Insult to injury

  • Author : Katie Wilson
  • Date : February 2011
ABOUT THE AUTHOR: Katie Wilson is Manager of Advice Policy at Towry

F inancial settlements in catastrophic injury claims invariably follow years of financial hardship for a claimant and their family. Settlement promises an end to living in unsuitable accommodation, dependence on whatever care and equipment the local authority can provide and uncertainty about the future. Combine this with the often combative nature of litigation and it’s easy to see why a claimant’s relief upon finally settling their claim might be confused with a sense of having won something tangible.

Media coverage focuses more on the value of the pay-out than on the severity and consequences of the injuries sustained, and public perception seems to be that claimants have suffered but have been left wealthy as a result.

Illusion of wealth

But are they wealthy, or is it just an illusion of wealth? To answer this question we need to consider a typical award:

Annie is aged 15 and was paralysed in a car accident. She will never work and is dependent on others 24 hours per day. Annie’s multi-million pound award included the following:

General Damages
£230,000
Past Losses
£170,000
Accommodation
£172,500
Future Care
£3,000,000
Future Loss of earnings
£562,000

General damages are awarded as compensation for pain, suffering and loss of amenity, calculated by reference to the Judicial Studies Board Menu. As Annie’s injuries are at the more serious end of the scale she was awarded GBP230,000. All other elements of the award are designed to compensate for a specific loss.

Past losses are used to repay expenses incurred up to the point of settlement and included the reimbursement of costs borne by Annie’s family. Where past costs can be proven and are not excessive, they will usually be compensated in full, with interest.

The same cannot be said with regard to accommodation losses. Annie needs a wheelchair-friendly home with carer’s accommodation and the experts agreed that this would cost approximately GBP430,000. However, Roberts v Johnstone applied so Annie only received GBP172,500, leading to a shortfall of GBP257,500.

So how will Annie fund the shortfall? She could use her general damages of GBP230,000 and take the remainder from her award for loss of earnings, but this may not leave her with sufficient capital to fund expenses such as food, clothing and utility bills. And she won’t be left with any capital reserves in the event that she lives longer than anticipated.

Shouldn’t we also consider the fairness of Annie having to use the only element of her award that is actually designed to compensate her for her pain and suffering to subsidise the cost of purchasing an adapted property to house herself and her carers?

Matters become even more complex when trying to quantify Annie’s future losses, as these costs needed to be determined many years in advance. This process relied on the views of various experts, based on their qualifications and experience.

As well as identifying the future costs, it was necessary to agree timescales. Annie’s loss of earnings were calculated with reference to an anticipated retirement age, discounted to allow for contingencies such as extended maternity leave. But in the case of lifetime losses such as care costs, the value of her award was dependant on Annie’s life expectancy, estimated by medical experts to be reduced by around 15 years as a result of her injuries.

The lump sum value of Annie’s future losses was then calculated with reference to the Ogden Tables, a set of actuarial tables designed to calculate the present day value of future costs. The Ogden tables indicate that an average 15-year-old female with a 15-year reduction in life expectancy is likely to survive to age 73, giving a residual life expectancy of 58 years.

It is generally accepted that a claimant should not receive the full amount of their lifetime costs because they will have the opportunity to invest over their lifetime, so a discount rate is applied in all but exceptional cases. The discount rate, set by the Lord Chancellor, is currently 2.5 per cent per annum (an assumed growth rate of 2.5 per cent, plus inflation, net of tax and investment charges), giving Annie a lifetime multiplier of 30.

Annie’s lifetime care costs were agreed at GBP100,000 per annum, indexed in line with the Annual Survey of Hours and Earnings (ASHE) unit group 6115. Assuming increases in ASHE 6115 continue at the current rate of approximately 4 per cent per annum, Annie’s care costs will increase as follows:

If Annie dies as predicted at age 73, and the assumption regarding indexation is accurate, Annie’s lifetime care costs (the shaded area in the chart on p.68) will total almost GBP22.8 million. Annie has only been awarded GBP3 million, however, to meet these costs.

We have established that Annie does not have enough money to meet her accommodation needs and fund her anticipated lifetime expenses. Further, if she is to fund her future care costs she will need to achieve consistent investment returns in excess of 6.5 per cent per annum, net of tax and charges. With careful financial planning most claimants can limit their tax liability to 20 per cent per annum, but this still equates to a hurdle rate of almost 8 per cent, net of charges.

This conflicts with the long-established principle of 100 per cent compensation and the accepted view that a claimant should not be expected to take the same risks that an ordinary investor might be expected to take. The result is that, like many claimants, Annie will need to reduce her outgoings or be forced to take significant levels of investment risk.

The obvious remedy is to reduce the current discount rate, but the rate has not been changed since 2001 despite numerous calls for review. The Association of Personal Injury Layers (APIL) have resorted to the threat of judicial review to try and force the Lord Chancellor to reconsider the rate but it is still unclear when a decision will be forthcoming.

Another option is for claimants to push for settlement by way of index-linked ‘Periodical Payments’ that aim to match their rising costs, guaranteed over a predetermined period, often for life. However, this can be an expensive option for defendants, many of whom do not meet the ‘reasonable security’ test laid down in the Courts Act and, for a wide-range of reasons that fall outside the scope of this article, take-up has been disappointing.

To date, claimants have been able to secure ‘top-up’ funding but many of these opportunities are disappearing. The Independent Living Fund, established to provide for the most disabled members of society, is now unavailable to those who are unable to work. Primary Care Trusts are cutting back on services that aren’t clearly identified as healthcare, and social care and direct payments are being reduced as local authorities are forced to cut their budgets.

Claimants are still able to ring-fence their award in a trust to maintain eligibility to means tested benefits, but there is no guarantee that this will continue indefinitely.

Difficult decisions

In reality, many claimants and their families are being faced with some difficult decisions. They may have to remain in unsuitable accommodation, rely on family members to provide care or cut back on important treatments and therapies. They may need to forgo the protection afforded by having a professional deputy or trustee, leaving them vulnerable to financial abuse. Some are simply forced to accept that they will run out of money, at which time they will be reliant on whatever help their local authority can afford to provide. This will almost certainly include residential care and a complete loss of independence.

When David Cameron was leader of the Opposition, he commissioned Lord Young to review and comment on Britain’s ‘damaging compensation culture’. However, Lord Young concluded that:

‘The problem of the compensation culture prevalent in society today is one of perception rather than reality. Britain’s “compensation culture” is fuelled by media stories about individuals receiving large compensation payouts for personal injury claims … and the promise of a handsome settlement if they claim.’

So, many claimants settle their cases believing their financial needs can be met for the rest of their lives, the media report the value of the award without reference to the costs that claimants will incur, and the myth lives on. Few people recognise that most awards are inadequate for purpose and are likely to lead to increasing strain on local authority and NHS funding, with individual claimants and the tax payer picking up the tab.

The complex issues facing claimants make it paramount they obtain specialist independent financial advice.


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