Changes in how Future Damages are Calculated

State Claims Agency vows to Appeal decision of Irish High Court to apply a 1% multiplier to a future loss claim.

In a recent decision the Irish High Court varied the level of deduction on a large future loss claim from the traditional 3% rate to 1% per annum.

In a claim for significant loss damages for future loss are normally awarded in a lump sum although there can be provision for periodic payments. Where damages are awarded in a lump sum the assessment requires the conversion of future cash flows into a capital sum.

In those circumstances experts would advise the Courts to apply a multiplier approach. A multiplier based on the expected duration of the loss is applied to an amount representing the annual loss, (the multiplicand) producing a capital figure.

In claims in the Republic of Ireland the multiplier is the number of weeks of loss which is discounted to account for the early receipt of the lump sum. The multiplier is adjusted downwards to take into account the time value of the money. For example if the loss is not expected begin until sometime into the future there must be an adjustment of the discount for accelerated receipt. A further and separate downward adjustment would be made to reflect the contingencies of life. The multiplier should also take into account contingencies and the rate of return on investment of the lump sum in the future. These principals apply to both future expenses and loss of future earnings.

There are certain assumptions that underlie the multiplier to include an assumption as to what extent investment returns will exceed wage inflation over the period of a loss.

In Ireland the leading case to date on the imprecise deduction made by Courts when calculating special damages to take account of future uncertainties is the case of Reddy .v. Bates. In fact, the discount applied is commonly known as “Reddy .v. Bates Deduction”.

The deduction in Reddy .v. Bates has been traditionally set at a 3% rate.

In the recent case before the Irish High Court of Russell V HSE, Mr Justice Kevin Cross said that in setting the level of the award, he would assume a rate of return from investing the money of 1% per annum.

In the case the Court was asked to assess damages towards the care for the rest of the life of a boy who had suffered brain damage at birth in a Cork Hospital.

The case saw detailed argument on the rate or return available to investors at the moment. Both sides relied on the evidence of a number of economic experts and the key issue was that the yields on relatively low risk investments such as Government Bonds are now at historic lows.

The Defendant had argued that by investing in higher risk areas such as Equities, the traditional 3% return was still achievable.

The Plaintiff’s case was that the Court had to take cognisance of the low return now available on safer investments.

This issue was recently the subject of an assessment of the English House of Lords in the case of Wells .v. Wells. In that case the Lordships had to consider whether the appropriate investment returns could be based upon Equities which involved significant risk or the Index Linked Government Securities (which are much safer and which provide a lesser return to the investor). It was held by the House of Lords in a unanimous decision that the latter approach was the appropriate one.

In that case, Lord Steyn said “The premise that the Plaintiffs’ who have perhaps been very seriously injured, are in the same position as ordinary investors is not one that I can accept. Such Plaintiffs’ have not chosen to invest; the tort and the consequences compel them to do so.”

The Court in that decision went on to say that by investing in Equities an ordinary investor takes a calculated risk which he can bear in order to improve his financial position but that the typical Plaintiff requires the return from an award of damages to provide for the necessities of life.

In Ireland there is no equivalent of the Index Linked Government Securities. In the Russell case the Plaintiff did ask the Court take cognisance of the low return now available on safe investments and in particular Index Linked Government Bonds from larger economies which are currently offering no interest rate return to their investors.

Mr Justice Cross put heavy emphasis on this and further dismissed the argument that public policy would dictate the fact that the state was the Defendant should be taken into account. He said “Arguments on public

policy, such as this, are in my view, more suited to lounge bars of Golf Clubs than to the Courts of Law”.

The Director of State Claims Agency has confirmed that the decision of Mr Justice Cross would be Appealed. He estimated that applying the 1% rate instead of the traditional 3% rate would increase the cash cost of meeting claims made on the State by about One Hundred Million Euro per annum or One Billion Euro over the next decade.

The decision of course has major implications for Insurance Companies and there is a suggestion that the decision could lead to a sharp increase in the costs of claims and potentially in the premiums charged to customers.

The written Judgment is awaited in the case of Russell V HSE.

Damian McGeady 23rd December 2014

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