What happens when the personal injury discount rate changes, but everyone knows it will change again in the near future? How does this affect claimants and their ability to settle claims? Does it affect defendant behaviour and their willingness to settle?
APIL was able to survey its members about the unique period between February 2017 and July 2019 when the discount rate changed, and changed again, to try to answer these questions.
What was the background?
After 16 years at 2.5 percent, the Lord Chancellor announced that the personal injury discount rate for England and Wales (E&W) would change from 2.5 per cent to minus 0.75 per cent. This change was announced on 27 February 2017 and came into force on 20 March 2017.
The Lord Chancellor made it clear in her statement of reasons that she was exercising her power in section 1 of the Damages Act 1996. Basing the discount rate on the real redemption yield of ILGs was consistent, she noted, with the approach taken by the House of Lords in Wells v Wells and by the then Lord Chancellor, Lord Irvine, when he last set the rate in the Damages (Personal Injury) Order 2001 (S.I. 2001/2301).
Following the change in the rate the Government immediately issued consultation papers in March 2017 and September 2017 with a view to changing the way in which the discount rate should be calculated.
When publishing the second consultation, which set out the proposed legislation for implementing changes to the way in which the rate would be set in the future, the Ministry of Justice confirmed that the new calculation of the rate would be by reference to ‘low risk’ rather than ‘very low risk’ investments. The Lord Chancellor would consult a panel of independent experts when setting the rate. The Government’s response also confirmed that there would be a review of the rate at least every three years, although the rate would not necessarily change every time there was a review.
In 2019 while the Civil Liability Bill was awaiting Royal Assent, which when enacted would change the way the personal injury discount rate was set, a call for evidence was published in 2019 in preparation for the first review of the rate under the new legislation.
On 15 July 2019 the Lord Chancellor announced the setting of a new E&W discount rate of minus 0.25 per cent.
We were interested in finding out what happened on our members’ case files in the period between February 2017 and July 2019: the time it took between announcing the new rate calculated according to Wells v Wells, consulting on and implementing the new framework for calculating the rate and finally setting a rate under the new regime.
We contacted APIL practitioners who were members of its damages special interest group who were most likely to be engaged with issues surrounding the discount rate and likely to have active files to which they could refer. We asked them whether they had settled any cases since the rate change in February 2017 and if so, what rate was being offered by the defendants and at what discount rate did the claim eventually settle? We were also interested in whether a discount rate other than the official rate was used and the reasons why. We also surveyed the same group in 2019 to ask them about defendant behaviour during the same period.
A total of 181 responses were received to our survey on settlements since February 2017, of which 147 (82.12 per cent) respondents had settled a claim where a discount rate had been applied.
Following the reduction in the discount rate in 2017, claimant lawyers reported that defendants had attempted to delay settlement of claims until the discount rate changed again. Alternatively, defendants had argued that the interim rate of minus 0.75 per cent should be ignored.
Despite this, claims were settled and claims which had waited for the announcement began to move.
It was clear that defendants and their insurers had offered a range of discount rates in an attempt to settle claims during the two and a half year period, from the official rate of minus 0.75 per cent to a rate of plus 1.5 per cent, although the majority of claims received offers at between minus 0.75 per cent and one per cent (fig.1).
Thinking about the claims you have settled since February 2017, what discount rate was being offered by the defendants or their insurers to settle the claim? (Expressed as % of those who responded)
It was also clear that practitioners had negotiated more favourable rates for their clients in some of these cases, and although claims had still settled for a variety of discount rates, 41.67 per cent of respondents had settled claims at the new discount rate, while a further 39.99 per cent had settled claims with a discount rate of less than one per cent (fig 2).
Thinking about the claims you have settled since February 2017, at what rate have these claims generally settled? (Expressed as % of those who responded)
During the interim period while the consultations progressed and the Civil Liability Bill was introduced to Parliament, there were a number of conflicting sets of influences on practitioners which affected the rate which defendants were prepared to offer and claimants to accept.
As well as the usual litigation risk and issues relating to liability and causation, there was a concern that the conclusion of the consultations and subsequently the Lord Chancellor’s deliberations would be that the rate would rise again. As to where it would be set, predictions varied from remaining below zero to up to one per cent. On 7th September 2017 David Lidington MP, then the Lord Chancellor, had indicated that if the discount rate was set on that day, it would be somewhere between zero and one percent. But as time ticked on, the markets continued to move, calculations made elsewhere suggested other likely rates. The uncertainty persuaded many claimants to accept something in between the existing 2017 rate and one per cent rather than go to trial at some date in the future.
In a free-form answer section of our survey we asked what factors had affected their decisions to accept a discount rate other than the official minus 0.75 percent. A desire for certainty now, rather than uncertainty later and the risk of the rate moving upwards were the main motivations (fig 3).
Figure 3 (The % of those who responded to this question)
Despite push back from defendants, claimants were able to settle personal injury claims using the interim discount rate.
Where defendants offered rates other than the official 2017 rate of -0.75%, claimants were able to negotiate settlements on terms more favourable than the pre-2017 discount rate.
Many factors influenced both claimant and defendants when deciding to offer and accept variations on the official discount rate. The risk of the rate changing again, general uncertainty and the amount of time until the trial date were the most influential factors.