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LONDON-A landmark House of Lords ruling will increase court awards to accident victims and could mean a hike in rates for U.K. liability insurance.
The law lords ruled in three test cases on July 16 that courts, when deciding on the amount of damages to be awarded to bodily injury claimants, should not factor in potential future gains to be made by investing an award in the stock market.
Instead, the law lords agreed that courts should base potential interest on an award on projected returns from investing in low-risk index-linked government securities, which offer an average rate of return of 3%, according to the ruling. By contrast, investing in the stock market yields an estimated annual return of between 4% and 5%, the ruling stated.
The ruling, which has been welcomed by personal injury lawyers, will mean damage awards will increase substantially to reflect the lower investment returns over the life of a bodily injury victim.
The Assn. of British Insurers estimated that the ruling will mean an increase of 500 million pounds ($824 million) in bodily injury claims currently facing insurers. Hundreds of claims were on hold pending the House of Lords ruling.
As a result of the ruling, premiums for employers liability, professional indemnity and auto liability insurance are expected to rise substantially, the association added.
Actuarial and risk management consultant Tillinghast-Towers Perrin agreed that the ruling will cost liability insurers more money.
"The House of Lords judgment will have a significant effect on the personal injury insurance business, which will ultimately affect both insurers and their customers," said John Beck, a principal of the London-based consultant.
"We expect the judgment to result in increased premiums and to have a significant short-term impact on insurers' profitability, as they adjust their reserves to the new levels," said Mr. Beck.
A risk manager said the ruling may hit employers. "Insurance costs are likely to be affected by the House of Lords decision, and the insurance industry will no doubt look for innovative methods of financing compensation payments," said David Gamble, executive director for the Assn. of Insurance & Risk Managers.
"Plainly, the decision also highlights the importance of a comprehensive risk management strategy within organizations to reduce the number and scale of incidents which may lead to claims for compensation. Risk management plans and procedures will be reviewed and improved to ensure that they are loss sensitive, in light of this ruling," Mr. Gamble said.
The ruling also will impact the public sector significantly, warned David Forster, marketing manager for Zurich Municipal, the United Kingdom's leading insurer in the public sector. "This is likely to cost local government and the National Health Service millions of pounds," he said.
"Increases in insurance premiums will account for most of these costs. But there will also be more expensive claims, paid directly from public funds, up to the agreed excess (retention) levels at which insurance policies would pay out," Mr. Forster noted.
One party, the Nottingham-based Assn. of Personal Injury Lawyers, was pleased with the judgment. The group described the ruling as a "momentous step forward in the fight to ensure accident victims gain fair compensation for severe injuries."
Frances McCarthy, vp of APIL, said that "severely injured accident victims already face the future with great uncertainty, and APIL has always felt it is completely unjust that they should be expected to make adventurous investments with compensation awards that are designed to cover high expenses such as future loss of earnings and the costs of long-term care, often for the rest of their lives."
She added that the "ruling will have a significant impact on the lives of those people most severely injured through no fault of their own, who should now be able to invest their money in low- or risk-free schemes and face the future with some degree of confidence, without being penalized for their caution."
The three test cases involved a steel mill worker seriously injured when a hot steel bar pierced his skull at work, a handicapped boy injured because of treatment given to his mother before his birth, and a nurse injured in a car accident. All three victims had had their initial damage awards substantially reduced on appeal, when the Appeal Court judges had decided that the plaintiffs should not be placed in a special category different from ordinary investors and that the conventional discount of 4% to 5% for future investment earnings should be used when setting damage awards.
The Law Lords, however, overturned the Appeal Court's rulings. They supported the recommendations of the Law Commission-Britain's government-funded legal reform body-and a working party on damages headed by lawyer Sir Michael Ogden, which together recommended that basing discounts on investment in index-linked government securities, with return rates of 3%, was a more preferable, lower-risk option for accident victims.
As a result of the lords' ruling, steelworker Kelvin Page had his award increased by 186,000 pounds ($306,000) to 889,000 pounds ($1.5 million), 7-year-old James Thomas' award increased by 300,000 pounds ($494,000) to 1.3 million pounds ($2.1 million), and former nurse Thelma Wells' award increased by 108,000 pounds ($178,000) to 1.2 million pounds ($2.0 million).
Meanwhile, the ABI has pointed out that the government has the power to clarify the law. Under the Damages Act of 1996, the Lord Chancellor can set a discount rate for the courts to use. The ABI is urging the government to consult widely on the issue before setting any such rate.