Discounting the Discount Rate?

In broad terms, damages for personal injuries are intended to put their recipient in the position they would have been “but for” the negligence act of the “at-fault” party.

The Court of Appeal in London recently considered the basis on which compensation to cover long-term additional housing costs should be calculated.

Background

On Halloween 2013, the claimant was the front-seat passenger in a car driven by her now-husband. They were involved in a road traffic collision. She was seriously injured, losing her lower leg. He was at fault. Liability was not in issue. 

Damages were assessed at £4m. There was, however, a question over the additional capital costs of £900k for accommodation to meet with the claimant’s disability.  

Following the Court of Appeal precedent of Roberts v Johnstone (1989), the trial judge declined to make a further award on the basis that the “Discount Rate” to be applied was negative. 

Doctrine of Precedent

Stare Decisis et Non Queita Movere

This Latin maxim can be translated as “[t]o stand by things decided, and not to disturb settled points”. The effect, in this case, was to bind the High Court to follow the previous decision of the Court of Appeal. 

The Discount Rate

The Discount Rate is a multiplier used in calculating high-value personal injury awards to allow for future losses, costs and expenses to ensure claimants receive the full compensation awarded. To do this, the prevailing Discount Rate is multiplied by an estimate of the claimant’s life expectancy. The idea is to reflect the interest that a claimant can, on balance, be expected to earn by investing their award.

The lower the rate, the higher the award. As of August 2019, the Discount Rate in England & Wales is minus 0.25%. Accordingly, any calculation would result in a nil award. 

In Northern Ireland, the historic 2.5% rate is currently under review.  

Assessing damages 

On appeal, the Court of Appeal took the view that:

…in the context of modern property prices and a negative discount rate, the formula in Roberts v Johnstone no longer achieves fair and reasonable compensation for an injured claimant. 
…it cannot be regarded as full, fair or reasonable compensation to award nil damages in respect of a large established need, on the basis that, if all the relevant predictions hold good over many decades to come, there will arise a windfall to a claimant’s estate. 
Nor is it fair or reasonable compensation to follow the Roberts v Johnstone approach on the basis that if all the same predictions hold good, there will in addition be in existence a suitable market to enable a claimant, by then elderly or aged, to release equity at a reasonable cost and without unacceptable disruption.

The Court of Appeal assessed the additional housing costs at £900k. Life expectancy was assessed at 45.43 years.  A cautionary rate of 5% was then fixed. Combining these figures (with the assistance of a scientific calculator!) gives a sum around £98k, which, when taken away from the number you first thought of leaves an assessment of damages of c. £802k.  

Conclusion

Although the Court of Appeal did acknowledge that this approach may not be universally appropriate, for example, in cases with low life expectancy:

…for longer lives, during conditions of negative or low positive discount rates, and subject to particular circumstances, this guidance should be regarded as enduring.

It is understood that the insurers are contemplating an appeal to the Supreme Court.

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