The Discount Rate – sometimes called the Ogden Rate (after Sir Michael Ogden QC) is the rate used by the legal profession to calculate the value of claims for catastrophic injuries. It is used to work out the initial amount of money somebody requires in order to generate a future income from that initial lump sum. The rate effectively determines what investment return you should expect to get on your money – the lower the rate, the more money you need to give somebody in order to generate a pre-determined level of future income.
On the 27th February Lord Chancellor announced she would be reducing the rate from +2.5% to minus 0.75% after the 20th March 2017. The reason the rate was changed is that it had not been reviewed since 2001 and it was felt that 2.5% did not reflect the current investment climate.
How does it affect me?
The cost of catastrophic personal injury claims will increase significantly. These are claims that result from brain or spinal injuries and mean that the injured party is unable to work and/or unable to care for themselves. The arboriculture industry is particularly susceptible to such injuries because of the nature of its work. The future loss of earnings and the costs of caring for a severely disabled claimant often form the largest part of a personal injury claim – it is these elements that are affected by the lowering of the Ogden Rate.
If claims cost more then it is likely that insurers will have to increase premiums to offset this. However, the greatest financial risk to your business arises from the inadequacy of the limit(s) under your Liability insurance.
In the early 1990s it was unusual for a personal injury claim involving a single claimant to cost more than £1m. More recently, prior to the reduction in Ogden Rate, it was rare for even the most serious claims to cost in excess of £10m. Now, following the rate reduction, the legal profession are valuing claims in excess of £20m – and that is for a single person getting injured. Imagine the cost if an accident at work resulted in two or three of your employees or members of the public suffering significant injuries as described above?
Here is an example of a claim:
A 21 year-old employee suffered a complete spinal cord injury when struck at the base of the neck by a falling branch. He has been left with permanent paralysis affecting all limbs and will require 24 hour care for the rest of his life. As a result of the Ogden rate shift the value of his claim for future losses increases dramatically. Looking at lifetime care needs alone, where these would have previously been valued at £5.3m, using the same estimates for the annual cost of care the total value now increases to £14.8m under the new Ogden rate. Once all future losses are taken into account the total value of the claim increases from £9m to £20.9m.
What should I do?
The standard limit for Employers’ Liability insurance in the UK is £10m (including legal costs). Many larger firms buy much more than this because they have a large number of employees. We now have a situation where a £10m EL limit may be inadequate to deal with a catastrophic injury to a single person. An insurer will not pay more than the limit that is provided by the policy. If a court awards damages to a claimant that are more than the limit under the policy then YOUR BUSINESS will be responsible for the balance. Remember that legal costs will be incurred on top of any damages claim.
You should also consider the adequacy of your Public Liability limit if your business involves work that could result in injuries to persons other than your employees.
To enquire about increasing your Employer’s Liability and/or Public Liability cover please call 01604 492644 and ask for Cameron or Geoff.
Published by Geoffrey Parrish