Increased Cost of Damages in UK

June 1999

(Sea Venture Volume 18)

The principle of multipliers arises whenever a Plaintiff claims a future loss, be it loss of earnings, pension or care. To say that the multiplier for a plaintiff who loses 10 years’ earnings should be 10 times his net annual salary would be over compensation; accordingly the sum received is discounted to reflect early receipt as the damages can be invested to generate interest.

The multiplier is based on the number of years for which a compensation award is being made but is discounted by reference to actuarial tables known as the Ogden Tables.

It was previously accepted by the Court that a rate of 4.5% was the appropriate net rate of interest which a plaintiff could receive on his compensation on the assumption of mixed investment in equities and guilts averaged over a period of time.

In their recent judgment in Wells v Wells, Thomas v Brighton Health Authority and Page v Sheerness Steel¹the House of Lords rejected this rationale saying that the plaintiff’s objective was to ensure that the money did not run out and as such it was reasonable for a Plaintiff to be "cautious and conservative in his investment". The rate of return from such an investment would be lower and as such the discount for early receipt should also be lower. As a result, the multiplier for future loss claims in all personal injury actions heard in the UK is increased, the Lords accepting the argument that a 3% rate of discount (rather than 4.5%) is appropriate to ensure that a Plaintiff continues to benefit from a damages award for the period compensated.

To appreciate the impact of the difference in rate, consider a hypothetical example: an 18 year old, who earned £20,000 p.a. net, who will not be able to work again as a result of an accident. Using a discount rate of 4.5%, the claimant could have expected a multiplier of approximately 19 to be applied to his claim for future loss of earnings giving a figure of £380,000. With a 3% discount rate, the multiplier is increased to 24.5 giving an award of £490,000, an increase of £110,000.

There will be no sympathy from the courts to the compensator’s plight. Lord Lloyd said in his Judgment: "…There is no room here for considering the consequences of a high award upon the wrong-doer or those who finance him…". Lord Irvine, the Lord Chancellor, must decide whether to ratify the House of Lords ruling. He has the power to increase the rate, but this is thought to be unlikely.

Whilst nobody has calculated the likely addition cost to the shipping industry, it is clear that this decision will have a substantial effect on damages awarded in the UK in the future and reserves will need to be adjusted accordingly.

 

With thanks to Jackie Knowles, Eversheds, Bristol for preparing this article

¹ [1998] 3 All E.R. 481