Opinion

Change in Discount Rate a significant victory for those suffered life-changing injuries

1st March 2017

The principle of assessing the value of claims for alternative accommodation has long been established in the case of Roberts v Johnstone which effectively set out the basis on which such a claim would be assessed.

In summary, if an injured person owned  a property worth say £150,000 and needed a property worth say £350,000 as a consequence of the injuries sustained (which must be supported by expert evidence),  Roberts v Johnstone established that the appropriate approach to calculation was to award the Claimant the cost of the capital value required to fund the replacement accommodation by applying a discount rate (to reflect likely investment return due to accelerated receipt) and then apply a multiplier (again to reflect accelerated receipt).

The Discount rate reflects the return that a Claimant might expect to make if he or she invested the compensation award in Index Linked Government Stocks.  Since 1999 the discount rate had been set at 2.5%. Applying Roberts v Johnstone in a case of a 40 years old with a lifetime need for the property would produce (at a discount rate of 2.5% discount rate) £138,800 (£200,000 difference between £350,000 and £150,000 x 2.5% discount rate x the multiplier for life of 27.76).  An award of £138,800 would be made meaning the Claimant needs another £61,200 to be able to move which would ordinarily be taken from other elements claimed (injury, lost earnings etc).

In February 2017 the Discount Rate was changed from 2.5% to -0.75% which was significant victory for those who had suffered life changing injuries.  The change effectively represented a significant shift in how claims for future losses would be quantified with the government accepting that if those seriously injured were to invest in government Index Linked Stock, they would actually see a negative return on their investment after taking into consideration inflation.  The change significantly increased the award except in relation to accommodation claims.

The impact of a negative discount rate has significant implications for how Roberts v Johnstone is now applied. The Claimant in JR v Sheffield Teaching Hospitals NHS Trust had significant accommodation needs arising from severe spastic cerebral palsy. JR had been cared for by his parents in inadequate accommodation for over 20 years and a claim was made for alternative accommodation. The need for such accommodation was not in issue; the question was whether and to what extent there was a loss. The Judge recognised that there had been numerous criticisms and attacks on the Roberts v Johnstone approach. However, he was bound by Roberts v Johnstone and, given the negative discount rate, he had to consider the return on a risk free investment as representing JR’s loss. On the evidence there was  no loss because the discount rate was negative. The Judge did however go on to add that there was an urgent need to “find a proper solution to the accommodation conundrum“. There was clearly a need for accommodation. 

What is interesting, however, is that it does not appear that there was any evidence before the Court as to the either alternative methods of evaluating the cost of the capital purchase or the cost of alternative funding solutions – for example, the cost of obtaining a mortgage to buy the property. Indeed, the Judge even went as far as to suggest that “it might have been possible to say that the interest element on an appropriate mortgage  over a 25 year term would provide a reasonable figure, the cost of annual mortgage interest being the alternative method of assessment suggested in George v Pinnock“, even though such an approach had been rejected in Roberts v Johnstone. Pending this claim going to the Court of Appeal and/or pending any change in the discount rate, it is appropriate for those pursuing accommodation claims to provide the court with evidence as to the likely interest that would be charged on a mortgage over the period the Claimant will need the property.

 

Other news

Contact us

3 Waterfront Business Park
Brierley Hill
West Midlands, DY5 1LX

Email: law@higgsandsons.co.uk
Call Us: 0345 111 5050

Follow @HiggsandSons on Twitter  Join Higgs & Sons on Facebook  Join Higgs & Sons on LinkedIn

Newsletter

Keep up to date with all the latest here.