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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. Helmots 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 Chancellors 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 Helmots lawyers as still making inadequate provision for the claimant. They argued that the Lord Chancellors 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 claimants 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 Jacksons 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 claimants 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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