01/03/2017
UK insurers have reacted furiously to the Lord Chancellor’s announcement that it will cut the Discount Rate (also known as the Ogden Rate) – a calculation used to determine lump sum compensation to claimants who have suffered life-changing injuries or are claiming under the Fatal Accidents Act 1976 - to 0.75% from 2.5%.
This first change to the rate since 2001 has shocked the insurance industry, who expected the rate to be cut to 1.5% - 1%. The change in the discount rate, which will cost insurers millions of pounds, resulted in shares across the sector plunging as much as 7% on Monday.
Insurers have stated that the decision will cause premiums to increase to cover the soaring cost of claims. Drivers and small business owners are likely to feel the impact of increased premiums the most.
But for the spouse or partner of a deceased person who lost their life due to the negligent acts or omissions of another, this news is positive. The amount received from a claim is likely to be substantially greater, especially in cases where the victim was young and had many years of earning potential left.
A brief guide to the Fatal Accidents Act 1976
The death of a spouse or civil partner leaves a gaping hole not only in the hearts of those left behind but in their future earning capacity. To help alleviate the financial difficulty faced by people whose spouse or partner has been killed following a negligent act or omission by a third party, the Fatal Accidents Act 1976 (the Act), sets out how compensation can be calculated and who is entitled to claim.
Who can claim?
Under section 1A of the Act, a claim can be made by a spouse or a civil partner. Late last year, a high court judge reluctantly held in Smith v Lancashire Teaching Hospitals NHS Trust [2016] EWHC 2208 (QB) that bereavement payments under the Act could not be extended to cover a cohabitee, even though, consultation by the Association of British Insurers shows that insurance companies are happy to make payments to this group.
Parents of a minor who has died without leaving any dependents may also claim; if the child is illegitimate, the mother has a right to claim under the Act. Statutory bereavement award.
A one-off statutory bereavement award can be made under the Act. At the time of writing, the amounts were:
Date of death:
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On or after 1st April 2013—£12,980
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Before 1st April 2013—£11,800
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Before 1st January 2008—£10,000
Loss of dependency award
The court can make an award for loss of dependency if the claimant can show that they were or were likely to be dependent on the deceased.
A claim for loss of dependency can be made by spouses, civil partners, and dependent children.
To calculate the dependency based on loss of the deceased’s earnings (or pension), the claimant must deduct from those earnings the amount that the deceased would have used as independent discretionary income. This is usually expressed as a percentage; the most common amounts deducted are:
In the common position where both spouses or civil partners are earning, the following steps are taken:
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find the aggregate earnings of deceased and spouse/civil partner, then
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reduce aggregate figure by 33% or 25% (where there are dependent children), then
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deduct the spouse’s/civil partner’s income
Services such as housework, childcare, and DIY can also be claimed for.
Once a lump sum compensation payment has been calculated, the actual amount a claimant will receive is adjusted according to the interest they can expect to earn by investing it. This is where the Lord Chancellor’s cutting of the Discount Rate bites insurance companies hard.
For example, under the old rate, an insurance company would have to pay a claimant £975 to cover a dependency income loss of £1,000. Now that same claim will cost the insurer £1,007.50.
For large claims, this difference could amount to tens of thousands of pounds.
In a statement, the Ministry of Justice stated, "The law makes clear that claimants must be treated as risk-averse investors, reflecting the fact that they are financially dependent on this lump sum, often for long periods or the duration of their life. Compensation awards using the rate should put the claimant in the same financial position had they not been injured [or their spouse or parent had not died], including loss of future earnings and care costs."
In summary
It remains to be seen whether the new Discount Rate will remain in place long term. It may be that the outcry, not only from the insurance sector but their clients who will suffer an increase in premiums at a time when living costs are being pushed up by inflation, results in the rate being brought up to the anticipated rate of 1.5% - 1%.
Fisher Scoggins Waters are a London based law firm who are experts in construction, manufacturing and engineering law. We act for both claimants and insurers. If you would like more information regarding legal matters relating to the Fatal Accidents Act 1976, please phone us on 0207 993 6960.