Discount rate difference could lead to claim 'forum shopping'

Out-Law Analysis | 08 Oct 2019 | 12:01 pm | 1 min. read

The UK government actuary has recommended that the personal injury discount rate in Scotland remain at minus 0.75%, lower than the minus 0.25% currently applicable in England and Wales.

It is likely that the Scottish government will accept this recommendation, meaning that there will be a divergence of 0.5% in the discount rate applied by the courts in Scotland and in England, according to litigation expert Bruce Craig of Pinsent Masons, the law firm behind Out-Law.

"The effect of Scotland having a lower discount rate means that Scottish claimants in otherwise identical circumstances will receive higher compensation payments for future loss than in England," said Craig. "This may result in claimants raising court proceedings in Scotland rather than in England if they can."

Craig Bruce

Bruce Craig

Partner

Differences in damages can result in 'forum shopping', where a claimant seeks to obtain jurisdiction in a court where higher damages are payable.

"Differences in damages can result in 'forum shopping', where a claimant seeks to obtain jurisdiction in a court where higher damages are payable. This is bad news for insurers but good news for claimants who, depending on the particular circumstances of their case, may be able to choose which jurisdiction in which to sue," he said.

The discount rate is a percentage applied by the courts to lump sum compensation awards, in order to ensure that the actual amount received by the individual reflects the return they can expect to earn if they had invested the payment. A rate of 0.25% below the retail prices index (RPI), up from minus 0.75%, has applied in England and Wales since 5 August 2019.

The previous minus 0.75% discount rate, down from 2.5%, came into force on 20 March 2017 in England and Wales and 28 March 2017 in Scotland. The change was the first since 2001 and was criticised by the insurance industry, which said that it reflected a flawed method for setting the rate and ultimately over-compensated payments. Both the Scottish and UK governments later passed legislation amending the way in which the rate is set, and requiring more regular reviews.

In Scotland, the Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019 introduced a new methodology for calculating the discount rate from April this year which incorporates the cost of obtaining tax and investment advice and the risk of investment underperformance. The rate is now based on the recommendations of the UK government actuary rather than the Scottish ministers, although the courts are free to apply an alternative rate in individual cases if "more appropriate in the circumstances".