Whiplash Reform & Discount Rate (March 2018)
Civil Liability Bill 2018
On 20 March 2018, the Civil Liability Bill was introduced to the House of Lords dealing with two contentious issues in the personal injury compensation system of England and Wales, being compensation for whiplash injuries and the personal injury discount rate.
Readers may well recall that the then Chancellor, George Osborne, proposed reform to tackle the rising cost of motor insurance as long ago as 2016. Subsequently, there was the introduction of the Prisons and Courts Bill which, amongst other provisions, set out proposals for whiplash reform, but proceeded no further due to the announcement of the general election. In June 2017, the Queen’s speech announced that the Government would be tabling a Civil Liability Bill.
In the interim, on 27 February 2017, Liz Truss, the then Lord Chancellor, changed the discount rate from 2.5% to - 0.75%, effective from 20 March 2017. The insurance industry was very critical of the change and, in particular, criticised the fundamental basis on which the discount rate was based on very low risk investment behaviour.
The Civil Liability Bill, unlike the Prison and Courts Bill, does not deal with the proposed changes to increase the small claims limit in road traffic related personal injury claims from £1,000 to £5,000 and for all personal injury claims from £1,000 to £2,000. Those issues are still being considered by the Civil Justice Committee.
The Bill provides for the following:
The introduction of a tariff of compensation for pain, suffering and loss of amenity for whiplash injury as defined within the Bill. The tariff itself has yet to be detailed and will be set out in secondary legislation in due course.
The introduction of a regulatory ban on settling or offering to settle whiplash claims without medical evidence.
Provides the judiciary with discretion to exceed the tariff for pain, suffering and loss of amenity in exceptional circumstances. There will be a limit for exceptional payments, which is to be set out in secondary legislation in due course.
Readers would be correct in concluding that the foregoing is nothing more than a repackaging of the provisions set out in the previously abandoned Prison and Courts Bill.
The change in the discount rate was made by Liz Truss under the powers conferred on her by the Damages Act 1996, guided by the 1999 case of Wells v Wells in which the Court determined that the discount rate should be based on the yields of Index Linked Government Stock.
When the discount rate was reduced in February 2017, the Government appreciated this would lead to higher levels of compensation for those with future losses, and that not only would this impact negatively on insurers, but also on public services with large personal injury liabilities, particularly the NHS. Thereafter, there followed a consultation launched in March 2017 resulting in the Civil Liability Bill setting out measures to:
Establish a new basis for the calculation of the discount rate that continues to support the principle of 100% compensation, but also reflecting the reality of how Claimants actually invest damages.
Putting in place a process of setting the discount rate on a statutory footing with the Lord Chancellor to review the rate at least every 3 years.
Establish an independent expert panel to advise the Lord Chancellor so as to ensure that the rate set is fair and transparent.
It is clear that the MOJ and Justice Committee have agreed that the discount rate should reflect "real-world" Claimant investment behaviour. The MOJ maintains that research by the Actuary Department indicates average awards may exceed the expected return by about 35%, although after an allowance is made for necessary expenses on tax and investment management, this figure may fall to between 20 to 25%. This is largely due to the way the current discount rate is calculated, making unrealistic assumptions about investment and returns. The MOJ have previously indicated that utilising the new proposed methodology may result in a discount rate of between 0 and 1%. The Justice Committee, on the other hand, has called for further evidence in relation to this issue before the draft legislation is progressed.
The introduction of the Bill is a clear indication that the Government remains committed to reforming the personal injury compensation system in England and Wales.