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Discount rate: an unreal construct or necessary to protect 100% compensation?


Malla: onus is on claimants

The sharp divide in opinion over the future of the discount rate came to the fore this week, with the argument that it should be set by reference to what claimants are actually going to do with their money countered by the claim that this would constitute an attack on the principle that injured people should receive 100% of their compensation.

The issues were aired at a debate hosted in London by insurance law firm Kennedys and chaired by Mr Justice Turner.

Simeon Maskrey QC, head of 7 Bedford Row, and David Westcott QC of Outer Temple Chambers were asked to take the roles of opposing counsel, with the caveat from both that they were not reflecting their own views.

The current government consultation questions the legal basis for setting the discount rate, derived from the 1998 House of Lords ruling in Wells v Wells. The Lords said that claimants were not in the position of ordinary, prudent investors and so calculated the return to be expected on the investment of damages by reference to low-risk index-linked government stocks (ILGS).

Speaking for a reduction in the rate, Mr Maskrey said there was “no justification” for classing claimants as a special case. While using ILGS sought to minimise any ‘market risk’ – that the yield will not keep pace with inflation or not be honoured – he argued that the approach failed to take into account ‘uncertainty’ risk (that the yield will not provide an adequate return for what the claimant wants or needs because costs are increasing at a greater rate).

There was also the ‘shortfall’ risk where claimants compromise certain heads of loss to achieve a settlement, leaving a hole which they need to fill through investment.

As a result claimants do not, in reality, invest solely in ILGS – even the Court of Protection does not, Mr Maskrey noted – and instead have a mixed portfolio aimed at securing a higher return to fill the gap created by these three risks.

He asked why the House of Lords ignored “what claimants are actually going to do in favour of what they won’t do”. In virtually all other circumstances, he observed, “the law asks a claimant what they are going to do and then gives them the damages to do it”.

On the other side, Mr Westcott said that to suggest claimants have an appetite for risk, or ought to be required to take risk, mistakes the relationship between investment and risk in their situation.

“Ordinary investors counternance – or even embrace – risk because they choose to invest their money,” he said. “Claimants are required to invest their damages through no choice of their own… There is no reason why claimants should be the only category of investors required to take a risk for the benefit of someone else [by reducing the amount of money defendants are required to pay].”

Saying the “law has always been clear that what the successful claimant will actually do with the money awarded is irrelevant”, Mr Westcott insisted that even if a claimant does invest in higher-risk equities, any return is not over-compensation but – like for any successful investor – a return for taking that risk.

Mr Westcott said the ruling in Wells and in later cases showed that judges regarded the use of a very low-risk option like ILGS as a “critical component” in the application of the 100% compensation principle. “To take the use of ILGS, without establishing that a better tool for the assesment of loss exists, is to attack the 100% principle itself.” Given that the yields from ILGS have sunk to zero since the financial crisis, the discount rate too should fall, he added.

Both barristers agreed, however, that there was a debate to be had about whether to maintain the 100% compensation principle.

Kennedys partner Christopher Malla said: “We see the strong force in the case for setting the discount rate by reference to what claimants actually do with their damages.

“The onus is on claimants wanting a reduction to the discount rate to provide evidence they invest solely in ILGS and not a mixed portfolio and that their compensation runs out because it is insufficient. To date this evidence has not been disclosed and I can only assume it is not available.”

Today, the new president of the Association of Personal Injury Lawyers, Matthew Stockwell, will highlight the future of the discount rate as one of the key issues for his members over the next year.