Date:  16 March 2009

AN INTERESTING CREDIT CRUNCH DILEMMA

It has been reported that Great Britain is currently facing the worst recession or “depression” since the 1930s. Economic output dropped sharply in the fourth quarter of 2008, unemployment figures have risen to 1.97 million and the FTSE 100 has dropped over 2200 points since the start of the credit crunch in 2007. Further in the same month 63 years ago, that the Bank of England was Nationalised, the Bank announced a drop in the Base Rate to an all time record of 1%. The Bank has since announced a further 0.5 % decrease to a Base Rate of a mere 0.5%, and intends to inject £75 billion extra cash into the economy.

When Great Britain was in the grip of a recession previously for example in 1984, 1990 and 1997 interest rates were (on occasions) at all time record high of 15%, 14% and 7.5% respectively.

Where a litigant in an action for personal injuries, suffered as a result of an accident or disease, seeks damages, there is an award of general damages for the pain, suffering and loss of amenity resulting from the injury, together with claims for certain heads of pecuniary losses i.e. loss of earnings, nursing care costs, medical or travel expenses. If a litigant secures a judgment of the Court the standard rate of interest on general damages is fixed at 2% per annum in accordance with the House of Lords decision in Birkett –v- Hayes (1982) 1WLR 816, (1982 2 All ER 70). The appropriate rate of interest for pecuniary losses or special damages is recoverable according to the Court Funds Office special account rate.

The special account rate is paid to children and Court of Protection clients who have money invested in Court, and which pays a higher rate of interest. Historically the special account rate has produced a good rate of interest. Having in mind the recent base rate fall, it is unsurprising that on 1st February 2009 the Court Funds Office declared that the special account rate is to change from its 2002 level of 6% to a current rate of 3%. Such a rate remains favourable when compared with general bank and building society savings deposit rates currently available.

An award of interest on top of damages has long been accepted by litigants on both sides of the fence as making a considerable difference to the level of overall damages recovered by a party. It will however become immediately apparent that the current drop in the special account rate will have an impact on the amount of interest recovered by a litigant in a personal injury action. At the time of the recession in 1984 the special account rate stood at 12% compared with the 3% announced in February by the Court Funds Office. The drop in interest rate is likely to be beneficial to insurers, potentially, at the expense of claimants. From a defendant insurer’s perspective, it is difficult to argue against such a conclusion.

In an action involving significant past and future pecuniary losses (the latter of which does not attract any award of interest) it is to be hoped that the claimant secures appropriate financial advice both pre and post settlement as to how to invest his award thus protecting the damages against inflation, whilst at the same time preserving the fund for future needs. The recent case of Lee Carl Thompstone (a minor) –v- Tameside Hospital NHS Foundation Trus 2008 EWAC 2948 (QB)t has confirmed to litigants in a personal injury action a model periodical payments order for use in cases where a Claimant is to receive payments during his or her lifetime - on this occasion an award of future care expenses and losses. When returns on investments are so poor, a guaranteed, tax free lifetime income, may be particularly important to a Claimant. It is therefore to be anticipated that one impact of the credit crunch may be the increased use of a periodical payments order, thus ensuring that the Claimant’s fund is properly preserved for future needs.

Using data from the Labour Force Survey, a report by Nasima Begum of the Office of National Statistics entitled “Characteristics of the Short Term and Long Term Employed” established that disabled people have a higher unemployment rate than people with no disabilities. For example in Spring 2003 the unemployment rate for people with disabilities was 8.2% compared with 4.5% for people with no disabilities. Furthermore unemployed disabled people were more likely to be long term unemployed, than people with no disabilities (34% compared with 20% respectively).

In times of severe economic recession it is anticipated that the distinction between a ‘disabled’ and ‘non-disabled’ unemployed worker will polarize further. Accordingly whilst the low interest rate level has some moderate benefits for Insurers, conversely, a consequence of the economic downturn is that a disabled or semi-disabled litigant is likely to find it considerably more difficult to find work, and be out of work for a significantly lengthier period of time. Hence insurers may be paying loss of earnings awards for longer periods whilst the claimant attempts to seek new employment.

In light of the knowledge that partially disabled claimants may face longer periods of unemployment insurers may make increased use of rehabilitation methods to attempt to get the claimant back to work sooner. The use of rehabilitation is now enshrined in the Pre Action Protocol for Personal Injury actions pursuant to the Civil Procedure Rules. Where there is a clear case of negligence on the part of a defendant in an action, insurers have been willing to consider a rehabilitation assessment at an early stage in the case. Early rehabilitation, whether the claimant is fully or partially recovered from his injuries, has been shown to return a claimant to work earlier than otherwise would be the case.

The current economic climate will continue to affect many individuals, not least we suspect, a claimant in personal injury actions and the insurers who pay the claims on behalf of their insured.

Collette Bourne