Compensation payments for personal injuries are expected to rise sharply as the Government announces plans to revise the calculation for financial awards.
From March 20 this year, the Discount Rate calculation that is applied to lump sums – the formula used to offset potential interest rates should they choose to invest the payout – will change from 2.5% to minus 0.75%.
Justice Secretary Liz Truss, who is responsible for the decision, said: “The law is absolutely clear, as Lord Chancellor, I must make sure the right rate is set to compensate claimants. I am clear that this is the only legally acceptable rate I can set.”
Victims of medical negligence, car crashes and other incidents will benefit from the revision.
What is the Discount Rate?
When victims of injuries accept compensation payouts, the court applies a calculation so the amount a person eventually receives is adjusted by a set interest rate – linked to the amount they could expect to earn if they were to invest the lump sum.
However, the law says claimants should be dealt with as “risk averse investors” and compensation should put them back into the same financial position had the incident not occurred.
Prior to 2001, the Discount Rate was set at 3%, but it has remained unchanged for the past 16 years.
The move is going to have a negative effect on the insurance industry, Huw Evans, director general of the Association of British Insurers, has said.
He has called Ms Truss’s decision “reckless in the extreme”.
He said: “Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK.
“We estimate that up to 36 million individual and business motor insurance policies could be affected in order to over-compensate a few thousand claimants a year.”
Date Published: March 3, 2017
Author: Jonathan Brown