The current system for the compensation of victims of accidents involving personal injury requires the claimant to be placed in at least the same financial position that they enjoyed prior to injury. This is a basic principle of the law of tort, and should remain enshrined in our law with strong resistance against setting off along the rocky road to punitive and exemplary damages, as seen in the US.
Careful attention to the financial consequences of injury can reduce the effect of an injury. This may be achieved by means of periodic payments, otherwise known as structured settlements.
For years, the courts have struggled to reach a point where justice has been served to both parties in what has become an increasingly litigious society. In most cases, the awards to accident victims comprise three basic elements: general damages for the injury (non financial loss, past losses), financial (expenses and earnings) and future losses (financial).
The area of greatest concern to the compensators has been the mushrooming of future loss claims. Even in cases of modest or even minor injury, a small amount of future loss can run to thousands of pounds.
The majority of the cases will be paid on the basis of a once-and-for-all or lump-sum settlement – the claimant goes away with a sum to invest and the lawyers and insurers close their files. But the story does not end there – research shows that recipients of the payments will remain concerned about the future due to the uncertainty of the return on invested sums, inflation and their life expectancy. It is merely the process of litigation that has ended.
The concern about this dates back as far as the Pearson report of 1978. This was followed by a Law Commission report on structured settlements of 1994, the Damages Act 1996 which recognised structured settlements, and in 2000 the Lord Chancellor consulted on the alternatives to lump sum payments. This is not just another example of the 'nanny state' controlling how accident victims spend their money. If the lump sum does not provide care for the victim during the rest of their life then he or she will inevitably end up being supported by the state rather than the compensating party to litigation.
The periodic payment system operates through a structured settlement where the compensator purchases an annuity or series of annuities which are redeemed during the lifetime of the victim. This should provide a steady flow of income for the accident victim, and the uncertainties of the stock market, interest rates and the victim's own management of funds can be minimised.
Although the ability to arrange structured settlements has existed for many years they have been largely ignored as they can be created only with the agreement of both parties. When giving judgment in Wells
Wells in 1999, Lord Steyn urged the Government to take matters in hand by allowing the court to make such an award by its own motion. He felt that the arguments against such powers being given to the court were merely lawyers' resistance to changing a familiar system.
It is not surprising that the Lord Chancellor feels obliged to revisit the issue with yet another consultation, as it is clear that the representatives of claimants and defendants do not find any attraction to this method of compensation.
At a conference chaired by Lord Woolf it was concluded that there should be more structured settlements and that ignorance was the main reason for them not being investigated. But this is too simplistic a response and those of us who handle these claims should not be too hasty to put on the hair shirt.
The suppliers of the schemes have been in business for many years, but the arrangements for payment of the periodic sums, the tax position and the poor returns on investment have created an atmosphere where the philosophy of periodic payments has been stifled.
Compensators are fearful of the long-tail nature of this method of compensation, but if the administration is handed over to the experts, namely the annuity providers, they should have the necessary structures in place to provide the service over many years.
Insurers may see this as an opportunity to contain the claims' spend by transferring this liability to their annuity colleagues, thereby improving the financial position of the company.
The Lord Chancellor does not propose that it be obligatory for the compensator to satisfy the structured settlement by the annuity route. This will be encouraging news for Lloyd's underwriters and the NHS and others who do not have their own life divisions, but it would be understandable if they felt nervous about the state of the market for products to cover the long tail of periodic payments.
Some cynics may say that these proposals are yet another opportunity for the Government to lay off expenditure to the premium-paying public. It is well recognised that the cost of clinical negligence claims is imposing a major drain on the NHS, and an obligatory element to the consideration of periodic payments will greatly reduce the exposure in that regard. This is typical of the thinking that has been prevalent among some victims' representatives – namely that periodic payments must be bad because they save insurance companies money.
The court should have the power to impose an order for periodic payments in cases where the future losses are significant – a figure of £250,000 is mentioned. This would be in addition to the other heads of claim so the number of such orders is likely to remain small, but at least the subject will be on the agenda for the court and the parties.
The claims handling industry is all about finality, as the claimant wishes to move on from the claim to coping with the injuries and day-to-day living. Likewise, the representatives need to close their files and move on to the next victim. The insurers and other compensators do not want to keep their files open for the adversarial system to continue running up costs and all of these needs can be addressed by adaptation to change.
Compensators may be surprised to find that a significant number of periodic payments cease before the expected date, thereby saving them money, compared with the old lump sum assessment.
The proposals consider a review for payments to be reduced as well as increased, although it is to be expected that these will be the exception rather than the rule.
The changes to the court rules try to move the profession on from its bad old habits, and the Lord Chancellor's proposals should be seen as an extension to the overriding objectives of Lord Woolf's reforms. But the drafting of Rules of Court and Practice Directions for the practical application of the presumption in favour of periodic payments will have to be done with care to avoid being consigned to the ignominy which has befallen the Provisional Damages Award, which has been available for many years and remains unused.
Crispin Kenyon is a personal injury specialist and partner at Vizards Wyeth and is chairman of the Forum of Insurance Lawyers Special Interest Group on Damages
|The Lord Chancellor's proposals|
To give the courts power to order that special damages for future losses and care costs in personal injury cases should be paid in the form of periodic payments
To allow claimants to return to court for variation of the payments, but not an unrestricted right of review
That the courts develop guidelines for the use of periodic payments
That there will be a presumption in favour of periodic payments in cases of “significant future losses”
The sum should be calculated solely on the basis of the future needs of the claimant
Not to impose a means by which the payments would be funded
To ensure that the compensator can meet the payments over the period
Not to change the tax rules, ie to leave them tax free
To ban the assignment of such payments.
The closing date for submissions on the consultation paper is 7 June 2002.