This paper sets out for consultation whether courts should be given the power to order periodical payments for future loss and care costs in personal injury cases. The consultation is aimed at people who are involved in personal injury litigation in England, Wales and Northern Ireland. This consultation is being conducted in line with the Code of Practice on Written Consultation issued by the Cabinet Office. It falls within the scope of the Code. The Code criteria set out in Annex F have been followed.
An initial impact assessment indicates that claimants, defendants, general and life insurers and their customers, and taxpayers are likely to be particularly affected. The proposals are likely to lead to some costs and benefits for businesses. A partial Regulatory Impact Assessment is attached at Annex A.
Copies of the Consultation Paper are being sent, amongst others, to:
Please send your response by 7 June 2002 to:
Victoria Brown
Lord Chancellor's Department
Civil Law Development Division
Room 3.S.5
Southside
105 Victoria Street
London SW1E 6QT
Tel: 020 7210 1219
Fax: 020 7210 1269
Email: Victorial Brown
Representative groups are asked to give a summary of the people and organisations they represent when they respond.
The Department may wish to publish responses to this consultation document in due course. Please ensure your response is marked clearly if you wish your response or name to be kept confidential. Confidential responses will be included in any statistical summary of numbers of comments received and views expressed.
Further copies of this consultation paper can be obtained from Victorial Brown at the above address or by phoning 020 7210 1219.
This Consultation Paper seeks views on proposals to give courts a discretionary power to order periodical payments for future loss and care costs in personal injury cases.
It is widely recognised that lump sum payments are not ideal. They are based on the predicted life expectancy of the claimant and they invariably provide under- or over- compensation, resulting in an injustice to either the claimant or the defendant.
The proposals set out in this paper will allow the courts to award periodical payments, in appropriate cases, either wholly or partly in place of a lump sum payment. This should help ensure that injured people receive the compensation to which they are entitled for so long as it is needed, without the worry of the award running out if they happen to live longer than was expected. Removing uncertainty should ensure that claimants are able to spend their money on providing the quality of life and the standard of care to which they are entitled.
But the proposals are not just about claimants - there are benefits for defendants too. For example, periodical payments can save money for the NHS and the taxpayer, and might give insurers more choice on how payments are funded, all without penalising claimants. I am, of course, aware that the proposals might incur some additional costs and that, in particular, the issue of reviewability is a difficult one. This Paper explores those problems and the various ways in which reviews might be taken forward in a controlled way. It also seeks information so that the potential costs and benefits of the proposals can be measured.
This Consultation Paper suggests a new approach. I believe that the proposals represent an important step forward in seeking to improve the current system for paying damages to injured people. I look forward to your responses.
In March 2000 the Lord Chancellor published the Consultation Paper Damages: The Discount Rate and Alternatives to Lump Sum Payments. The second part of the Paper sought views on structured settlements and periodical payments in personal injury cases. Since then, there have been other initiatives aimed at taking work forward in this area of litigation. These include the Clinical Disputes Forum's Consultation Paper Lump Sum Damages and Periodical Payments; the advisory group on clinical negligence, chaired by Professor Sir Liam Donaldson; and the Master of the Rolls' working party on structured settlements.
This Consultation Paper discusses lump sums and periodical payments. It concludes that in most circumstances periodical payments are, in principle, the more appropriate means for paying compensation for significant future financial loss. Periodical payments better reflect the purpose of compensation, which is to restore the claimant's prior position. They also place the risks associated with life expectancy and investment on defendants rather than claimants (paragraphs 14-22).
It is proposed that courts should have power to order that damages for future losses and care costs should be paid in the form of periodical payments. That power would be discretionary, and it would be for the courts to decide whether it was appropriate to make an order for periodical payments, based on the individual circumstances of each case. Views are sought on whether the legislation should include a presumption that for large cases periodical payments will be the preferred form of payment in normal circumstances, and any circumstances in which lump sums would be more appropriate (paragraphs 23-27).
It is also proposed that the calculation of periodical payments should be based on the 'bottom-up' method and that they should be tailored to take account of the claimant's future needs (paragraphs 28-32). The Paper discusses how defendants or their insurers might fund the periodical payments and the considerations that should apply (paragraphs 33-41). The underlying principle would be that however the payments are funded, a defendant or defendant insurer must provide for the claimant to receive the amount of the periodical payments awarded by the court.
Offers to settle (paragraphs 42-45) and the impact of regulations affecting tax and benefits (paragraphs 46-52) are discussed and views sought. Views are also sought on the assignment of periodical payments and whether it would be desirable to prevent or regulate 'factoring' (paragraphs 53-56).
The reviewability of periodical payments raises some difficult issues. The Consultation Paper suggests that orders should be reviewable where the possibility of medical deterioration or improvement, or changes in care arrangements, can be foreseen (but not necessarily assessed) at the time of the original order. In these circumstances the scope for review would be provided for in that order. The paper also seeks views on whether there are other exceptional life-changing circumstances in which a right to apply for a review might be appropriate (paragraphs 57-71). To prevent any review procedure being abused, and to reduce costs, it is proposed that there should be a permission stage with an initial consideration on paper and use of costs sanctions where appropriate (paragraphs 72-73).
A partial Regulatory Impact Assessment is at Annex A of the Consultation Paper, and information is sought to inform the full assessment.
This Consultation Paper seeks views on proposals to give courts in England, Wales and Northern Ireland the power to order that 'special damages' for future losses and care costs in personal injury cases should be paid in the form of periodical payments, rather than as a lump sum.
The proposals in this Consultation Paper do not seek to alter the underlying basis upon which the various heads of damages are assessed by the courts. It is concerned with the form in which damages for future loss and care costs are paid.
This is a devolved matter for the Scottish Parliament and the proposals in the Consultation Paper do not apply to Scotland. But a copy of the Paper will be sent to the Scottish Executive for information. References to the Civil Procedure Rules or Practice Directions do not apply in the Northern Ireland context.
Background
Where compensation for damages for personal injury is payable, at present courts may:
The Damages Act 1996 sets out the provisions covering damages paid by way of periodical payments. Section 2 (1) of the Act states that:
"A court awarding damages in an action for personal injury may, with the consent of the parties, make an order under which the damages are wholly or partly to take the form of periodical payments."
The Act then provides for periodical payments to be funded by means of an annuity. Section 4 (as amended) provides that the full amount of an annuity purchased pursuant to a 'structured settlement' or equivalent (consent) order shall be protected under the Financial Services Compensation Scheme, notwithstanding any limit on the scheme's obligations that would otherwise apply. Section 5 defines a structured settlement as:
"...an agreement settling a claim or action for damages for personal injury on terms whereby-
Section 6 provides for a Minister of the Crown to guarantee the periodical payments under settlements by, and consent orders against, public sector bodies.
Traditionally, damages have been paid in the form of a lump sum. But an award can cover both losses already incurred and future losses that have not yet arisen. We consider that lump sums remain the appropriate way to provide compensation for past financial losses (for example, care costs already incurred, lost earnings to date and interest on these). They are also more appropriate for 'general damages' intended to compensate for non-financial losses, for example pain and suffering, loss of amenity, bereavement (in the case of fatal accident) and, in some cases, lost years of life.
This Consultation Paper addresses the form in which compensation is paid in cases where there is long term or permanent personal injury, and where a significant award is made for 'special damages' for future care costs and loss of earnings. These are intended to cover future needs and losses that have not yet arisen. We consider that periodical payments can provide a fairer and more certain way of ensuring that claimants awarded damages for future losses and care costs, often for the remainder of their lives, receive the compensation to which they are entitled.
The need for the Government to bring about change was commented on in the case of Wells v Wells (1999) AC 345 at 384B. In his judgment, Lord Steyn described section 2(1) of the Damages Act 1996 as a "dead letter". He continued:
"The solution is relatively straightforward. The court ought to be given the power of its own motion to make an award for periodical 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 the judges cannot make the change. Only Parliament can solve the problem".
More recently, in a debate in the House of Lords on 29 November 2001 about the discount rate (used to adjust lump sums to take account of the interest that could be earned on them), there was support for the greater use of periodical payments. Lord Hunt of Wirral said:
"I hope that in the longer term those responsible for this policy will give greater consideration to providing the court with power to order structured settlements. That entirely equitable and humane alternative would avoid all those distasteful arguments about life expectancy and give the injured persons, particularly the parents of an injured child, the security that they need".
Baroness Crawley said:
"I also believe that the noble and learned Lord has struck a balance in recognising that the most significant risk that claimants face is not that their investments will fail to yield a 2.5 per cent return per annum, but that they will live longer than assumed when the compensation was awarded. To raise the value of lump sums with an artificially low discount rate will hinder the development of structured awards which can reduce the risk of claimants who live longer facing poverty in old age."
Lord Brennan said:
"...it is a strong and urgent request to the Government to put this history of uncertainty about claims and damages right out of the legal arena in personal injuries claims. That can be done under the law by judges awarding the annual cost of the loss - whether it be care, transport or whatever - which will run for the lifetime of the injured person. So when they go to court the decision is: how much do you need from time to time for that requirement? The heartache, the legal costs and the waste of time spent in trying to calculate a lifetime sum could be completely avoided. Justice would be done. Worry would be put aside. Everyone interested in this, from the claimants to the insurers and the lawyers, would find it much more satisfactory. I hope that the Lord Chancellor's present consultation on this issue will lead to a conclusion as robust as the one that I have suggested".
Many of these issues were considered in the Report of the Royal Commission on Civil Liability and Compensation for Personal Injury (1978) (also referred to as the Pearson Report) and in the Law Commission's Report Structured Settlements and Interim and Provisional Damages (LawCom No 224) (1994). The provisions for structured settlements were regularised in the Damages Act 1996. Subsequently, in March 2000, the Lord Chancellor published a Consultation Paper Damages: The Discount Rate and Alternatives to Lump Sum Payments. Although responses to this Paper were almost evenly split (with a slight majority opposed to the court having power to impose structured orders in all cases), we consider that subsequent initiatives and discussions on this issue have reflected a growing acceptance that periodical payments can provide a more certain and fairer form of payment than a lump sum.
In developing these proposals, the Lord Chancellor has taken account of:
the responses to his Consultation Paper. The second part of that Paper sought views on alternatives to lump sum payments for damages. A brief summary of the responses is at Annex B.
the Clinical Disputes Forum's discussion paper Lump Sum Damages and Periodical Payments and the subsequent report summarising responses;
the ongoing work of the Chief Medical Officer and his advisory group, who are considering reforms to the way in which clinical negligence claims are handled;
the ongoing work of the Master of the Rolls' working party on structured settlements;
discussions with various individuals, organisations and other Government departments; and
the systems in place in other countries, an outline of which is at Annex C.
Lump Sums or Periodical Payments?
When successful claimants are awarded a lump sum they are paid for all past and future losses at once. However carefully the claimant's likely future losses and needs are estimated, they can never be known with certainty in advance. An underestimate will cause the claimant to suffer; an overestimate will unfairly penalise the defendant. We consider that greater use of periodical payments offers scope to reflect claimants' actual needs and losses more closely than is possible with lump sums.
The most significant area of uncertainty is the future life expectancy of the claimant. Unless claimants live for exactly the number of years expected, they will invariably be either over- or under-compensated by a lump sum. Periodical payments, on the other hand, continue for the actual lifetime of a permanently injured claimant, and cease on the claimant's death (unless the terms of a particular order or annuity provide otherwise).
The issue of life expectancy, and whether a lump sum will run out because they might live longer than expected, can be of concern to claimants. In particular, this concern can result in an overly cautious approach being adopted to spending money, leading to seriously injured or disabled claimants not receiving the required level of care or full benefits intended by the award. If the money runs out, either because they live for longer than expected, or they dissipate their award, claimants may need to fall back upon the State, causing an additional burden to the Government purse and the taxpayer.
If a claimant dies much earlier than expected, a lump sum award will provide a windfall for the heirs of that claimant, and it will be they who benefit most from the award. It is sometimes argued that this does not matter because the lump sum payment still serves to penalise the defendant. But the purpose of tort law in these cases is to compensate claimants for loss, in particular by restoring them, so far as possible, to the financial position they enjoyed before the accident: it is not to punish defendants or provide heirs of the deceased with a financial gain beyond any compensation that was awarded to them by the court. And the cost of any 'windfall' or 'profit' is ultimately borne, for example, by other insurance premium payers or by users of the NHS.
Lump sum compensation for future financial losses is a crude mechanism for restoring the claimant's position. Care costs are incurred over time, not all at once. Similarly, damages for lost earnings are intended to compensate for a stream of income that would have been earned in the future, not for the loss of an existing fortune. For these reasons, lump sums can place inappropriate pressures on claimants. There is a risk that claimants will be overawed by the amount awarded or that receipt of a very large sum may encourage a false sense of security. Claimants may also come under pressure from family or friends to spend the award inappropriately, for example by using money intended for their future care to help out someone in financial difficulties or to invest in a risky business venture. Although most adult claimants are free to spend their money as they choose, the system should not rely on a form of payment that enables, and arguably encourages, claimants to use their awards inappropriately.
Lump sums also impose on claimants the burden of investing the award (assuming they choose to do so) in a way that will enable them to purchase the care they require and to restore the income they have foregone because of the accident. It would be difficult for anyone to manage an entire lifetime's income so that it lasted until the day they died. That is why large awards often include provision for financial advice. But claimants may not seek or receive sound financial advice - lump sums can be difficult to manage, but easy to spend. This difficulty is magnified when accident victims have to cope with the stress of ongoing disabilities and usually the knowledge that they have no alternative source of income.
Periodical payments, on the other hand, provide a guaranteed income and claimants will know exactly how much they are going to receive and when, without the need for expensive investment advice. They will know that they can spend the money on immediate needs, without the risk of depletion or worries about investment. Instead, periodical payments require the defendant or the defendant insurer to provide funds or invest in a manner that ensures successful claimants receive certain and ongoing streams of payments for the remainder of their lives. This places the risk associated with investment where it belongs, namely on the negligent party. And, in most cases, where that risk can be more effectively managed, namely on an insurance company or other large organisation. For example, insurance companies should be able to invest to meet their liabilities across a large portfolio of annuities or claims, with much lower overall expenditure on financial advice and other administrative costs compared to individuals each investing a single lump sum. Public sector defendants, in particular the NHS, will be better placed to manage their budgets effectively, because the total amounts paid out in damages in any given year will be more predictable. So periodical payments could offer advantages over lump sums for defendants, defendant insurers, and the NHS and its users, as well as for claimants.
It is sometimes argued that an advantage of lump sums is that they provide a clean break between the claimant and the defendant, putting an end to adversarial contact. The desire for a clean break is understandable. But where the defendant is insured, or is uninsured but has purchased an annuity, it will be a general insurer or life office making the stream of payments to the claimant, not the defendant. Similarly, with most clinical negligence cases, it is not the doctor or medical team that pay the compensation, but rather the NHS Litigation Authority. There is rarely an ongoing relationship with the negligent party in person. Moreover, facilities for electronic transfer of money can remove any personal element to the transaction. A more pertinent point concerning the clean break issue is considered in paragraph 58 below in the context of the question of whether it should be possible to review awards of periodical payments.
To sum up, we consider that in most circumstances periodical payments are, in principle, the more appropriate means for paying compensation for significant future financial losses. They better reflect the purpose of compensation which is to restore the claimant's prior position. They place the risks associated with life expectancy and investment on defendants rather than claimants. This ensures that claimants who live longer than expected enjoy the quality of life they are entitled to, and do not have fall back on social security when the money runs out. It should also benefit defendants by allowing awards to be managed more cost-effectively. Lump sums invariably penalise one of the parties whereas periodical payments can provide better justice for both.
Power to Impose
This section considers whether the court should have power to order that future losses should be paid in the form of periodical payments. At present, unless both parties consent, the court must order a lump sum. We believe that periodical payments are a fairer means of paying damages for future loss, and their greater use would bring potential benefits for claimants, defendants and society as a whole. Yet currently they remain the exception rather than the norm. This may be, as Lord Steyn suggested, simply the result of an ingrained legal culture. But that culture is unlikely to change when either party can insist on a lump sum if, rightly or wrongly, they perceive some advantage in that form of payment.
It is argued that claimants, in particular, are entitled to choose how they receive their damages, whether for past or future losses. But the fundamental legal principle in awarding damages is to restore claimants, so far as possible, to the financial position they would have been in but for the accident. Before the accident they would not have received their future lifetime earnings and pension, in advance, in one lump sum. Rather, they would have received a stream of income, to spend, save, invest or borrow against. We consider that periodical payments more accurately reflect that position and so do not consider that claimants have an automatic right to receive damages for future loss in the form of a lump sum.
But we do recognise that periodical payments will not be the most appropriate form of payment for future losses in every case. They offer few advantages where the future losses are low or only needed for a short period. The same may be true of fatal accident cases. Here, although the future losses may run for several years, their calculation does not turn on the claimant's life expectancy, as it does in a personal injury case. Where limited liability insurance does not cover the full amount of the award (in whatever form), the court will wish to take into account the proportion of the award likely to be covered by insurance and how the remainder might be funded before deciding the form of payment. And there might be some circumstances in which a combination of a lump sum and periodical payments would be appropriate, for example, a lump sum to purchase or adapt a property together with periodical payments for future losses and other care costs. For these reasons we are proposing only that the court should have power to impose an order for periodical payments, not that it should be the rule that future losses and care costs are paid in this way.
So it will be for the courts to develop the principles and guidelines for deciding which form damages for future loss and care costs should take. In the light of the arguments above, we hope that the courts will normally order periodical payments in cases of significant future losses. If they do so, the majority of cases that settle without trial will do so against that background. Although the parties will remain free to agree to a lump sum, and many no doubt will, it will be harder for one party to insist on a lump sum where the other wishes to settle for reasonable periodical payments; so we would hope that periodical payments will become the norm for settlements too. To assist this development, parties will need to know what factors might persuade a court to order a lump sum. We therefore think it would be helpful if, as soon as the new power took effect, a Practice Direction was issued, setting out the considerations the court should take into account when deciding between a lump sum, periodical payments or a mix of the two.
A further option would be to establish a statutory presumption in favour of periodical payments. We do not propose to define in Statute specific criteria for deciding between lump sums and periodical payments. That is a matter better left to the courts who are able to consider each case on an individual basis. A statutory list of factors would be inflexible and inevitably incomplete. But the Act might say, for example, that 'special damages' for significant future losses should be ordered in the form of periodical payments unless there was good reason not to. This might be helpful to define a context in which the courts could develop flexible criteria.
| Do you agree that the courts should have the power to order that damages for future losses in personal injury cases should be paid in the form of periodical payments? Should the legislation include a presumption that for larger cases periodical payments will be the preferred form of payment unless there is good reason not to? In what circumstances might a lump sum be more appropriate for all or part of the future losses? Should (i) the power to order periodical payments, or (ii) any presumption in favour of periodical payments, apply to cases under the Fatal Accidents Act 1976? |
Calculation of Periodical Payments
This section discusses the calculation of periodical payments. We consider that there is an unnecessary complexity in the way that structured settlements are usually calculated now. This is known as the 'top-down' approach and reflects the existing culture that sees lump sums as the norm. In doing so, it can preserve some of the disadvantages of lump sum payments.
A top-down structured settlement is derived after first calculating a lump sum. The various heads of damages (loss of earnings, costs of care etc.) are considered to estimate the annual needs of the claimant. This figure is then adjusted for inflation and multiplied by the life expectancy of the claimant to arrive at a total figure which is discounted to take account of the assumed return on investing that award. The resulting lump sum is used to purchase an annuity, which will then provide a stream of payments to the claimant for life (not life expectancy). The resulting payments would be the same as those in the original assessment of damages if, but only if, the price of the annuity reflects exactly the same assumptions about inflation, life expectancy and rate of return. In reality, the match will never be exact because annuity prices are determined by wider market forces, and based on an assessment of the probability of different life expectancies, not a single figure.
The simpler alternative is known as the 'bottom-up' approach. This involves the same calculation of annual needs by considering the various heads of damages adjusted for inflation. The defendant then agrees, or is ordered, to pay for the assessed needs, in a permanent-injury case for the remainder of the claimant's lifetime. There is no need to multiply the payments by an uncertain estimate of life expectancy (so avoiding arguments over life expectancy which can be very distasteful at times of great emotion for claimants and their families); nor to apply a discount rate at this stage. The defendant may then purchase an annuity calculated to produce the required stream of payments. We consider that a system based on this approach is preferable because it eliminates the complexity, lack of transparency and distortion associated with the so-called top-down approach, which in reality is little more than a division of a lump sum. The effect would be to transfer from claimants to defendants the costs or savings arising from differences between the discount rate and annuity rates.
We propose therefore that orders for periodical payments should be calculated solely on the assessment of the claimant's future needs. The court will be able to tailor the order to meet individual needs, for example, by:
The order made would set out the amounts to be paid - how they are funded would be for the defendant, subject to the considerations set out in the following section. But we hope that greater use of periodical payments, together with the flexibility proposed in the next section, will prompt the insurance industry to explore innovative ways of funding periodical payments cost effectively.
Security and Funding
This section discusses the need to ensure that the defendant or defendant insurer will be able to continue paying for the remainder of the claimant's life, and what this means for the ways periodical payments may be funded. We consider that periodical payments are only appropriate where it is clear that the defendant, defendant insurer or life office will be able to meet the payments for the lifetime of the claimant (or any other period for which the order provides). The Damages Act 1996 currently provides for the necessary protection in two ways.
Firstly, a public sector defendant can make the required payments as they fall due under a Ministerial guarantee. The system of periodical payments we propose will allow public sector defendants to continue to self fund and should allow for more accurate budgeting and provide improved cash flow through payments being spread over many years. This will benefit, in particular, taxpayers and users of the NHS.
Secondly, the Act provides that a defendant can purchase an annuity which will be fully protected through the Financial Services Compensation Scheme (which recently replaced the Policyholders Protection Act 1975). The current legislation assumes that the parties will have agreed to use an annuity to fund the structured settlement and that any court order will refer to that annuity. This means that an appropriate annuity must be identified before the consent order can be finalised. This will not necessarily be the case where the court makes a periodical payments order without consent, although there may be circumstances in which the court considers it necessary to secure payments by also ordering that the periodical payments ordered should be funded by an annuity, for example, an uninsured private sector defendant.
So if the court is to have power to order periodical payments without consent, it is necessary to consider whether defendant insurers should be given the option of funding periodical payments without purchasing an annuity. Large liability insurers may decide they can manage these payments more efficiently within their own business. In particular, they may find it attractive to be able to defer purchasing an annuity at times when annuity rates are unfavourable.
Therefore, subject to any condition the court may make, we consider that defendants' insurers should be able to opt to purchase an annuity or fund the periodical payments in-house. And in the latter case they should be able to purchase an annuity at a later date, provided it would produce the required level of payments.
The regulatory framework would already permit general insurers to self-fund in this way. In the case of compulsory insurance - principally motor and employers' liability insurance, which cover the great majority of personal injury claims - self-funded payments would already be fully protected under the Financial Services Compensation Scheme. It would be necessary to amend that scheme to extend the self-funding option to other forms of insurance.
| Do you agree that insurers should have the option of self-funding, provided the court was satisfied about the security of the periodical payments? Are there other funding options that might offer adequate security? |
Particular types of annuity
At present some annuities offer 'guaranteed years'. A guarantee to make payments for the first five years will mean that if a claimant with a life expectancy of ten years dies after two, payments will continue to the deceased's heirs for a further three years. This form of annuity may be appropriate where the court orders on-going payments to provide for the claimant's dependants. But where periodical payments are ordered just for the lifetime of the claimant, 'guaranteed years' annuities will inevitably cost more to produce a given level of payments.
Some structured settlements are now funded by 'with profits' annuities. These policies participate in equity investment funds. They require the annuitant to take a higher degree of risk compared to a simple index-linked annuity. The annuitant may receive higher payments if the fund performs well, or lower payments (possibly subject to a guaranteed minimum) if it performs badly.
In paragraph 35, we propose that the court should be able to require that the periodical payments should be backed by an annuity, if this was necessary to provide adequate security. But we do not propose that the court should have power to order a particular type of annuity. It will be for defendants and defendant insurers to purchase an annuity that ensures that the claimant will receive the periodical payments ordered by the court. They remain free to choose the type of annuity, provided that it will secure the ordered level of payments over the required period. It would still be open to the parties to reach a settlement using either of the types of annuity mentioned above.
Offers to settle
This section considers how a system of 'bottom-up' periodical payments might fit with the provisions in the Civil Procedure Rules (CPR) about offers for settlement.
Part 36 of the CPR provides for an offer to settle to be made. An offer by the defendant can be backed up by a payment of the amount of money offered into court. If the offer is not accepted, and the party refusing the offer does not achieve a better outcome at the hearing of the claim, that party will be liable for both sides' costs since the date of the offer. Rule 44.3(4) is a more general rule that requires the judge to take into account any admissible offer in making an order for costs.
Part 36 is designed for offers of a lump sum payment. If courts are given the power to order periodical payments, it raises the issue of whether it should be possible to make offers of periodical payments under Part 36, with automatic costs sanctions if the offer is refused and not 'beaten'. We consider that costs sanctions under Part 36 can only work where the comparison between the offer and the final order is straightforward. That would not necessarily be the case when comparing different schemes for periodical payments, or a scheme of periodical payments and a lump sum. Any such comparison would require an assumption about life expectancy and a discount rate. It might therefore become necessary to estimate and possibly dispute life expectancy solely to decide the issue of costs. Moreover, a dispute about whether damages should take the form of periodical payments or a lump sum is likely to involve issues that go beyond simple arithmetic comparison. The same is true when comparing periodical payment schemes that vary significantly in terms of the timing as well as the amounts of the payments. So we do not consider that Part 36 offers are appropriate for periodical payments.
Instead, we propose that in cases where periodical payments are offered or awarded, the provisions of Rule 44.3(4) should be applied when deciding whether an admissible offer was unreasonably rejected, leading to cost sanctions. Rules or a Practice Direction could clarify what constituted an 'admissible offer' in these cases and the factors the judge might take into consideration.
| Do you agree that this is the best approach? |
Tax
This section discusses how personal injury compensation is treated for assessing liability for tax.
Where compensation for personal injury is paid as a lump sum, that sum is not liable to income tax and is exempt from capital gains tax. If the capital sum is then invested to provide an income, that income will be liable to income tax in the normal way.
Where a claim or action for damages for personal injury is settled by agreement on terms where the damages are to consist wholly or partly of periodical payments then those payments are exempt from income tax. The same applies where a court makes an order awarding damages for personal injury which provides for the damages to consist wholly or partly of periodical payments.
It is not necessary for the periodical payments to be paid by the person liable for the damages. The commonest arrangement is for an annuity to be purchased for the absolute benefit of the claimant by the person liable for the damages or by their insurer. If the court order, agreement or a subsequent agreement provides for the use of an annuity, the annuity payments will be exempt from tax in the same way as direct periodical payments by the defendant.
The exemption from tax is personal to the claimant and does not continue beyond his or her death. This is relevant where an annuity provides for payments to continue for a guaranteed minimum number of years. The exemption from tax does apply to a 'with profits' annuity provided that annuity is specified in the order, agreement or subsequent agreement.
We do not propose to change the current position under which periodical payments for personal injury are calculated and paid tax free. This is simpler than calculating an award that allows for tax and then taxing it. It provides tax benefits for defendants while remaining neutral for claimants (see Annex A). It also means that the value of periodical payments will not be affected by any subsequent changes in tax rates or allowances.
Benefits
Personal injury compensation also affects eligibility for social security and other benefits. The relevant rules can be complex and various factors can impact on their effect. An overview of the principal current provisions is at Annex D. We consider that the treatment should, so far as practicable, be the same or equivalent for compensation in the forms of lump sums and periodical payments. In particular it would be undesirable if the system created benefit incentives to argue for a lump sum where periodical payments would otherwise be more appropriate.
| Do you consider that any of the current relevant regulations create inappropriate incentives or other anomalies and if so, what are they and how could they be remedied? |
Assignment of Periodical Payments
This section considers the possibility that claimants might create a capital sum by borrowing against their future income under an order; and in particular, whether claimants should be allowed to assign periodical payments ordered by the court. Factoring, where claimants sell their right to receive future payments under an annuity in return for a discounted lump sum, has raised concerns in the USA (see Annex C).
Borrowing can add some flexibility to how claimants use their money, particularly when their circumstances change. Claimants receiving periodical payments for loss of earnings should, like anyone else, be able to borrow against their future income. This could be helpful, for example, if at some later stage the claimant wished to raise capital to start a small business.
Factoring can raise a different consideration. If claimants sell the right to receive some or all of their payments to a factor, they may not receive the level of financial advice that they would during litigation. So there is a risk that they will receive significantly less than the true current value of their award. This in turn would mean claimants not receiving the level of care intended and possibly falling back on the State for both benefits and care due to the money running out. Selling the periodical payments in return for a lump sum could also be seen as undermining the court's intention in making the periodical payment order.
Factoring of structured settlements has not been an issue in this country to date. This might be because the market is not large enough, or because at present periodical payment orders are only made by consent. This may change if the courts are given power to order periodical payments. We consider that banning the assignment of periodical payments ordered by the court would reduce the scope for major abuse. Unscrupulous lenders are less likely to attempt to exploit claimants if they cannot obtain good legal title to the future payments. As an alternative, consideration could be given to regulating the lenders, for example, by requiring independent financial advice about the current value of an award.
| Do you agree that it would desirable to prevent or regulate the factoring of structured awards? If so, is the best approach to bar claimants from assigning periodical payments? If not, how should this issue be tackled? |
Review
This section considers whether it should be possible to seek an order changing the level of the periodical payments. Lump sums are ordered once and for all. The purpose of periodical payments is to reflect more accurately the actual needs that will arise. But they can only do this to a certain extent if they too are fixed once and for all. However, a system for reviewing periodical payments would raise a number of difficult issues. The majority of responses to the previous consultation paper on this subject were opposed to periodical payments being reviewable.
In considering the scope for review, we recognise the wide range of concerns expressed on the issue. In particular:
reviews could impose an excessive burden in terms of additional legal, expert and court costs, particularly if claimants were free to apply for a review for any reason and at any time;
reviews could be used to attempt to re-open issues already determined at trial or settlement and to raise new issues of causation;
claimants do not wish to continue an adversarial relationship with defendants - they want a clean break;
equally, defendants and insurers want to close their books - they do not want the continuing liability that reviews would create;
reviews would probably be asymmetrical in that most would be initiated by claimants. Most defendants would not have the resources to keep track of the changing circumstances of claimants; and
claimants would nevertheless fear being spied on by defendants, creating a disincentive to recovery.
For these reasons, we do not consider that there should be an unrestricted right of review. Nor do we consider that regular reviews, for example every five years, should be timetabled as a matter of course into the original order. They would introduce uncertainty and incur preparatory costs and stress, often for no purpose. However, we consider there is some merit in the argument that there should be some scope for review in exceptional circumstances if periodical payments are to achieve their aim of meeting the claimant's needs more accurately and less rigidly than a lump sum. There are various considerations that need to be taken into account.
Flexibility of non-reviewable periodical payments
An award of periodical payments, even if it is not reviewable, will remove the most significant uncertainty of all - that of life expectancy. Periodical payments can also be structured in a flexible way to provide for circumstances that can be foreseen, for example large sums to provide for the purchase of special equipment from time to time. Provision can be made for payments to increase (or decrease) at certain times, for example at the age of 18. And indexing can make allowance for the effects of inflation under the various heads of damage.
Provisional Damages
In addition, the current system of provisional damages already provides some flexibility. This applies "for personal injuries in which there is proved or admitted to be a chance that at some definite or indefinite time in the future the injured person will, as the result of the act or omission which gave rise to the cause of action, develop some serious disease or suffer some serious deterioration in his physical or mental condition" (Section 3 of the Damages Act 1996). Any claim for provisional damages must be included in the particulars of claim. The court can exercise its discretion to award provisional damages where it can be demonstrated that there is a chance of serious deterioration in the claimant's physical condition. Case law has established that the risk needs to be clear and severable - there has to be some clear-cut event which, if it occurs, triggers entitlement to further compensation. The order for an award of provisional damages will specify, inter alia, the disease or type of deterioration in respect of which an application may be made, by the injured person, at a future date. We consider that the system of provisional and further damages should be retained. And we propose that provisional and further damages awards could in future be made in the form of periodical payments rather than a lump sum.
The system of provisional damages already provides for a form of review. Any review procedure for periodical payments could subsume cases where provisional damages would currently be awarded. The court could make a periodical payments order, but build into that order permission to apply for a review if the identified deterioration occurred. This would also allow an order to be made at the defendant's request or at the court's discretion, rather than limiting it to claimants only as at present.
Foreseen ongoing medical changes
Provisional damages cannot currently be awarded where there is ordinary continuing deterioration from a degenerative condition. Where this type of deterioration can be both foreseen and quantified at the outset, final orders for lump sums or structured settlements can already take account of this. An order for periodical payments would equally be able to provide for different levels of payment over time to allow for this.
But it will not always be possible to assess the degree and speed of deterioration at the time the order for periodical payments is made. In these circumstances we consider it could be appropriate for the judge to consider whether to include in the original order provision for a review at some future date, when a new order could be made if the deterioration had proved significant. We recognise that this approach might raise concerns for both parties. However, any review would be limited to cases where the court was satisfied at the time of the original order that there was a real chance that the condition caused by the accident was likely to deteriorate. The order could specify the nature of the ongoing deterioration identified. The process would be controlled by the court, which would be able to take into account the views of both parties before making any order that included a provision for review. A review would avoid the need to build into the original award a contingency payment that might be considerably too much or too little, so causing injustice to one of the parties.
We consider that where there is a right to review for a foreseeable chance of medical deterioration, the same rights should exist for medical improvement.
Unforeseen medical changes
We have considered whether significant but unforeseen medical deterioration (or improvement) should also provide grounds for the review of an order for periodical payments. It is our view that this would introduce an unacceptably high level of uncertainty and potential costs for both parties. With the passage of time it would become increasingly difficult to establish a causal link to the original injury. So a review would be likely to re-open issues of causation. We consider that the disadvantages of providing for review in these circumstances are likely to outweigh any benefits.
Other changes
There remains the issue of changes in care needs caused, not by changes in medical condition, but by other changes in the claimant's circumstances. Many potential changes can be identified at the time of making the original order, for example the possible death of a carer. Where the cost of change is predictable, it can be built into the original order as a contingency. But there may be factors which make accurate prediction difficult. One approach to protecting claimants from the possibility of a change of circumstances is to base the original award on the full cost of accommodation and private nursing care to ensure there will always be sufficient funds. But the result is that the defendant has to pay additional compensation for something that might never be needed.
We consider, therefore, that the court should have discretion to build into the order a review where there is a significant and foreseeable change in life circumstances, but where the quantum and/or timing is not easily assessable at the time of making the original order.
But there may also be some significant changes in care needs that cannot be foreseen. One way of allowing for this possibility would be to order that a proportion of future losses be paid as a lump sum to provide a form of 'contingency fund'. But a significant contingency fund would have the same disadvantages, albeit on a smaller scale, as a full lump sum award. A further flexibility could be provided if the claimant was able to commute future income into capital for immediate use and so save long term costs, for example, to purchase some new piece of equipment that would reduce future nursing needs. These options add some valuable flexibility, but they are not suitable for large changes in care needs.
We therefore suggest that there might be circumstances where there should be limited scope for either party to apply for review in unforeseen and exceptional life-changing circumstances.
Applications for review
To sum up, we suggest that the court should have power to provide for a review in the original order where there is a chance of significant changes in the claimant's needs that can be foreseen and specified. Settlements could make similar provisions. We also suggest that either party should be able to apply for a review where there has been a significant change in the claimant's needs caused by unforeseen changes in his or her circumstances, but not by changes in medical condition or treatment.
Where the court builds a review into the original order it might provide:
for an automatic review at a certain time, tied to a date or an event (for example, the death of a carer, attaining the age of 18);
for an automatic review at regular intervals where the prognosis is uncertain and it is too early to make a longer term order (for example, a child with cerebral palsy);
that either party can apply to the court for a review in certain circumstances, which could be closely defined in the order (for example, identifying the type of medical deterioration or improvement that it has been established can be foreseen and, where possible, the extent of change that might justify a review);
the conditions under which a review could be brought (for example, whether any expert's report was required and what it should cover, whether the parties should first attempt to mediate or reach agreement, or whether permission should be sought (see following paragraph)).
To ensure that the system for review is not abused and costs are kept to a minimum, we propose that there should be a paper application seeking permission for a review in the first instance (except where the original order provides that permission is unnecessary). This would act as a filter to weed out frivolous, mischievous or misjudged applications. Both parties would then have the right to request an oral hearing if they disagreed with the decision on paper. The savings to be made by having an initial determination on paper would largely depend upon how often parties were willing to accept that initial decision. However, we consider that once precedents have been set, including the appropriate use of cost orders where applications were renewed unwisely, a permission filter of this sort would be helpful in ensuring that most applications for review would be made in appropriate cases only. Where permission was granted, the judge could give case management directions as to the conduct of the review. We consider that a Practice Direction could assist in providing guidance on the circumstances which a court would find compelling in agreeing to a review.
| Do you agree that it should be possible to award provisional and further damages by way of periodical payments? Do you agree that orders for periodical payments should be open to review only:
If not, should there be more or less reviewability and in what circumstances? Should there be a paper application for permission to review (except where the original order provides that permission is unnecessary), with the right to an oral hearing if either party objects to the decision on paper? If not, how should applications for review be dealt with? |
Overview
Courts in this country may order an award for damages to be paid in the form of a lump sum. But an order for periodical payments can be made only with the consent of the parties. This Consultation Paper proposes that legislation be introduced to give courts an additional power which would allow them to impose an order for periodical payments without needing the consent of the parties. We consider that it is generally preferable for claimants to receive periodical payments instead of a lump sum in most cases where significant damages are awarded for future care costs and loss of earnings. This form of payment will ensure that the risks and costs associated with life expectancy and investment are borne by the defendant or an insurer, who should be better placed to manage them. With a lump sum, those risks fall on the individual claimant.
The Consultation Paper also considers whether an order for periodical payments should be reviewable in certain circumstances, the security and funding of a periodical payments order and the impact of various regulations relating to tax and eligibility for benefits.
This partial impact assessment attempts to identify in general terms the principal costs and benefits arising from the proposed reforms, and seeks information to help estimate the scale of those impacts. The responses to this consultation will inform a full regulatory impact assessment, which Ministers will consider when deciding the way forward and which will then be published.
The overall effect of reform will be that many large settlements and awards, which would now be agreed or ordered as a lump sum, will in future take the form, in whole or large part, of periodical payments. It will be impossible to predict how extensively the courts would exercise a power to order periodical payments rather than lump sums. But we will attempt to estimate the total value of larger lump sum awards for future loss in order to illustrate the maximum potential scale of the impacts of this reform.
Who will be affected?
Giving the courts the power to award periodical payments in cases for personal injury will have implications for:
How will they be affected?
The cost and benefit implications for those affected will primarily be influenced by the following factors:
We consider that the implications of other issues considered in this Consultation Paper will be of relatively little significance or almost impossible to assess. These include:
We also propose to assume that that there will be either no, or only marginal, overall effect on:
the number and success rate of claims (although there might be, at least initially, more appeals on the issue of form of payment);
the proportion and timing of settlements v hearings (most cases that need to go to trial involve substantive issues about liability, causation or quantum. It is difficult to assess whether the existence of a power to order periodical payments will lead to more or fewer cases that cannot settle solely because the parties disagree about the form of payment);
the underlying quantum (this will be assessed as now; but our proposals will eliminate the subsequent complex adjustment required to calculate lump sums or for structured settlements using the so-called top-down approach (see paragraphs 28-32 above); and
the legal and experts' costs of substantive cases (although there might be some savings in the use of financial advice). Additional costs are likely to be incurred on review.
| Do you agree with the assumptions in paragraphs 6-8 about the material factors for assessing the overall impact of these proposals? If not, what other factors should be considered and how could these be quantified? |
For those factors which we consider have more significant implications, the likely impacts are set out below.
a) Life Expectancy of Claimants
The life expectancy of claimants is built into the calculation of lump sums awarded by the court. Lump sums either over or under compensate due to the difficulties in predicting life expectancy accurately. The relevant potential costs and benefits of the greater use of periodical payments are:
claimants will benefit from the certainty that they will receive the amount ordered for the remainder of their life (or as otherwise ordered). There will be no fear of the money running out, which can result in their not receiving the level of care or quality of life intended;
periodical payments will provide compensation based on actual life, so will cost more than a lump sum in some cases and less in others. These effects will tend to balance out if the distribution of life expectancy matches predictions. Where the payments are self-funded by defendants, including the NHS Litigation Authority (NHSLA) or general insurers, they will bear these costs and benefit from these savings. Where the payments are funded by an annuity, any costs and savings will fall on the life office;
if claimants die sooner than expected, their heirs will not receive a 'windfall' payment, including care costs that are no longer needed;
claimants in receipt of periodical payments should not need to fall back on State benefits if they live longer then expected.
b) Reviewability of awards
This Consultation Paper proposes that it should be possible to review a periodical payments order in certain limited circumstances. The potential costs and benefits of a review are that:
it allows provision to be made for significant changes in the claimant's medical condition and care needs. If a review results in an increased order there will be an additional cost to defendants or their insurers; a reduced order will cost less (although it is recognised that this will be less common). There may also be savings to the taxpayer if reviews make it less likely that claimants will require State benefits or care;
it saves having to build contingencies into awards to allow for events which might never happen and to avoid the possibility of under-compensation. Insofar as awards do this now, the effect should be to produce savings for defendants and their insurers;
insurers cannot close their books, which may increase administrative costs (in addition to any costs arising where reviews lead to increased orders);
additional legal costs and court time (although limiting reviews to specific circumstances, with a Practice Direction setting out clear guidelines, the use of a permission stage and costs sanctions should deter unjustified claims, so limiting the scope for incurring unnecessary costs and wasting court time). These costs will fall on both claimants and defendants.
c) Investment costs and returns
Many claimants are not equipped to handle vast sums of money. An order for periodical payments will transfer the costs and risk of investment from claimants to defendants or their insurers, who should be better placed to handle risk and will have considerably more expertise than a claimant. The effect of this should be:
to reduce the overall administrative costs associated with the investments used to fund claimants' income stream. Individual claimants need detailed financial advice to invest and manage a lump sum award. We have been told that the cost of this advice accounts for about 3-5% of a typical large award. We would expect the insurance industry to be able to fund periodical payments with significantly lower average expenditure on financial expertise, investment transaction costs and other administrative expenses, with consequential savings for defendants and their insurers;
where periodical payments are funded by an annuity, to produce costs or savings for defendants and their insurers arising from the difference between the price of the annuity and the amount of an equivalent lump sum award. The overall effect will depend on the difference between the prescribed discount rate used to calculate lump sums and the average rate of return implied by annuity prices at any given time. But the difference between average annuity rates for index-linked annuities and the discount rate is unlikely to be substantial as they follow broadly similar (although not identical) principles, founded on low risk. The average annuity rate will vary with market conditions, and is likely to be higher than the discount rate at some times and lower at others. However, our proposal to allow defendant insurers, so far as possible, to choose how to fund periodical payments (see paragraphs 33-38 above), is intended to allow flexibility to adopt the most cost-effective approach to providing the required level of income for claimants;
to enable self funding defendants to spread payments over a number of years, providing improved cash flow and allowing more accurate budgeting.
d) Tax treatment
This Consultation Paper proposes that the tax treatment of personal injury compensation should remain as now. Lump sum payments are calculated on the basis that the lump sum will not be subject to capital gains tax, but that the earnings on it will be subject to income tax. Periodical payments are calculated and paid free of tax. If more awards are paid as periodical payments rather than lump sums, this means that:
the effect on claimants will be broadly neutral. Either way, the award will be calculated to produce a given level of income after or without tax;
defendants and their insurers will benefit because awards of periodical payments do not need to include provision for subsequent income tax. In principle, this saving would be offset in part by an additional liability for corporation tax.
| Do you agree with the analysis in paragraphs 9(a)-(d)? Are there any other material costs and benefits that should be considered? Are any of the impacts described misconceived or likely to be insignificant? |
Risk Assessment
If the courts are not given the power to impose a system of periodical payments, successful claimants will continue to be over or under compensated; they will also continue to carry the risks of life expectancy and investment.
Small Business
Where small businesses or charitable organisations take out insurance (for example, employers' liability insurance or motor insurance) the proposals may lead to changes in insurance premiums, depending on the overall impact on the insurance industry.
Data and Questions to inform the full Regulatory Impact Assessment
In order to estimate the scale of the overall impact of the proposals, we will require data on the number and size of significant awards of damages for future loss. There is no comprehensive source of information on this. We will consider various published data, for example Judicial Statistics, legal aid statistics and academic research analysing samples of personal injury cases, and also data from the NHSLA and the Court of Protection.
| Can you suggest any other data we should consider? |
We will also need to make an assumption about the level of award below which periodical payments are unlikely to be a worthwhile option. At present, the NHSLA automatically considers a structured settlement for all cases worth more than £250,000.
| Is £250,000 an appropriate cut-off point for the purpose of this assessment? If not, what should the figure be? |
It would also be helpful if respondents could supply views or information about the following questions:
| (a) to what extent is life expectancy assumed in lump sum awards either over or under estimated? |
| (b) how many large awards are currently settled using a form of periodical payment, and what proportion of the future losses in these awards is structured? |
| (c) in how many cases are provisional damages awarded, and what proportion of other cases might entail a foreseeable chance of significant medical deterioration or improvement? |
| (d) what proportion of cases is likely to involve an unforeseeable change in the claimant's circumstances leading to a significant change in their care requirements? |
| (e) on average, what proportion of a large lump sum award is intended to pay for financial advice? |
| (f) what is the average administrative cost to the insurance industry of purchasing and providing annuities to fund structured settlements? |
The Consultation Paper The Discount Rate and Alternatives to Lump Sum Payments was published in March 2000. It was divided into two sections. The first twelve questions dealt with the discount rate. A summary and analysis of responses can be found on the Lord Chancellor's Department website www.lcd.gov.uk. The final eight questions dealt with alternatives to lump sum payments. We received eighty-four responses in total. A summary of responses to the second part of this paper is below.
Question 13
Should courts be given powers to impose structured settlements, even when both parties do not consent?
The responses to this question showed a small majority against a power to impose. 38 responses answered 'no', (although some felt that it might be acceptable in certain circumstances). 32 responses answered 'yes', again including some qualified responses, where respondents felt that the power should only be available in certain circumstances.
The major concern of those who answered 'no' was that the claimant should have the freedom to choose how they receive their damages, as an able-bodied person has choice over control of their finances. Some felt that this could be overcome by giving the courts the power to order a structure without the consent of the defendant but not against the wishes of the claimant. Other concerns were the need for a clean break between the parties and that the structured settlement market is not mature enough at present.
It should be noted that amongst those who answered 'no' to this question there was a lot of support for the courts having the power to question why a structure has not been agreed in cases requiring court approval (i.e. cases involving minors and the mentally incapable).
Those in favour of the power argued that a 'bottom up' structured settlement would overcome the problems associated with lump sums whilst a 'top down' approach would not. Other arguments in favour included that such a power avoids risk of dissipation and overcomes the problem of defendants refusing to agree a structured settlement unless the claimant agrees to a discount.
Question 14
Should the court have power to order non-reviewable periodic payments (other than structured settlements), even when both parties do not consent?
This produced a similar response to question 13 with a small majority against and with the same arguments generally being advanced. A number of responses suggested that it was not clear what the Consultation Paper had in mind when it referred to periodical payments other than structured settlements, while others suggested that it was not a helpful distinction. A number of responses that were in favour of the imposition of structured settlements opposed it for other periodical payments. Among the reasons for this difference were concerns that the preferential tax treatment would not apply and that defendants would continue to have responsibility for payments and would not be able to discharge their liability. It was also suggested that the benefits of periodical payments other than structured settlements were not clear.
Question 15
Should the court have power to order reviewable periodic payments? If so, should such orders require the consent of both parties?
A substantial majority of responses were opposed to this. Prominent arguments included the desire of both sides for a clean-break, problems for insurers and reinsurers if they could never close their books, increased legal costs and use of court time, and disincentives for claimants to improve their position. There were also concerns that in practice the power would only be used one way, in claimants' favour. The main argument advanced in favour of reviewable periodical payments was that they represented the only true way of meeting changes in claimants' needs, and thereby avoiding under or over-compensation. A number of those in favour accepted that there would be a need for restrictions on when a review would be appropriate and a need for incentives not to abuse the process.
Question 16
Should the possibility of lump sum awards be retained, for some or all heads of damage? If so, for which heads of damage would lump sum awards, and periodic payments, be applicable?
There was no objection to lump sums continuing to be available for past losses and pain, suffering and loss of amenity. Among those in favour of some form of periodical payments there was general agreement that they were suitable for costs of care and related expenses, but there was no clear view on whether future loss of earnings and pension rights were more suited to a lump sum or periodical payments. Other comments on this question included the suggestion that even where periodical payments were to be made on certain heads of damage, part of the award should be paid as a lump sum to create a 'contingency fund'.
Question 17
What comments do consultants wish to make about tax and inflation provisions which periodic payments might attract?
The widely supported view on tax was that all periodical payments should be free of tax in the same way as income from structured settlements is at present. There was disagreement over whether the law provides for this at the moment.
There was agreement that inflation proofing was necessary but disagreement over the appropriate index. A number of responses took the view that the traditional link to the RPI was not appropriate for loss of earnings or costs of care as both could be shown to increase at a higher level. But there was no consensus on the appropriate index for each. Among those in favour of maintaining the link with the RPI, it was suggested that the use of different indices would be too complicated. It was pointed out that the Court of Appeal made its decision on general damages in Heil v Rankin (2001) PIQR by reference to the RPI. It was also pointed out that payments from annuities were linked to the RPI because matching requirements mean that Life Companies have to secure the payments with investment in index-linked gilts.
Question 18
If periodic payments are to be available, how should the court be satisfied as to the defendant's financial means, and the security of the payments in the future?
While there was a range of answers to this question security was a concern in all cases except those where a defendant was backed by a Government department. In such cases security is provided by section 5 of the Damages Act 1996 and the NHS (Residual Liabilities) Act 1996. Several responses pointed to the fact that 100% security for structured settlements was provided by the Policyholders Protection Act 1975. Some gave this as a reason for limiting any new powers to structured settlements; others said that the protection should be extended to other periodical payments.
Question 19
Should periodic payments be restricted to personal injury and death claims? If not, in which other types of claims should they be available?
Among those who expressed an opinion on this question, there is no clear consensus one way or the other. Questions were raised on whether it would be appropriate for the heads of damage that arise in other types of claims to be dealt with by way of periodical payments.
Question 20
What other issues do respondents believe should be taken into account in reaching a conclusion on these questions?
This question drew a wide range of responses, including comments on the use of Part 36 offers, the need for financial advice and insurance issues concerning the market place, types of annuities and self-funding. The responses did, however, make clear the high level of support for the wider use of structured settlements, even amongst those who believed that consent should continue to be required.
Several respondents to the previous consultation suggested that, before implementing a system of periodical payments orders in the UK, consideration should be given to the experiences of other countries. This Annex summarises the information we have obtained about the position in the USA, Canada, Australia and the EU. The details for the countries of the European Union reflect responses to our enquiries received in late 2001 from the Ministry of Justice in each country.
USA
Structured settlements were first recognised in Federal law in the USA in 1982 when a tax break was introduced for payments from an annuity funding a structured settlement. In most States, the courts do not have power to impose structured payments on claimants or defendants. Courts in a few States do have that power. In California, for example, the court has the power to order structured payments in all cases where the future damages exceed $50,000.
Structured settlements have proved popular in the USA, with particularly rapid growth over the last two years despite low interest rates. The total value of premiums paid for annuities to fund structured settlements in 2000 was $6 billion, a 25% increase on 1999. The figures for 2001 are expected to show a further increase of about 20%.
There has also been substantial debate in the last few years about the issue of factoring. The factoring market grew rapidly in the late 1990s leading to the formation of a National Association of Settlement Purchasers (NASP). The NASP argued that the ability to factor all or part of the future payments under an annuity added a valuable element of flexibility, particularly where the claimant's circumstances changed unexpectedly. Opposition to factoring has been led by the National Structured Settlement Trade Association (NSSTA). They argued that factors often bought the annuity for substantially less than its current market value, sometimes as little as 40-50%. This was often possible because claimants did not understand that the capital value of their annuity had increased significantly due to falling interest rates. Although many annuity contracts contained non-assignment clauses, there were doubts about whether these were legally enforceable, and claimants were able to evade them in practice by directing payments to a PO Box address belonging to the factor. The NSSTA was also concerned that insurers faced a tax-reporting requirement once the annuity was assigned to a third party, and that they might face a double liability if a claimant accepted a lump sum from the factor but failed to re-direct the periodical payments.
Starting with Illinois in 1997, a number of States have enacted consumer protection to control factoring. In April 2001, the NSAP and NSSTA reached an agreement about regulating the situation on the basis of legislation at both State and Federal level. The model State legislation provides for disclosure by the factoring company of all costs, discount rates and fees, and requires that a court must find the transaction "in the best interests of the claimant". As of December 2001, 30 states had passed laws of this nature, with more pending. The Federal legislation, currently before Congress, provides for a 40% excise tax on deals that do not comply with State model laws. There will be an 18 month grace period before this takes effect to allow other States time to pass the necessary legislation.
Canada
In Canada, the courts have power to impose structured payments in Ontario, Manitoba, Saskatchewan, Quebec (in respect of minors only), and British Columbia (in respect of motor accident cases). In Ontario, there is a statutory presumption in favour of periodical payments, but this is often rebutted in practice. In other Provinces, structured payments require the consent of the parties.
Payments under a structured settlement can be tax free. To attract the tax break, the annuity must be purchased and owned by the liability insurer; the annuity must be non-assignable, non-commutable and non-transferable; and the insurer must make an irrevocable direction to the life office to make all payments direct to the claimant. The purpose of this direction is to give the claimant priority over other creditors in the event of the liability insurer's insolvency. But a further effect has been to prevent the spread of factoring to Canada, because a lender cannot access the payments that are irrevocably directed to the claimant.
Australia
In Australia, a Structured Settlement Group has been campaigning for the acceptance and tax exemption of structured settlements by the Australian Government. In June 1999 a formal proposal for tax-free structures as an alternative compensation package for accident victims was put to the Commonwealth Government. In September 2001 the Government announced that it would introduce legislation designed to encourage the use of structured settlements. No further details are currently available.
EU Systems
Austria
A structured settlement system has evolved in Austria, mostly out of case law rather than legislation. In general, courts will initially look to the defendant and claimant to agree a form of payment. Where this is not possible, the court will make a ruling, but agreement between the parties can take place at any time including after a court ruling.
For claims against future loss of income, where the size of the future loss is quantifiable, a monthly payment is usually agreed. Where the loss is not easily quantifiable, a lump sum payment may be agreed. A claimant can also ask the court to make the defendant liable for future losses, as and when they arise, for a period of up to thirty years.
It is possible to go back to the court to seek a review of an order. Reviews are rarely requested in practice because awards are usually indexed. Agreements to settle often include a clause to prevent future changes. Litigation would be required to force the terms of such agreements to be reopened.
Awards made in respect of loss of income are not tax-free, but the defendant is liable to pay the tax and any social security payments that arise. For awards in respect of personal suffering, there is no tax liability.
Belgium
One-off lump sum payments are the norm for damages in personal injury cases. There is no legal reason why structured settlements could not be awarded if both parties agreed, but the Ministry was unaware of any recent cases where this had happened. Compensation payments are tax-free.
Denmark
In general, damages payments for personal injuries claims in Denmark are made as a lump sum.
The exception to this rule is for industrial injuries, where the loss of earnings element of the damages is generally paid on a monthly basis. However, if the injury is assessed to have reduced the victim's earning capacity by less than 50%, the monthly payments will automatically be converted into an equivalent lump sum paid up front without any requirement for the recipient's consent. Where earning capacity has been reduced by more than 50%, the victim may request that a fixed proportion of the damages be converted into a lump sum. The other party (who will always be covered by employers' insurance) has no say in how the payments are made.
The level of payments can be reviewed at any time within a five year period from the assessment of the damages. This limit can be extended by agreement before it runs out and, where the circumstances require, ignored entirely.
Lump sum payments are not taxed. Monthly payments for industrial injuries are treated as normal income for tax purposes.
Finland
At present the Finnish legal system states that a person is entitled to compensation for medical costs, loss of income and disability as the result of an injury. The compensation can take the form of a one-off lump sum payment or a structured settlement. In practice, almost all settlements are made as a lump sum payment. Periodical payments are sometimes awarded if a person has permanent loss of income and needs long-term medical care.
The Finnish courts have the power to decide on the method of payment in personal injury cases. The parties do not have to agree to periodical payments for the court to order them. However, in many cases the parties agree on the level and form of compensation without going to court.
The Finnish tort system does not currently allow for reviews of awards. Any payment to cover medical costs and adaptations and special equipment is tax-free. However, a person is taxed on compensation to cover loss of income.
In December 2001, an inter-ministerial working group published a report recommending changes to the compensation system for personal injuries in Finland. In particular it recommended that there should be clear guidelines on the method of payment to give in different types of personal injury cases.
France
In France the court is responsible for fixing the amount of damages for personal injury cases, taking into account (although not necessarily following) what the victim claims. In cases involving accidents at work, the social security authorities are responsible for fixing the amount of damages to be awarded.
Payments of personal injury compensation can be made in a lump sum, or in a series of payments. The court decides which method of payment is suitable, and the decision does not necessarily reflect the wishes of the claimant (although their preference would be known). This decision can be appealed in a higher court.
Lump sum payments are not subject to any tax; but periodical payments can, in certain cases, be subject to income tax.
Germany
In German law, the general rule is that personal injury compensation is paid through "structured payments". The German Civil Code provides:
"(1) If, in consequence of injury to the body or health, the earning capacity of the injured party is destroyed or impaired, or there is an increase in his needs, compensation shall be made to the injured party by payment of an annuity.
(3) Instead of the annuity the injured party may demand a settlement in a lump sum, if a serious cause exists."
A serious cause may exist, for example, if the injured person needs the lump sum to start a small business.
Parties are free to agree on a lump sum in an out-of-court settlement. In practice they often do so.
It is possible to review the periodical payments at a later date if the circumstances so require.
The general rule is that payments for loss of earnings are taxed, but there are some exceptions.
Greece
The Greek system only allows for damages to be paid in a single lump sum. Lump sums are paid tax-free.
Holland
The court has the power to order payment of a lump sum or periodical payments for future losses. It can also order, in the latter case, that financial security has to be provided. There are several methods to provide for periodical payments including an annuity. These methods can have different fiscal consequences. The choice is at the discretion of the court. The parties do not have to agree to periodical payments for the court to be able to order them. The court can rule, at the request of one of the parties, that the periodical payments can be revised at a later date if the circumstances so require. A request for review has to be brought before the court which decided the original claim for compensation (not necessarily the same judge).
In most cases income tax has to be paid on periodical payments. So most claimants prefer a lump sum payment.
Ireland
Ireland has no system for structured personal injury payments. All settlements and awards are paid in a lump sum. In exceptional circumstances (e.g. compensation for haemophiliacs given infected blood transfusions) structured settlements have been used, but this required one-off legislation.
Italy
The position in Italy is that damages in personal injury cases are routinely paid as a lump sum payment ordered by the judge. Damages can only be paid in periodical payments if the injured party has requested the payments to be made in such a manner.
Luxembourg
The courts have the power to order either a lump sum or periodical payments, although lump sums are favoured. Both lump sums and periodical payments can be reviewed. The claimant receives the settlement tax-free.
Portugal
The Portuguese system allows for damages to be paid in periodical payments. In both civil and criminal processes claimants may be entitled to compensation, which can be either a one-off lump sum or structured payments.
Either party can call for a review where there is a significant change of circumstances. There is no tax liability on income from compensation payments arising from insurance contracts or court decisions. There are exceptions: for example, if the compensation payment is to cover future loss of earnings.
Spain
The Spanish system allows for damages to be paid as lump sums or periodical payments. The court has the power to order either system of payment. Neither of the parties has to agree to the system of payment. The court decides on the basis of the ability of the defendant to pay and the needs of the claimant. The payments are subject to tax.
Sweden
For future loss of income, the Swedish system not only allows for, but favours, the use of structured or periodical payments rather than a lump sum. No payments are offered to cover health care costs because this is presumed to be provided by the State (although there are some exceptions). Periodical payments are the norm, and the court has the power to order that form of payment. Parties do not have to agree to periodical payments. Rather, they both have to agree if a lump sum arrangement is to be used, after which court authorisation is required.
Where compensation for loss of income or other financial support is provided under a life annuity, it can be increased or reduced if the conditions that determined the compensation have changed considerably. If the compensation was paid in a lump sum, supplementary compensation may be awarded to the person suffering the loss.
Summary of EU systems
| Power to order periodical payments | Review of periodical payments | Is Compensation Taxed? | |
|---|---|---|---|
| Germany |  Courts will only award periodical payments. Many opt to settle for lump sums |
|
Payments for loss of earnings are taxed |
| Sweden | Lump sums require the consent of both parties and the court |
|
Payments for loss of earnings are taxed |
| Luxembourg | |
|
Settlements are tax-free |
| Portugal | |
|
Payments for loss of earnings are taxed; those for care costs are tax free |
| Austria | |
|
Payments for loss of earnings are taxed; those for personal suffering are tax-free |
| France | |
? | Lump sums are tax free. Periodical payments can be subject to income tax |
| Holland | |
|
Most periodical payments are subject to income tax |
| Spain | |
? | Payments are taxed. |
| Denmark | For loss of earnings in industrial injury cases only |
Within 5 years of judgment |
Lump sums are tax free; monthly payments for industrial injuries are subject to income tax |
| Finland | |
 |
Payments for loss of earnings are taxed; those for care costs are tax free |
| Italy | () Only at claimant's request |
? | Periodical payments are tax free |
| Belgium | Both parties must agree |
|
Compensation is tax free |
| Ireland | No system for periodical payments |
|
Lump sums are tax free |
| Greece | No system for periodical payments |
|
Lump sums are tax free |
Benefits
This section summarises the treatment of damages for personal injury when assessing eligibility for means-tested benefits (Income Support, income-based Jobseekers' Allowance, Housing Benefit and Council Tax Benefit) and tax credits (Working Families' Tax Credit and Disabled Person's Tax Credit). The relevant rules can be found in the Income Support (General) Regulations 1987.
Generally, personal injury damages are taken into account when assessing eligibility for benefits. This applies to capital received as a lump sum, to income earned on that capital, and to income in the form of periodical payments (including income from annuities funding a structured settlement). But the capital value of an annuity is disregarded.
The main exception is where the lump sum award is paid into a trust. The capital in the trust will be disregarded. Treatment of the income paid out of the trust depends on the nature of the trust.
Where the award is held in a 'discretionary' trust (i.e. payments are made at the trustee's discretion rather than as of right), income is treated as a voluntary payment. As a voluntary payment, if the income is specifically intended and used for something other than normal living expenses, the money will be fully disregarded; if not, up to the first £20 per week will be disregarded. (The regulations specify a list of items that constitute normal living expenses, including food, fuel, housing costs etc).
If payments are made at the trustee's discretion to a third party, they can still be disregarded if used for items other than normal living expenses. This disregard would cover, for example, payments to a nurse or paid carer.
Where the award is held in a non-discretionary trust (a 'Bare Trust'), a beneficiary has the right to direct how the money is to be used. Payments are therefore not made entirely at the trustee's discretion, so cannot be viewed as voluntary payments. The income paid out of the trust fund would therefore be taken fully into account when calculating entitlement to benefits.
Local authority accommodation
Local authorities have powers to provide residential accommodation and associated services to those who, by reason of illness, disability or any other circumstance, are in need of care and attention which is not otherwise available to them. This may very well include those who have suffered injury where compensation is payable. Authorities are required to recover all or some of the costs of accommodation and associated services if the individual can afford to pay. A person's ability to pay is determined under the National Assistance (Assessment of Resources) Regulations 1992. The Regulations are detailed but the general scheme is as follows.
Generally, capital above £18,500 is taken into account in determining a person's ability to pay. So too is income above the sum required for personal requirements prescribed in the Regulations. Capital