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Helmot v Simon (Guernsey)
7 October 2010
The claimant recovered £13.7 million in damages having suffered
a brain injury following an RTA. The award exceeds those made in
England and Wales, which typically run up to around £11 million for
the most serious injuries. Helmot's damages were raised to this
unprecedented level by the application of discount rate of minus
1.5% rather than the 'normal' 2.5%.
The discount rate is intended to reflect the income a claimant
will receive by investing a lump sum damages award, balanced
against the effect of inflation upon the value of his savings. It
was fixed at 2.5% by the Lord Chancellor in 2001 and has remained
unchanged since. The courts in England and Wales have refused to
depart from the 2.5% rate, despite the best efforts of claimants
and their representatives. The discount rate is supposedly kept
under review, but has not changed since 2001. There has nonetheless
been ongoing lobbying by claimant bodies to have the Lord
Chancellor reduce the rate.
The reasoning in Helmot
The Guernsey Courts are not bound by the Lord Chancellor's
discount rate. In the case of Helmot, the first instance Judge
therefore carried out his own calculation to arrive at a 1% rate.
He began with the 2.5% rate, and adjusted it as follows:
- to account for the difference between Guernsey and UK inflation
-0.50%
- to reflect the underperformance of Index Linked Government
Securities against the 2.5 rate -1.00%
This reduced rate was appealed by Helmot's lawyers as still
making inadequate provision for the claimant. They argued that the
Lord Chancellor's figure was the incorrect starting point, and the
Court should carry out its own calculation. The appeal was
successful, and the calculation adopted was:
- Start with the rate of return on Index Linked Gilts for 2010:
1.13%
- Reduce by 0.5% to reflect higher rate of inflation in Guernsey
-0.50%
- then rounded down to 0.5 -0.13%
- Reduce again by the rate at which earnings a likely to
outperform RPI: -2.00%
The result was a discount rate of minus 1.5%, and an increase in
damages of around 50%, from £9.3 to £13.7 million.
Impact
In using a 2.5 % multiplier, we routinely assume that a claimant
will invest the lump sum received on conclusion of a claim and that
the interest received will more than offset inflation in the cost
of goods and services which the claimant will require. That means
that, for example a claimant who requires £1,000 per annum for 10
years does not require damages of £10,000 but only £8,860. The
balance will be made up by interest received over the years.
The Helmot judgment assumes the opposite - the claimant's return
on his investment will lag behind inflation meaning that he will
require more than £10,000 to ensure he has sufficient funds to pay
for annual treatment over the next decade.
As demonstrated by Helmot, the effect may be substantial. Take a
24 hour lifelong claim for a 20 year old, which might be valued at
£200,000:
| Discount rate |
Multiplier |
Total cost of care |
% increase (against 2.5%) |
| 2.50% |
31.63 |
£6,326,000.00 |
0.00% |
| 1.00% |
47.14 |
£9,428,000.00 |
49.04% |
| 0% |
64.87 |
£12,974,000.00 |
70.51% |
A minus 1.5% rate will result in greater figures. The
calculation is not included here as the necessary data is not
included in the standard actuarial tables used for claims of this
type.
Broader effects?
The direct effect of the Helmot decision is limited to Guernsey,
and it will be advisable for insurers to review their risks in that
jurisdiction. The decision does not have direct application to the
UK, and some of the economic factors considered have specific
relevance to Guernsey. However, much of the reasoning underlying
the judgment has equal relevance here. It is based on a finding
that the 2.5% discount rate assumes investment performance which is
unrealistic and, as a result, undercompensates claimants. The case
was heard by Judge Jonathan Sumpton QC, a UK barrister with a base
in London. It cannot be simply dismissed as a 'foreign
decision'.
We can expect further lobbying by claimant bodies to have the
discount rate reduced across the UK. In the past this has met with
limited success, but there is reform afoot in the personal injury
sphere following Lord Justice Jackson's report and with change in
the air, the Lord Chancellor may more easily be persuaded to look
again at the discount rate. However, the Government will
undoubtedly be mindful of the potentially substantial impact on
claims spend by public bodies if the rate is reduced. At a time of
austerity, this may be sufficient to prevent significant
change.
Inadequacy of the discount rate also favours increased use of
Periodical Payments. These track an identified index (RPI by
default, but others such as ASHE 6115 may be selected) and so ought
always to provide an adequate annual sum to meet a claimant's
needs. If claimants are at risk of being undercompensated by a lump
sum award, due to the existing discount rate, then they and their
advisors will seek periodical payments. While PPOs undoubtedly have
their place, for many Defendants they can impose an additional
financial burden due to increased damages payments, long-running
liabilities in respect of claims and administration costs.
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