Time for action on multipliers

Personal injury claimants could lose out on substantial amounts of damages if the Lord Chancellor delays further in setting a rate for interest on their damages.

The House of Lords' landmark ruling in July 1998 in Wells v Wells [1998] 3 ALL ER 481 led to substantially increased awards in personal injury and fatal accident cases. Their Lordships unanimously held all that multipliers should be calculated by reference to returns on Index Linked Government Stocks (ILGS). They held it was appropriate to assume that the claimant would invest in ILGS because:

Investment in ILGS is the most accurate way of calculating the present value of loss which claimants will actually suffer in real time.

A claimant is not in a position to take risks, and to protect himself against the effects of inflation it is prudent to invest in ILGS, which is risk free.

At the time of their Lordships' ruling, real returns on ILGS were about 3 per cent a year, where in the past it had been assumed that a claimant would recover returns of about 4-5 per cent a year. By assuming a lower rate of return, multipliers have been increased and this in turn has led to substantially higher awards of damages.

Their Lordships also held that "actuarial tables with explanatory notes for use in personal injury and fatal accident cases (known as the Ogden Tables) should be "regarded as a starting point rather than a check".

Lord Lloyd set down guidelines to replace the old 4-5 per cent bracket. He held that the returns on ILGS should be looked at over the period of a year. Once the net return has been established to the nearest 0.5 per cent, the multiplier should then be selected from the Ogden Tables. Unfortunately, however, their Lordships did not agree on the guidelines for future adjustments of the interest rate.

Section 1 of the Damages Act 1996 states: "In determining the rate to be expected from the investment of a sum awarded as damages for future pecuniary loss in an action for personal injury the Court shall, subject to and in accordance with the rules of the court made for the purposes of this Section, take into account such rate of return (if any) as may from time to time be prescribed by Order made by the Lord Chancellor..."

The previous Lord Chancellor, Lord Mackay of Clashfern, indicated that he was awaiting the decision of the court of appeal in Wells v Wells before setting the rate but unfortunately the current Lord Chancellor has not yet progressed the issue further.

The Ogden working party issued a statement on 28 April in which it recommended that the interest rate should now be fixed at 2 per cent. The members said that when they met on 26 April, the actual rate of return on ILGS was 1.72 per cent and had been consistently below 2.5 per cent gross since the end of October 1998.

The overriding objective of the court is to provide a lump sum to the accident victim which will provide full compensation for the injuries he or she has suffered. It is clear that if a rate of return of 3 per cent a year is assumed when ILGS actually return rates of only 2 per cent a year, claimants will incur a substantial shortfall.

For example, a 20-year-old male claimant with lifetime losses of £20,000 a year would have a multiplier of 27.40 at an interest rate of 3 per cent. This would provide a lump sum of £548,000. However, if the interest rate is assumed to be 2 per cent, the multiplier would be 34.30, which would provide a lump sum of £684, 000 - a difference of £136.000. If returns on ILGS remain at 2 per cent a year, the claimant's lump sum would be extinguished by his 61st birthday, leaving him without damages in his final 14 years of normal life expectancy.

In his ruling, Lord Lloyd said: "It goes without saying that the sooner the Lord Chancellor sets the rate, the better." The Lord Chancellor's delay in this matter will result in accident victims continuing to be undercompensated.

Paul Kitson is a partner at Russell Jones & Walker. He acted for the appellant in Wells v Wells and its associated appeal of Page v Sheerness Steel.