Periodical Payments: Good, Bad or Indifferent?

Transcription

1 Periodical Payments: Good, Bad or Indifferent? WILLIAM NORRIS QC The Caroline Weatherill Memorial Lecture Friday, 26 October 2007

2 Introduction I have read a number of tributes to Caroline Weatherill in whose memory this lecture is given. Although I did not know her personally, I was very impressed by the universally high esteem in which she was held, both as a person and as a lawyer. It is therefore a great privilege to be invited to give this, the first of what is to be a series of memorial lectures. Since Caroline s practice in England and in the Isle of Man concentrated on the field of Personal Injury, it seemed appropriate that this first lecture should be on a subject which is currently of particular interest to Personal Injury practitioners, namely Periodical Payments. This new regime came into effect on 1 st April Interpretation of its key provisions has already provided fertile ground for the lawyers present company included, I am afraid and opinions as to the merits of the regime remain mixed hence, the title of this talk which, in the best legal tradition, allows me the opportunity to examine a range of opinions without necessarily having one of my own. Background to the New Regime Let me begin with a little background. Until the new regime came into force in 2005, compensation for future loss almost always involved awarding damages in the form of a lump sum. The only exceptions to that general rule - both of which depended upon the consent of the parties and did 2

3 not lie within the power of the Court were known as Periodic Payments and Structured Settlements. The power to make awards of damages in respect of future loss upon a periodic basis was created by Section 2 of the Damages Act However, as Lord Steyn 1 has observed, that power was, for all practical purposes, a dead letter. It could only happen if the parties consented and most claimants preferred to control their own money. In any case, they were unlikely to be very interested in an annual award which gave no protection against inflation and would be taxable as income. Thus, Lord Steyn spoke for many when he suggested that the solution was relatively straightforward the Court ought to be given the power of its own motion to make an award for periodic payments rather than a lump sum in appropriate cases. Such a power is perfectly consistent with the principle of full compensation for pecuniary loss. Except perhaps for the distaste of Personal Injury lawyers for a change to a familiar system, I can think of no substantial argument to the contrary. But judges cannot make the change. Only Parliament can solve the problem. So what I have called the first exception was really no exception at all. The second exception - and this was a real one came about with the introduction and increasing but inconsistent use of Structured Settlements. These first came to the 1 Wells v Wells [1999] 1 AC 345, at 384B 3

4 attention of practitioners in the late 1980s. Where such a settlement was entered into, what happened was that the defendant would purchase an annuity in the name of the claimant from an approved insurer. That annuity would usually provide a guaranteed income. To preserve the value of that annual payment against inflation, there were sometimes flat annuities but with a guaranteed amount over a minimum number of years but, more usually, the annuity would be linked to the Retail Prices Index or part sometimes all of the fund would be placed in a With Profits fund. In that case, the income would rise annually according to RPI or, for With Profits Funds, according to the performance of the market in which the fund was invested. The obvious attractions of a structured settlement from the point of view of the claimant were that he received a regular and predictable income, was relieved of the burden of managing his investments 2 and the income under the structured settlement was received net of tax and, at least after secondary legislation introduced following the report of the Master of the Rolls Working Party 3 in general, the receipt of income from such an annuity would be unlikely to affect a claimant s State benefits. Structured Settlements were usually but by no means always dealt with on a top down basis: that is, the parties first calculated what they thought the award would be worth as a conventional lump sum. They then looked at what income could be generated from an annuity purchased by a part of that lump sum. That sum was applied to the structure. Occasionally, the more creative and perhaps better informed and more numerate advisors would take a bottom up approach that is, they would agree what the claimant needed annually, find the price of an annuity 2 Moreover, as was made clear in Eagle v Chambers [2004] 1 W.L.R. 3081, the costs of active management of a portfolio are not recoverable as a head of claim within a lump sum award. 3 Of which the author was a member. 4

5 which would meet that loss and then dispose of that part of the future loss by the purchase of an annuity in that amount. What proportion that represented of the overall lump sum award then became irrelevant: that element of future loss was simply taken out of the calculation. In practice, the biggest attraction to claimants was that the payments would continue for life. That was of vital importance because the predominant concern of those who are seriously injured, and/or of those who care or are responsible for such people, is that they want to be assured that the money will not run out if, in fact, they live longer than the doctors expect. In the case of the profoundly disabled child, the concern of the parents is, quite understandably, about what will happen when they are no longer around to take responsibility. And it must be appreciated that these concerns were not simply expressions of false hope. On the contrary, improvements in life expectancy in the UK population, in general, and amongst those with cerebral palsy, or suffering major head injuries, tetraplegia or paraplegia in particular have improved very substantially in the last quarter of a century. Whether the rates continue to improve over the next century is not so clear, at least if the dire warnings about an increasingly obese population are to be taken seriously. There were, therefore, good reasons why Structured Settlements were attractive to claimants but there were the same or similar reasons for preferring a lump sum which, as we shall see, still exist in relation to an award of Periodical Payments. Of course, there were lawyers who preferred a lump sum settlement just because that was the system they knew, that was the way they did their sums and they were fearful of change. Equally, there were clients who were quite capable of making up their own minds as to the most attractive form of settlement, especially as it became 5

6 increasingly common as it was by the late 1990s for expert financial advice to be sought by the parties in the major claims. My experience, and I think this is shared by most other practitioners, is that what was almost always decisive could be narrowed down to one or two factors. First, some form of annuity was always going to be attractive if there was a real dispute on life expectancy, particularly if there was any concern that it might be resolved in the defendant s favour. Second, the claimant needed to know the rate of return which a particular annuity could guarantee or was likely to produce: he would compare that with the income he might obtain by investing a lump sum. At one time, when the annuity market was particularly buoyant, there were rates of return approaching ten percent. Obviously, such rates were particularly attractive to a claimant, but they also had attractions for defendants. It was by no means unusual, from time to time during the 1990s, for a defendant to discover that the application of a lump sum for the benefit of the claimant on the annuities market generated such an attractive rate of return that the insurer was then able to settle the case for a net outlay that was actually less than if he had paid over a single lump sum in damages and the claimant was still better off. But those good days did not last long. When the annuity market declined, as it did from time to time in the 1990s and as it has done since probably around 2003, Structured Settlements became less popular and cases, again, tended to settle on a lump sum basis. Courts did very little to police these different approaches to litigation. Of course, unless the claimant in a particular case lacked capacity, how the parties settled their claims is and was entirely their own business. But even in the case of claimants without capacity, the general experience was that if the judge was 6

7 satisfied that the claimant had been properly advised, both by his lawyers and, where appropriate, by a financial expert, they would not intervene if approval was sought of a lump sum award. Full Compensation: The 100% Principle Those then were the two acknowledged exceptions to the traditional lump sum approach. But it is important to remember that whether future loss is compensated by some form of annual payment under structured settlement or a periodical payment or by an award of a lump sum, each method has the same object of seeking to achieve full compensation for the injured person s actual loss. Commentators regularly trace this full compensation principle back to the well known statement by Lord Blackburn in Livingstone v Rawyards Coal Company 4, dealing with an appeal to the House of Lords from Scotland, where he said that: In settling the sum of money to be given for reparation of damages, you should as nearly as possible get at that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong. But if that is the object, achieving it has never proved entirely straightforward. 4 (1880) 5 Ap. Cas. 25. Lord Blackburn s words have been cited in almost every major PI case in the last 3 years, whether at first instance or on appeal. 7

8 It is also worth remembering that until the late 1960s it was perfectly common for courts to award a single, global sum by way of compensation for all personal injuries and loss, past and future alike. The global sum comprising that award would often be calculated without even ascribing a particular figure to a particular head of loss. As late as 1967, the Court of Appeal felt able to say - with a straight face 5 - that itemised awards were exceptional. It was not until Jefford v Gee 6 that one could say with confidence that the tide had turned in favour of an increasingly scientific approach. However, the road to a scientific or accurate calculation of loss has been a bumpy one. As late as the early 1990s, many of us knew judges or practitioners who were almost equally oblivious to the meaning, value and application of actuarial tables. Indeed, it was thought necessary for the Damages Act 1996 to provide specifically that the Ogden Tables, as they had become known, were thereafter admissible evidence without formal proof to support the calculation of future loss. And the object of the actuarial multiplier, when applied to the multiplicand representing the annual loss, is to produce a sum which, sensibly invested, provides the necessary level of income throughout the period such as the claimant s life over which the loss will be suffered. Even when the judges got the hang of the Ogden Tables, many still felt that their powers were emasculated unless they could also apply some sort of instinctive judicial discount to those actuarial multipliers. Incredible though it may seem, it was even argued on behalf of the defendants in Wells v Wells in the House of Lords 7 5 In Watson v Powles [1968] 1 Q.B [1970] 2 Q.B [1999] 1 AC 345 8

9 that there was still a proper place for such discounts. But as Lord Lloyd made clear in that case, The [actuarial] tables should be regarded as the starting point rather than a check. A Judge should be slow to depart from the relevant actuarial multiplier on impressionistic grounds, or by reference to a spread of multipliers in comparable cases, especially where the multipliers were fixed before actuarial tables were widely used. Achieving accuracy Clearly, one of the obvious shortcomings of the lump sum calculation is not just that future loss is assessed at the date of trial and inevitably involves guesswork as to what are likely to be the claimant s needs in the future, but, more particularly, it is bound to be inaccurate because it depends on making a judgment as to the claimant s life when setting the multiplier, particularly for those losses which are likely to continue for the rest of his or her life. For all future losses, therefore, it is inevitable that the award will either be too much or too little because one can almost guarantee that the claimant will live less long or longer than the theoretical date that might derive from the life tables: even for an award in respect of loss of earnings, say, to a 50 year old to cover the years to age 65 or for care for someone who is likely to live to the age of 80, there is the risk of over-compensation should that person die sooner. For the badly injured 18 year old, with a normal life expectancy reduced only by, say, 10%, the risk of error is much greater. 9

10 The other problem, given that the assessment of future losses is made at the date of trial, is to preserve the value of the award over the relevant period. A discount rate of 2.5% is 2.5% after tax and inflation measured by reference to RPI 8. If as is generally acknowledged to have happened with regard to care costs actual costs have risen at a faster rate then there is a clear risk of under-compensation with an RPI based discount rate at that level. If there are cases where there has been over-compensation for either reason, I have to say that I think they must be very rare. On the other hand, few of us have any very clear idea whether lump sum awards have in fact led to under-compensation and, if so, whether that is as true of the more recent awards over the last few years as it may be of the older awards. At least in the last 10 years, probably because of an increasingly scientific approach to the bases of calculation and because the courts have been more inclined to embrace the 100% principle and judges are less alarmed by the enormity of the sums awarded, the levels of awards have been much greater. Whether they will provide sufficiently for a claimant s needs in the long term is uncertain. Equally, few of us actually know whether, in practice, claimants really do institute and maintain the elaborate care regimes for which their experts have argued so persuasively. It would also be wrong to assume that even the older apparently very much more modest lump sum awards have necessarily led to undercompensation. Master Lush, Master of the Court of Protection, in a paper in , gave the example of the award of 229,000 as a lump sum in the case of Lim Po Choo 8 It also assumes the fund is invested at the beginning of the multiplier period and exhausted at its end. 9 Originally delivered to the London Common Law & Commercial Bar Association s seminar on 19 April 2005, but updated: Damages for Personal Injury: why some claimants prefer a conventional lump sum to periodical payments. 10

11 v Camden and Islington Area Health Authority 10, Dr Lim Po Choo suffered devastating injuries as a result of a minor gynaecological operation which went wrong in Master Lush s records show that her nursing fees are 65,000 per annum and have been more or less the equivalent sum for the last 30 odd years. Her investments, which have been actively managed throughout that period, are currently worth 1,379,000. On the other hand, there are, as Master Lush also notes, cases where the fund has been diminished in value or even exhausted. In such cases, the claimant necessarily falls back on the State, which of course already provides for those who do not have successful compensation claims. In short, despite increasing obedience to the 100% principle and now the developing use of periodical payments, nobody really knows whether recent awards will prove sufficient. It is time, I suggest, for some new research given that what there is very outdated, such as the paper for which the Law Commission was responsible Personal Injury Compensation: How Much is Enough? 11 published in The Arguments in Favour of Periodical Payments This desire for full and more accurate compensation forms the key rationale for the periodical payments regime and for giving the court the power to impose such an award upon a defendant who, at least in the current financial markets, will usually be reluctant to agree to settlement on that basis. That reluctance arises for the 10 [1979] 1 QB 196, [1980] AC (1994) Law Com No

12 understandable reason that it is, at present, far more costly to purchase the annuity to cover an annual loss than it would be to settle the same loss calculated on the conventional lump sum basis. I can give you a vivid example from one of my own current cases. The claimant is an 18 year old boy with a slight reduction in his life expectancy of around 5 years. The multiplier based on a discount rate of 2.5% in Ogden Table 1 would be 31. The annual cost of the relatively limited care and support he needs is 20,000. On a lump sum basis the award under this head would be 620,000. The annuity quotes in July 2007 were as follows: for an annual income of 20,000 for life increasing according to RPI - 961,000, the equivalent of applying a multiplier of 48: for RPI + 1% - 1,300,000: for RPI + 2% - 1,900, It must also be recognised that not all advocates or supporters of the new regime were necessarily motivated by altruism. For example, few doubt that the prime mover behind the Courts Act 2003, by which this provision was introduced, was the Treasury. Anybody who believes that the Treasury liked the idea of settling awards of damages by annual payments rather than by substantial lump sums because of a philanthropic concern for the welfare of claimants, as opposed to the state of its accounts, probably also believes in fairies. Quite simply, the Treasury pressed for the new provision because making such awards on an annual basis suited its special accounting interests. A recent expression of exactly the same policy is the case of A v B Hospitals NHS Trust 13 where the claimant wanted a lump sum, but the defendants insisted on an award of Periodical 12 One cannot purchase an annuity linked to a different index such as the Annual Survey of Hours and Earnings (ASHE) or the Average Earnings Index (AEI) for a number of reasons including the impact of the Close Matching Regulations governing the products that life insurers can offer. These have to be matched by stocks such as Index Linked Governments Stocks the link in question being to RPI. 13 [2006] EWHC 2833 (Admin) 12

13 Payments but only so long as the award was linked to the RPI. That provided the lawyers with an early foray into the arguments about indexation for future loss, to which we shall turn in a moment. Another reason for the Treasury, and perhaps the insurance market to an extent, to favour the new regime was a concern that, if the Court could only compensate by lump sum awards, and they were potentially going to cause under-compensation, there might well be pressure on the Government to change the discount rate of 2.5% which had been set by the Lord Chancellor in I have already commented that there were powerful arguments that the discount rate at that level at least by 2003 would result in under-compensation. Nevertheless, the Court of Appeal ruled in Cooke v United Bristol Healthcare 14 that the rate could not change until the Lord Chancellor said so. The consequence was that there were political pressures 15 which led some to expect that the discount rate might well be reduced, perhaps to 2%, perhaps even to 1.5%. That would undoubtedly have made lump sum awards significantly more expensive, because multipliers would have been increased. The other reason why the insurance industry felt able to support the new regime was because, at the time when the matter was debated in Parliament in early 2003, the state of the annuities market was such that it was expected that the difference between an award of Periodical Payments and one by way of a lump sum would be insignificant that it would be cost neutral : that is, the anticipation was that the cost of funding 20,000 per annum for the care of the young man in our earlier example, as a lump sum calculated on the multiplier/multiplicand basis, would not be 14 [2003] EWCA Civ Not least from the Government s own Actuary, Christopher Daykin. 13

14 very significantly different from the cost of an annuity providing an equivalent income. Implementation Royal assent was given to the relevant provision on 20 th November However, implementation was delayed and occurred rather suddenly on 1 st April The provision gives the Court the power to order Periodical Payments in all cases where orders or settlements have not been made before 1 st April [2005]. The power to order variable Periodical Payments will apply only to proceedings issued on or after 1 st April [2005]. The Act does not simply leave it to the parties to do what they choose. The court 16 may (a) order that the damages are wholly or partly to take the form of Periodical Payments; and (b) shall consider whether to make that order. The Practice Direction is in a similar vein. PD 41.6 says that the Court shall consider and indicate to the parties as soon as practicable whether Periodical Payments or a lump sum is likely to be the more appropriate form for all parts of an award of damages. PD A and 6.7 provide that 16 What is now Section 2(1) of the Damages Act

15 the Court must be satisfied that the parties have considered whether the damages should wholly or partly take the form of Periodical Payments. How Periodical Payments are funded If damages are to be paid by way of Periodical Payments then, in practice, this is achieved is in one of two ways. Either the defendant/insurer can purchase an annuity from an approved provider, that is, a Life Insurer. But the problem is that only annuities that will be available will be RPI linked or RPI + a percentage (say 1 or 2%) as a proxy for a more generous index than the RPI 17. Alternatively, the insurer or defendant can (if qualifying as a secure provider himself 18 ) choose to self fund or he may have no choice if the Court insists on a more generous index than RPI (such as ASHE 6115). In that case, given that the only annuities available will be RPI or RPI plus, if the Court is not satisfied that either is equivalent to the more accurate index, the only solution will be to self-fund 19. But not all defendants or insurers will qualify as secure providers entitled so to do. And many will not want to. Self funding has always been an attractive option from the point of view of the Treasury and it was thought that it might also be attractive to insurers who have advantage of managing their own money and can avoid paying huge sums in a particular year. In practice, few insurers have done so. 17 A solution which is acceptable under the financial regulatory regime, as Baroness Scotland acknowledged during the Parliamentary debate in See sections 2(3) and (4) of the Damages Act I know of one case in which it is suggested that the insurer might purchase the RPI annuity and maintain a running account so that it can provide annually for any shortfall between the income from the RPI annuity and what income would be received indexed to ASHE

16 Preference versus Need The parties preferences are specified as relevant factors to be taken into account in the practice direction, but it is the claimant s needs which are decisive 20. To date, courts have generally been prepared to support the parties preferences as to whether a case should be disposed of by a lump sum or by Periodical Payments. But it is not an entirely consistent picture. In Godbold v Mahmood 21 the parties were keen on a lump sum disposal, but were very much at odds as to the appropriate multiplier because there was an issue as to the Claimant s life expectancy. Mr Justice Mitting, on 20 th April 2005, insisted that there should be a periodical payment, linked to the RPI. More recently, in Sarwar v Ali 22 the Claimant, who was of full capacity, participated in a trial which was to be one of the test cases on indexation 23 but changed his preference after the evidence was complete. Lloyd-Jones J noted the Claimant now preferred a lump sum for three reasons: the first was to bring the litigation to an end and to avoid becoming involved in an appeal process. The second was because the issue of life expectancy had been resolved in his favour and the third was because he wanted more control over his life. The judge considered that the expert evidence that the claimant himself had called during the course of the case created a compelling argument in favour of the award of Periodical Payments, particularly as regards the cost of care, case management and loss of earnings, and he ruled accordingly. 20 See PD [2005] EWHC [2007] EWHC and also covered very many other issues. 16

17 More recently still, in Burton v Kingsbury 24, Flaux J dealt with a case in which perhaps unusually 25 - the defendant argued that the award should be Periodical Payments and the claimant expressed a strong preference for a lump sum. Flaux J respected the claimant s preference but only to a very limited extent. He did not propose to order Periodical Payments generally but he did do so with regard to the cost of future care and case management 26. He expressed the view that such an award, if indexed properly, will best protect the claimant in respect of his likely needs in the future. He also felt that such an order would best suit the way in which he intended to deal with the issue between the parties about how far account should be taken of the possibility/probability that some/much/all of the claimant s care might be funded by the State 27. Notwithstanding those two last examples 28, it remains, in my experience, very unusual indeed for a judge to insist on Periodical Payments if the claimant is of full capacity and wants a lump sum. Of course, the court has no power to impose a Periodical Payments order if the parties have settled the case before it comes to trial or judgement, unless the claimant lacks capacity and the judge has to approve any settlement. In a case where the claimant does lack capacity, the court is not only required to adopt a more paternalistic role but is long since accustomed to so doing. Here the position may be very different. But again, judicial attitudes vary. Master Lush, in the paper to which I referred earlier, made it clear that he was generally 24 [2007] EWHC (QB) 25 One can speculate about the Defendant s real motivation in making this submission, but that is probably a matter for another day. 26 See paragraph 88 of the Judgment. 27 The Judge acceded to the Defendant s proposed arrangement with regard to the State funding issue, (paragraph of the Judgment) which may explain why the Defendant s lawyers made the submission they did with regard to Periodical Payments. 28 Interestingly, from judges who did not themselves practice in the field but whose judgments nevertheless make very impressive reading. 17

18 inclined to follow a claimant s preferences so long as he was confident that that claimant had been properly advised. He noted 29 that in 70% of the higher value cases coming into the Court of Protection, claimants, their families and their legal and financial advisors, when given the choice, would prefer to settle on a conventional lump sum basis, and they usually have sound reasons for doing so. These reasons are not simply financial, but extend across a much broader range of considerations medical, social, cultural, rights-based and personal and are more holistic insofar as they treat the claimant as a member of a family rather than in isolation. How popular have Periodical Payments become? When the new power was introduced, there was a wide divergence of opinion as to how popular such awards would be. The Guidance issued by the Department of Constitutional Affairs (as it then was) was upbeat: Ministers expressed the hope that the use of Periodical Payments in appropriate personal injury cases will become the norm. Other commentators thought that such awards would only ever be made in exceptional cases: Lord Steyn might have anticipated that that was explicable only because of practitioners distaste for a new system arising out of their familiarity with the old one. But the fact remains that many claimants, as we have seen from Master Lush s experience, which is consistent with my own, have nevertheless preferred the 29 In his conclusion at page

19 traditional, lump sum approach. It may, therefore, be convenient at this juncture to consider the pros and cons from the claimant s point of view. I would give the following reasons why a claimant might be attracted by a periodical payment. First, as we have already seen, he need not worry about the money running out should he live longer than expected. If the award is made for life 30 it will last so long as he lives. Second, the payments will be secure: where an insurer or a defendant purchases an annuity to meet the obligation for Periodical Payments, the liability to make those payments due under the Court Order is discharged and passes to the Life Office and is protected under the Financial Services Compensation Scheme. Equally, if the payments are funded by the defendant, then so long as the defendant qualifies as a secure provider, the payment is secure 31. A third good reason would be that the claimant is relieved of the burden (and expense) of managing the investments. Fourth, he may continue to receive State benefits 32. Fifth, an order can be made providing for monies to be paid to dependants post death; and sixth, if a devout Muslim, he avoids the impact of the charitable obligations arising under Shari a law. One might expect those preferences to arise only with regard to the larger cases but it is not necessarily so. It is not difficult to imagine that a claimant with, say, a five year loss of earnings from age 60 to 65 in the sum of 15,000 per annum might prefer to 30 It need not be: it can be made for some lesser period, such as loss of earnings to age Section 2(3) of the Damages Act 2006 provides that Court may not make an order for Periodical Payments unless satisfied that the continuity of payments under the order is reasonably secure. That means private Defendants, some medical defence organisations, foreign insurers and certain others cannot self fund. 32 Though this is itself a controversial issue, at least if such benefits are not means tested. 19

20 have a secure annual income for that period, without any worries, rather than managing his own lump sum. There are a number of reasons why claimants might have good reasons not to want Periodical Payments. I will concentrate on the three main ones. The first reason concerns the indexation debate. It was understood by I believe almost everyone, at least until Sir Michael Turner said otherwise in Flora v Wakom 33 that the annual value of the payments would be preserved by linking such payments to the Retail Prices Index 34 save in an exceptional case. Indeed, this was a reason regularly given to judges on approval hearings as justification for settlement on a lump sum basis 35. This was particularly true where a claimant had a big annual loss and a relatively long life expectancy. The concern was that the claimant did not wish to be tied into an investment vehicle that would lead to him being under-compensated if, for example, the costs of nursing care in the future were likely to increase at a faster rate than the RPI. Whether an RPI links constitutes full compensation is one thing. Whether Parliament intended that courts should have the power to provide a different link in the unexceptional case is another matter entirely. On the face of it, the statutory provision and the Practice Direction seemed to be clear. Section 2(8) provides that: 33 A decision upheld by the Court of Appeal. [2006] EWCA Civ Godbold v Mahmood is as good an example as any. 35 An example would be the claimant s preference as explained and endorsed by Lloyd-Jones J in A v B Hospitals NHS Trust [2006] EWHC 1178,