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Interim changes to the Personal Injury Discount Rate in Northern Ireland good news for Plaintiffs, but bad news for Insurers

  • Northern Ireland
  • General

20-05-2021

In personal injury claims where an individual has suffered a life changing injury resulting in an inability to work or a requirement for medical care, any monetary award will encompass an element of compensation for their future loss of earnings and care needs. However, a discount rate is applied to this future compensation to account for the returns this compensation could be expected to attract if invested.

The rate is currently 2.5% in Northern Ireland and has remained at that rate since 2001, despite changes in England & Wales and Scotland. The rate in England & Wales is currently -0.25% whilst Scotland is -0.75%. When originally set in the Wells v Wells decision in 1998 the rate was 3%, to link it to the return on the index linked government securities (this was seen as a ‘safe’ investment rate, as the court held a Plaintiff is not in the same position as an ordinary investor and should be entitled to greater security and certainty). Since 1998 the interest rate has fallen significantly as a result of the recession in the previous decade and more recently, financial uncertainty and difficulties caused by the coronavirus pandemic.

The Justice Minister has confirmed that the Damages (Personal Injury) Order (Northern Ireland) 2021, will come into force on 31 May 2021 and will set the discount rate at -1.75%. This will result in Northern Ireland having the lowest discount rate in the UK by a significant margin. This is of practical importance, as the lower the discount rate, the larger the lump sum paid to the Plaintiff at settlement/court. For example, an 18 year old male with a loss of £25,000 to the age of 65 would receive an award of £684,500 at the 2.5% discount rate, but an award of £1,787,750 at the -1.75% discount rate, a difference of circa. 261%.

The implementation of the interim rate of -1.75% will be disappointing for insurers, public bodies such as local health and social care trusts and others who will be paying out in respect of personal injury claims. As a result of the new rate, claims may be worth more than double in Northern Ireland than they are in England & Wales. This may have implications for insurance policies, as limits of indemnity may no longer be sufficient, and some insurers may decide to withdraw their products from the Northern Irish market. 

The proposed rate change is described as an “interim” measure on the basis that a “stable longer term” rate will come into effect in early 2022 under the framework proposed by The Damages (Return on Investment) Bill (“the Bill”), which was introduced to Stormont in March 2021. This follows a legal challenge to the Department of Justice’s announcement in October 2020 that they would not proceed with a planned change to the discount rate under the current Wells v Wells legal framework and the failure of the Bill to secure accelerated passage through Stormont.

A public consultation between June and August 2020 invited views on the most appropriate legal framework setting for the discount rate; the English model, the Scottish model, or a bespoke model for NI. The Department recommended the Scottish model be adopted and the Bill was introduced, despite the majority of consultees proposing the English model.

The Bill prescribes a new statutory methodology to be applied by the Government Actuary to calculate the discount rate. The methodology is based on the Scottish model, however deviates in relation to the length of the assumed investment period from 30 years, to 43 years (as used in England) as an assumed investment period of 30 years was felt by the Department not to correlate with the average or typical investment period for a lump-sum damages award. Importantly, the bill also provides for regular reviews of the rate which should ensure the rate aligns with the changing financial climate.

We will be keeping a close eye on this and the effect this has on litigation in Northern Ireland on behalf of our insurer clients.

For more information, please contact

Emily Paisley, Associate in Dispute Resolution & Litigation - EmilyPaisley@eversheds-sutherland.ie

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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