Further discount applied

Last week’s announcement of a new process for setting the discount rate applied to serious injury compensation did not come as quite the surprise that the sudden hike in March did, and the proposals seem targeted on the middle ground between insurers and those representing severely injured accident victims. ARAG’s Product Development Manager Lesley Attu takes a closer look at the announcement.

Liz Truss sent the insurance industry into a tailspin a little over six months ago, when she announced a change to the ‘discount rate” from 2.5% to -0.75%. Share prices dropped, premiums were hiked and the insurers’ PR machines went into somewhat unseemly overdrive, demanding that the ‘crazy’ decision to ensure that people with catastrophic injuries should be adequately compensated, be urgently reviewed.

It may not have come about quite as quickly as some would have liked, but the MoJ’s proposals for a new mechanism to set the discount rate seem designed to strike a compromise. If Lord Chancellor David Liddington’s prediction that the new system would currently generate a rate between 0% and 1%, then it could fall very close to the mid-point between the -0.75% that so outraged the ABI and the 2.5% that it lobbied and fought so hard and for so long to preserve.

The MoJ says it will maintain a 100% compensation rule so that claimants should receive full compensation for the loss caused by the wrongful injury, and not any more, nor any less. It has accepted that the existing legislation governing how the rate is set is unrealistic and could result in awards that significantly overcompensate claimants.

The consequence, it claims, is that the NHS and other public sector bodies can be adversely affected and insurance premiums are inflated.

The MoJ has also acknowledged that injury victims are likely to be more risk averse than ordinary, prudent investors but that “low risk” rather than “very low risk” investments would represent a fairer benchmark. 

Primary legislation is necessary and, once it is passed, the discount rate will be set by the Lord Chancellor, who will take advice from a panel of independent experts. The panel will be chaired by the Government Actuary and will include four other members who will bring experience as an actuary, an investment manager, an economist and a consumer investments expert. HM Treasury will continue to be a statutory consultee for each review, which will take place every three years.

The panel will still be able to set different rates for different types of case, but the principles behind how the rate is set will be set out in the legislation.

So far, the Lord Chancellor’s news has been received more enthusiastically by the insurance industry (and its investors) than those representing injured victims, but only time will tell if the new rate setting mechanism will prove fairer or not.

For and most importantly against the LASPO Bill

Various government proposals and bills seem to be having a tough time in the House of Lords, not least the rocky ride being shown to the Legal Aid, Sentencing and Punishment of Offenders Bill (LASPO) which proposes cuts to legal aid and sweeping changes to civil litigation.

Currently in committee stage there have already been a few concessions made but with many peers opposed to the Bill the next report stage should be very interesting.

The last couple of weeks have seen a number of articles in the news with varying opinions on the LASPO Bill.

In the Telegraph over the weekend, the Justice Minister Ken Clarke was defending the Bill by highlighting the costs that the NHS pays in success fees to lawyers in clinical negligence cases. According to their figures:

• the number of claims rose from 5,426 in 2006/07 to 8,655 in 2010/11
• legal costs of claimants suing the NHS rose over the same period from £83 million to £195 million
• the cost of defending the actions rose from £49 million to £62 million.

Blaming the compensation culture, Clarke explained that "Taxpayers expect that the system should compensate claimants properly and reward their lawyers appropriately, not liberally.”

On the other side of the fence, the Telegraph article mentions phone-hacking victims like the Dowler family who have lobbied the government with a letter saying that “the changes will make it difficult for any but wealthy people to launch legal actions.”

Similarly, a range of charities, organisations and campaign groups are fighting back against the Bill, including AJAG and the CJA both of which ARAG is a member of.

The latest press release from the Law Society explains: “Peers in the House of Lords will discuss altering the legislation in a bid to eradicate "compensation culture" but the move would instead penalise victims of accidents, fraud, negligence and wrong-doing as well as businesses and even the Government.”

In an article in the Guardian, charities Oxfam and Amnesty International have joined the campaign on behalf of those suffering human rights abuses, warning that, “Victims of oil spills, pollution or land grabs in developing countries will no longer be able to pursue claims in British courts against multinational corporations under [these] legal reforms.”

Another hole identified in the Bill is that of the money saving aspect. Concerns have been raised by many that the calculations haven’t been done and that the cuts in legal aid and amends in civil litigation will cost more than they save. A report by King’s College London identifies that “these changes will incur new costs for the taxpayer by simply shifting the burden onto other parts of the public purse.”

In another academic report, Dr McIvor, Senior Lecturer at Birmingham Law School, accused the reforms of being “excessive and over-zealous”. She advised that “the evidence does not necessarily demonstrate that the primary source of the current high level of costs is the recoverability of success fees and after-the-event insurance premiums.”

What is also surprising about the Bill is the lack of joined up thinking in the government. With Clarke, together with his counterpart, Eric Pickles, continually following the party line about saving money (Guardian article: Eric Pickles: council tax rise a 'kick in the teeth' for cash-strapped residents), if the Bill is passed and legislation implemented then Council Tax will increase. The reason for this is quite simple. Unlike the present system where Local Authorities can recover their legal costs when they successfully defend a claim, under the new proposed system, they will not unless the case is deemed to be fraudulent or frivolous, which is extremely difficult to prove. This Bill is leaving Local Authorities will their hands tied behind their back. One the one hand they will want to defend cases, but on the other they know that if they do they won’t recover costs. Claims won’t reduce, so compensation payments by local authorities will increase, meaning only one thing, a cut in services or an increase in the Council Tax.

With the report stage to come and many amendments expected to be tabled by the Lords to all sections of the Bill, the fight is not yet over for those battling for and most importantly against the LASPO Bill.

A boost for the campaign against the Jackson reforms?

The campaign against the civil litigation reforms proposed by LJ Jackson received a boost recently after the response by three cost judges to the Green Paper was revealed by the Access to Justice Action Group (AJAG).

According to the Law Society Gazette the judges, “have broken ranks to object to radical reform of civil litigation” and were “unable to agree with the majority view of the costs judges”.

Backed by the Ministry of Justice (MoJ), the reforms include proposals to end the recoverability of success fees and After-the-Event (ATE) premiums, cap success fees at 25% of compensation awarded and increase general damages by just 10%. ARAG, AJAG, the Consumer Justice Alliance (CJA) and many others believe that such changes will significantly reduce access to justice and it seems the cost judges agree.

Describing many of the proposals as “inappropriate”, the judges have said in their response, “claimants who have suffered serious medical injuries could lose thousands of pounds intended to pay for their care”. They go onto say that it is often the conduct of the defendant that increases costs, so shifting the payment of success fees and ATE premiums to the claimant will cause “injustice”.

For ARAG and other legal expenses insurers who believe that ATE insurance helps access to justice as well as reduce costs by rooting out unmeritorious claims, a further comment describing the reforms on ATE as having “gone much too far” is a welcome one.

As pointed out in a Legal Futures article “the fact that important voices in the judiciary have such serious doubts about the reforms will give campaigners heart.” The fight continues!