Calculating the cost of personal injury

Rakesh Kapila explains how personal injury claims will be affected by a recent decision made by the House of Lords. Rakesh Kapila is a partner at chartered accountants, Sim Kapila.

Future losses calculated from the result of personal injury cases look set to increase significantly as a result of last month's House of Lords decision in Wells v Wells, Page v Sheerness Steel and Thomas v Brighton Health Authority.

Future loss calculations will increase through the use of larger multipliers, which represent the duration of plaintiffs' future losses.

The primary objective of the multiplier is to put the plantiff back in the position he or she would have been in prior to sustaining the injury.

A third edition of actuarial tables was published by the Government recently, primarily to account for longer life-spans. In addition to general information on the use of the tables – including the implications of different retirement ages – the third edition considers the effects on multipliers of a number of contingencies, such as variations in the levels of economic activity and employment and variations by geographical region.

The updated actuarial tables provide the opportunity for a more scientific approach to the selection of an appropriate multiplier to compute future loss.

In particular, the volume of data included in the third edition enables greater account to be taken of each plaintiff's specific circumstances and provides additional information to assist in the evaluation of non-earnings losses, such as lost pension rights.

The tables also provide the opportunity to use multipliers based on projected mortality rates, which are likely to be lower than historical mortality rates.

The tables though will be affected by the House of Lords decision in Wells. This case concluded that instead of assuming that personal injury victims would invest lump sum claims in a mix of equities and Index Linked Government Stocks (ILGS), invest- ment in ILGS alone should be considered the most acceptable basis of calculating the present value of a plaintiff's future loss in real terms.

After considering the rates of return available on ILGS, the House of Lords decided that the appropriate rate for all but the most exceptional cases should currently be 3 per cent, resulting in a general decrease in the rates used in calculating multipliers to date and leading to the use of increased multipliers.

It was proposed that the rate of 3 per cent should be in general use until the Lord Chancellor has specified a new rate under section 1 of the Damages Act 1996.

It was accepted that it would be open to plaintiffs in very exceptional cases to contend that higher multipliers should be taken into account in situations in which higher rates of tax would be payable on the income arising from lump sum awards.

Although the House of Lords noted that there was room for discounted multipliers in computing future loss of earnings, it accepted the argument put forward by actuaries that whole life multipliers need not be discounted – that is, multipliers applicable to losses sustained over an entire life-span.

Following the House of Lords decision, a fourth edition of actuarial tables is expected to be published by the Government's Actuaries Department.

It will be important for lawyers involved in personal injury claims to assess periodic changes in the rates available on ILGS and the consequential change in the rate recommended by the Lord Chancellor for use in the computation of multipliers.