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Increase in Rate of Return

A recent High Court judgment could have far-reaching consequences for the value of future losses awards in personal injury cases.

 

Background

Gill Russell suffered catastrophic injuries at the time of his birth on the 12th July 2006 due to the admitted negligence of the HSE, and has cerebral palsy. He requires full time care and assistance for his lifetime and is totally dependent for his every need on a 24 hour basis.

He sued the HSE via his mother and the case initially came on for hearing in 2012 when a settlement was approved and a sum of €1.4m was awarded by way of periodic payment for two years. This sum covered general damages and the cost of care to date. The case was adjourned to 2014 to allow for the possible introduction of legislation for periodic payment orders. This did not occur and Gill Russell pursued the balance of his claim against the HSE for future care, aids and appliances for the rest of his life. Future life expectancy had been agreed between the parties.

 

Decision of Judge Cross

Mr Justice Cross considered the “rate of return” expected on any investment of the lump sum to be awarded to Gill Russell to provide for his future care. This is also known as the “discount rate” – the amount by which awards may be reduced based on the expected investment return. Although Mr Justice Cross noted that the Minister for Justice Equality and Law Reform did in fact have the power to fix the discount rate under the Civil Liability and Courts Act 2004, this had never been done. In the United Kingdom, the rate is fixed by the Lord Chancellor.

Mr Justice Cross noted that the courts have tended to apply a rate of 3% which was the amount a prudent investor could reasonably expect as a return on a mixed investment of equities, gilts and cash over an extensive period. Counsel and experts for Gill Russell argued that such a mixed fund was an unacceptable risk for such a vulnerable investor. Judge Cross found that a plaintiff will be more risk averse than an ordinary prudent investor in the marketplace. He stated that “it is impossible to imagine any individual more risk adverse than this plaintiff”.

Judge Cross concluded that the applicable multiplier was not a heading of damages but a mathematical tool to come to a total. Once it was assessed, it was not subject to any further reduction. He stated that there was no such thing as a “risk free” investment. The appropriate rate in his view was between 1% – 1.5%.

In this particular case, this meant that the overall special damages awarded were over €13m. Had the rate of 3% applied, the award would have been approximately €9m.

 

Consequences

The Director of the State Claims Agency estimates that the reduction in the rate of return will result in an increase to the cost of claims made against the State of approximately €100m per year. It is hard to see how the decision will not apply widely to all cases of future losses, to include loss of earnings and care costs. This will certainly impact on the cost of insurance premiums and overall will increase the cost of awards.  The decision was approved by the Court of Appeal on the 5th November 2015.

 

Summary

In a recent case the appeal court decided that 1%-1.5% is the appropriate rate of return to be expected on any investment of lump sums awarded for future losses awards in personal injury cases.

 

2018-11-13T10:48:05+01:00November 13th, 2015|Publications|