Periodical Payment Orders – The Brexit Effect

Brexit is taking the blame for much that is negative in the news, often for political purposes. However, the result of the recent referendum may well have thrown into doubt, established case-law, and the ability of the Court to make an order for periodical payments in certain circumstances. Nick Leech and Andrew Sands, specialist financial advisers, analyse the implications.

Periodical payments cannot be ordered for all claimants with lifelong needs. That has been the case since the commencement of the statutory regime. Such an unresolved situation is most unfortunate, as compensation based on an annual, guaranteed, tax-free payment which is properly proofed against inflation and paid for life, is surely the gold standard. Compare that with the traditional one-off lump sum award, beset as it is with the two major risks relating to investment: mortality and having to bear the costs of taxation and investment management.

Reasonable Security
First, a reminder of a basic requirement – the Court cannot usually order or approve periodical payments or absent the defendant meeting the requirements of Section 2(4) of
the Damages Act 1996 (as amended). That section relates to the Court being satisfied that continuity of payment under the Order is reasonably secure, and reads as follows:

2(4) For the purpose of subsection (3), the continuity of payment under an Order is reasonably secure if:

(a) it is protected by a guarantee given under section 6 of the Schedule to this Act

(b) it is protected by a scheme under section 213 of the Financial Services and Markets Act 2000 (compensation) (whether or not as modified by section 4 of this Act), or

(c) the source of payment is a government or health service body.

Broadly speaking, the effect of (b) is that, should a defendant insurer regulated by the Financial Conduct Authority default on a periodical payment order, the Financial Services Compensation Scheme (FSCS) would guarantee the payments to the claimant. The guarantee in relation to NHS Trust cases, or those against the Ministry of Defence, is covered by (c). In other words, most defendants can be considered reasonably secure in terms of the above legislation.

All well and good, however, since the outset, there have been problem areas which were identified within the guidance issued by the Department for Constitutional Affairs (DCA) way back in 2005.

Section 2 (4) does not cover periodical payments self-funded by the Motor Insurer’s Bureau, medical defence organisations, offshore insurers or private defendants, as none of these payments attract statutory protection under the FSCS.

However, the DCA Guidance goes on to state the following:
This does not mean that the Courts cannot order periodical payments against these defendants and insurance bodies. They may be able to provide statutorily secure periodical payments by purchasing an appropriate annuity from a life office for the benefit of the claimant, thus attracting the full protection of the FSCS under Section 4 (1) and (2) of the 1996 Act… Alternatively, it is open to these bodies to satisfy the Court that they can offer a method of funding other than one of those deemed secure under section 2 (4) that is reasonably secure

Other cases which cannot meet the requirements of Section 2 (4) include insurers involving Lloyd’s Syndicate members, but only where the accident predates January 1st 2004.

The Importance of the Thacker Case

Developments since the DCA guidance was published include the appropriate annuity option being entirely unavailable, and the Court holding that the Motor Insurers’ Bureau (MIB) actually is reasonably secure. This means that it can self-fund periodical payments from its own resources, despite not complying with Section 2 (4). The case of Thacker v Steeples and MIB 16th May 2005, (unreported, but see Lawtell Quantum AM 0900821 and [2005] 3 Kemp News 5), considered the issue. The Bureau was held by the Court to be reasonably secure because:

  • It has longevity and significant resources.
  • It is a collective of 80 motor insurers. If one fails, MIB would simply increase the levy on remaining 79.
  • The MIB is the body through which the Government satisfies its obligation to ensure compensation for victims of uninsured and untraced drivers under Art 4 of European Directive on Motor Insurance. Therefore, morally and politically it is unlikely that Government would allow the MIB to dissolve, without its continuing liabilities being provided for.

The Thacker decision was also important in that it provided an answer to the pre-2004 Lloyd’s Syndicate cases. The MIB could be considered insurer of last resort in the event of default, as long as the Bureau had been properly notified. That position was examined in the case of Bennett v Stevens [2010] EWHC 2194(QB), where, as regards reasonable security, a note of caution was sounded by Mackay J. The Judge’s analysis of the resources backing the insurer, which was not automatically reasonably secure (as it was a Lloyd’s Syndicate), sets a high bar, and gives an indication of the level of judicial scrutiny to be applied:

…if I make a Periodical Payment Order and continuity of payment is broken and those payments cease, the claimant’s position here would be a disastrous one. He would have no further recourse to the defendants, to whom he will have given a legal discharge as a consequence of the making of the Order and he will have no recourse to any compensation scheme or guarantee. He will be left with desperate measures seeking to set this Order aside many years hence, or making a claim against his solicitors. 

While, therefore, I am only required by the statute to consider whether the proposed Order is reasonably secure, I am not required to find that it is entirely secure or free of all risk, it seems to me that my satisfaction has to reach a high level, given what is involved and I must finish up satisfied on something higher than a mere balance of

To recap, therefore, MIB cases per se and pre-2004 Lloyd’s Syndicate cases (subject to MIB notification) can be considered reasonably secure on account of the Thacker decision. However, that is now open to question in the light of Brexit. The Court in Thacker drew comfort from the fact that the MIB is the body through which the Government satisfies its obligation to ensure compensation for victims of uninsured and untraced drivers under Art 4 of European Directive on Motor Insurance. Absent that on account of Brexit, would the Court still be satisfied that the MIB is reasonably secure? Given the initial view of the DCA about the status of the MIB and Mackay J’s guidance in Bennett, there must be an element of doubt.

EU Based Insurers

Outside of the MIB context, the Financial Services Compensation Scheme has confirmed, in principle, (albeit qualified to apply on a case-by-case basis) that, in claims involving EU-based insurers based outside of the UK, as long as the contract of insurance was concluded in the UK, the FSCS would be the insurer of last resort. The FSCS would only step in should the similar scheme in the insurer’s home country become exhausted. In general terms, the FSCS covers firms that are authorised to trade in the UK by the Financial Conduct Authority. However, protection available for EU firms may vary. In other words, pre-Brexit, a UK Court could be satisfied as to the reasonable security of a non UK-based EU insurer. As EU obligations are at the heart of this, such an arrangement relating to the FSCS and similar bodies in other EU countries is now questionable.

Summary and Conclusion

Brexit has cast a shadow of doubt over the Court’s ability to make Periodical Payment Orders in certain categories of cases. When taken together, claims against the MIB, pre-
2004 Lloyd’s Syndicate cases (where the MIB can be considered the element of security), and cases involving EU insurers outside of the UK, amount to a very significant cohort.

It appears that the body of case law relating to reasonable security has been disturbed and may need to be re-evaluated. Bearing in mind the huge advantages of periodical payments over the lump sum alternative, it would be a great pity if their availability was to be denied to a substantial number of catastrophically injured claimants, simply on account of the referendum result.

A final thought, perhaps of cliff-hanger magnitude, would relate to the annuity option outlined by the DCA in its guidance and described above as entirely unavailable. If, however, such a product, properly regulated by the FCA, was to become a reality, that would allow bodies which do not fall within Section 2 (4) to lay off their liabilities in a
manner that would comply with that statutory provision, thus making periodical payments available to the above claimant cohort.

Nick Leech and Andrews Sands are Directors of Nestor, a firm of independent financial advisers, specialising in the personal injury field. Nestor is authorised and regulated by the Financial Conduct Authority.