It is of course, a trick question – a periodical payments case, is always a periodical payments case. Why should that not always be true? Periodical payments represent compensation paid without risk for life, free of tax and appropriately proofed against inflation. An award inclusive of a substantial annual income, is also far easier to manage. By contrast, lump sum awards are taxable and more difficult to manage on account of risks related to investment performance, and claimants living longer than expected. So there it is in a nutshell.
Unfortunately, there are exceptions…
In short, the defendant has to be considered to be good for the money, before the Court can make a periodical payments order. Some organisations cannot meet the statutory criteria required by s2(4) of the Damages Act 1996. The vast majority of insurers do fall within those requirements, as do NHS Trusts and the MoD. Beware however, EL and PL policies, which may have an insufficient indemnity limit. For example, an EL policy with a limit of £10,000,000 is unlikely to be able to sustain a substantial periodical payment for a young claimant with a long-life expectancy. In other words, the indemnity limit might be met during the claimant’s lifetime and payments would cease. In that case, the Court would clearly not be able to make an award, inclusive of periodical payments.
What about the reduced discount rate?
Inverse proportionality means that as the discount rate has reduced, lump sum awards have significantly increased. Does this now make lump sums more attractive, when compared to periodical payment awards? On the basis that the old 2.5% discount rate was probably wrong for years, the -0.25% rate provides a better chance of adequate compensation. However, the calculation of future losses is underpinned by the very same risks and uncertainties.
A lump sum award is basically a compressed amount, that is assumed to grow in line with a notional investment return. A battle then commences between that assumed level of growth and expenditure, which expenditure wins on the claimant’s assumed date of death. Does that sound attractive and inspiring of confidence? On the other hand, a periodical payment order simply removes those assumptions and the risks they inevitably bring about and provides the claimant with peace of mind.
The defendant says no
A common experience, is that of insurers, refusing to negotiate on the basis settlement inclusive of periodical payments. A well-pitched lump sum offer, toward the top end of the reasonable settlement range, might well put the claimant at risk.
Assuming that defendants’ insurers have their own interests at heart when taking that approach, such as closing the book, and avoiding open ended liabilities in their accounts; what can be done to shift risk away from claimants, so that periodical payment orders remain available, in spite of such resistance from defendants?
Putting pressure on defendants to achieve that end, is clearly a matter for claimants’ legal teams, and the approach required, would likely vary on a case by case basis. However, the rules are helpful in that regard, and a timely indication, as per Rule 41.6 may provide assistance;
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 or part of an award of damages.
WE can help….
…with our periodical payments viability reports, which can be prepared whenever required during the course of the claim. Issues such as whether the defendant is good for the money (as above), or which heads of future loss might best be met by way of a periodical payments order can be addressed. We are also happy to discuss cases generally and have many years’ experience in this specialist field. Please contact us for more information.