The impending change to the discount rate means a focus on old part 36 offers, accommodation claims and cases that have settled but still require court approval, a leading defendant lawyer has said.
Last month, Lord Chancellor David Gauke formally began his review of the rate, as required by the Civil Liability Act. It must be concluded by 5 August.
An increase from the current -0.75% to between 0% and 1% is expected to result.
Mark Burton, a partner and head of the catastrophic injury group at City firm Kennedys, said that, given that a higher rate would reduce awards, “the greater risk of adverse costs consequences arguably weighs on claimants who might have rejected defendant part 36 offers under the old rate, which become protective under the new rate”.
But he said compensators still needed to review their historic part 36 offers and withdraw any that might otherwise overcompensate in order to avoid claimants accepting them out of time, “or preferably vary them downwards to avoid losing the preceding costs protection”.
One unintended consequence of a negative discount rate was to extinguish the Roberts v Johnstone element of accommodation awards, he wrote on the Kennedys website.
“Some claimants sought to mitigate that inequity by maximising their claims for adaptation costs and other incidental heads of accommodation loss, such as extra running charges in the new larger property, which are not dependent on a positive discount rate.
“A return to a positive rate at a lower level than the historic 2.5% will reinstate recoverability of the R v J component, but is highly unlikely to satisfy those claimant lawyers who have long been campaigning for an overhaul of accommodation methodology because of perceived unfairness in particular for claimants with short life expectancy.”
Mr Burton said a challenge before the Court of Appeal or Supreme Court seemed inevitable.
“In the interim, many claimants are trying to overcome the current R v J difficulties by seeking an award reflecting the likely mortgage interest (as determined by IFA experts) on the extra capital amount.”
The rate change also potentially created uncertainty for cases settled prior to the announcement but still requiring court approval, he added.
“We may even see test cases during the transition period where claimants are recommending the original settlement and defendants are actively challenging approval of the outdated terms.
“Whilst not an attractive prospect, that is merely the reverse of the situation in early 2017, when many claimant advisers sought to renegotiate settlements upwards as a pre-condition of recommending approval.”
Mr Burton welcomed the 2018 Act for providing compensators with “much-needed certainty” after a period of “unprecedented awards and a slow process of reforms despite patent overcompensation”.
Obliging the Lord Chancellor to publish the reasons for each rate determination would allow all stakeholders to monitor investment performance and obtain rolling financial advice regarding likely discount rate projections.
“However, that may also inadvertently encourage tactical behaviours in the run-up to the next review, by parties seeking to accelerate or delay issue or trial dates depending on expected review outcomes. Compensators will need to stay alive to behaviours that may develop in that regard.”
Indeed, Samantha Hemsley, head of serious injury claims at leading claimant firm Thompsons, claimed that insurers were now “cynically trying to delay in the hope that they can avoid having to pay at the current discount rate of -0.75% and instead at what they hope will be a more favourable rate for them at the end of the current review”.
She argued that this was “text book bullying by insurer fat cats; claiming anything and doing anything to increase their profits at the expense of the injured”.
Last month, Admiral said its profits were £66m higher on the basis that the new rate would be 0%, while Aviva said that rate produced a non-operating profit of £190m.
Calculations from Thompsons showed that someone awarded £21m for catastrophic injuries would see their award reduced to £18.5m on the basis of a 0% rate, £16m if the rate was 1%, and £12.9m if it returned to 2.5%.
Ms Hemsley said: “For 10 years, the discount rate bore no relation to what was really available as interest on savings. The fact that the rate was at least 2% away from market reality meant that insurers saved hundreds of millions of pounds whilst the severely injured got less.
“When the discount rate gravy train was finally stopped in 2017, many insurers claimed the change from an assumed 2.5% to a more realistic -0.75% would bankrupt the industry. These figures boasting of extra profit to come show what nonsense that was.
“The insurance industry raked in millions for years and now, as they admit that a 0.75% change will make them millions in extra profits we see the extent to which they are prepared to treat the injured with contempt.”
The Lord Chancellor is required to consult the Government Actuary and the Treasury as part of his review, and the terms of reference issued to both were also published last month.
They suggest that the Government Actuary’s advice will be relied on for the detail of the decision, and the Treasury more for the general macro-economic picture.
They also highlight that the Lord Chancellor may prescribe different rates of return for different classes of case, a practice already seen in other jurisdictions.