and hence, indirectly, the NHS) the benefit of the use of that money?
The Lord Chancellor has promised a review of the system of compensation. These essentially ethical questions should be at the heart of the review.
References
- [1999] 1 AC 34