In a shock move by the Lord Chancellor it was recently announced that the ‘discount rate’ that is applied to serious and fatal accident claims is to be decreased from 2.5% to 0.75%. The end result is that for further awards of compensation (that is money that is used to compensation victims for fatal accidents and serious non-fatal accidents) for a term in the future or a life time award will obtain more money.
Insurers argue the increase in compensation award for serious injuries and fatalities will cost the industry £6 Billion.
How the Discount Rate Works to Calculate Future Awards
In simple terms, when an award for compensation is made, it is designed to put the injured victim (or in a fatality) the victim’s estate and dependents back into the same financial position as they would have been had the accident not taken place. No more and no less.
Where, for instance in a life changing injuries or serious injuries case the employee can no longer work, it would mean that the injured victim would lose out on his/her wages for years to come up to the usual retirement age. See how this is calculated below:
Fatal accident claims compensation example:
To take a simple example, a man sustained serious non-fatal accident claims: say he was earning £20,000 net per year in wages and had 10 years working life left but the accident has put a stop to him ever working again.
What the court will do is not say that he would the worker will be entitled to 10 years x £20,000 and provide a lump sum award for his future of £200,000. The court and the non-fatal accident claim solicitors will have to ‘discount’ the £200,000 to reflect that if the worker was to receive compensation he would have had to work 10 years, but he is getting it immediately.
Thus if the worker invested £200,000 today, over a period of 10 years it is likely that £200,000 would be worth more due to interest and investment returns. Remember the worker cannot be ‘over -compensated.’ So a discount is applied depending on the age and how long the future award will last which has been applied by the courts for many years at 2.5%. So rather than received £200,000, the worker may only get say £185,000, a discount of £15,000.
But the assumption made by the court were back in the day where the UK Banks and investments had much better returned than they do today. This means the since the financial crash in in 2007 in particular the discount applied to future lump sum awards in non-fatal accident claims and fatal injuries where too much and therefore under-compensating the victim.
The new suggested discount rate has been reduced to reflect the reduced returns on investments and interest rates to as to re-balance the compensation award for victims of fatal accident claims.
