The majority of personal injury claims are settled in the way of a lump sum to the injured party. However, where large sums of money are recovered in damages, it may be worthwhile for the parties’ representatives to consider a structured settlement, especially where the purpose of such damages is to cover long-term future care costs.
A structured settlement is an agreement between the pursuer and the insurer acting on behalf of the defender, whereby at least part of the damages are paid to the pursuer by means of a continuing series of regular payments to the injured person, the intention for the payments to be for the rest of the pursuer’s life.
Currently, Section 2 of the Damages Act 1996 allows the Court to be award damages in the form of a structured settlement only if the parties agree. However, in the rest of the UK the Courts have the power to impose a periodical payment without the parties’ consent. In considering this, the Scottish Government, following consultation, have announced its intention for the Scottish Courts to be provided with the power to impose without consent in order to put them in line with the rest of the UK.
The Lump Sum Payment
The lump sum payment is the traditional route taken by the parties on settlement of a personal injury claim. The idea behind the lump sum is for the injured party to invest the sum at a set rate of return, which in theory will enable them to purchase the necessary care equipment and maintain their required care needs.
Although the theory behind the lump sum is sound, the practicalities of its application are not as straightforward. The rate of return, set by the Lord Chancellor in 2001, is set at 2.5%. This has not been updated in the meantime and therefore has not adapted to changes in economic circumstances. Furthermore, the calculation relies on predictions of the injured party’s life expectancy. Life expectancy in itself is an unpredictable and forever changing factor. There may be a risk of under-compensation as a compromise due the issue of life expectancy. Advances in medicine and differing opinions of experts make it difficult to quantify the amount required for future care.
Additionally, the common lump sum provision can disadvantage the injured party in respect that the management, risk and cost of investing the lump sum falls to them. Unfortunately such costs are not recoverable as a head of claim and there is further concern with regard to tax. It should be noted that although the lump sum itself is not taxable, the investment income would be.
The Structured Settlement
Although structured settlement are rarely used in Scotland, they are deemed to be beneficial for personal injury claims where the injuries are so severe that a significant amount of the sum sued for is for the future costs of care, equipment and potential therapies.
The benefits of Structured Settlement
Unlike with the lump sum, the periodical payments would be tax free. Immediately the Pursuer is alleviated from the risk of investing the lump sum. The damages due to them are guaranteed to last them until the end of their life. Also, as an aside, it helps to protect those individuals who may find themselves in a vulnerable position with regard to the monitoring of the lump sum. The additional stress may be detrimental to the injured party. The burden of maintaining the payments falls on to the defender, or more accurately the insurer acting on behalf of the defender.
However, there are some disadvantages which must be addressed with regard to structured settlements:-
- It may be possible for the insurers to seek a discount on the lump payable in order to purchase and maintain the annuity.
- The periodical payments will only last for the lifetime of the pursuer. This may be altered depending on the terms of the agreement where a guaranteed minimum payment has been agreed upon. Nonetheless, if the pursuer dies before all payments have been made, the remaining sums due will no longer be payable and thus they will not fall into the victim’s estate on their death.
- There is also a risk of security with regard to maintaining of the periodical payments. In England, the Damages Act ensures that the Court is unable to make an order for a periodical payment unless it has been satisfied that the continuity of the payments are reasonable secure. This is not yet the case in Scotland, where the pursuer is instead required to satisfy the court and themselves of the security of the payments by taking the advice of an independent expert.
As of yet, the Structured Settlement remains rare in Personal Injury claims in Scotland. However they can be advantageous in certain circumstances. It is necessary to consider the facts of each individual case a weigh up the pros and cons of the possible distribution of damages in order to ensure the outcome is in your best interest, particularly in regard to future care. At present the Courts in Scotland cannot enforce such an arrangement without the agreement of the parties, however, this is likely to change in the near future and thus the implications of such must be considered.
Please note that this article is for general information only. Nothing in this article should be taken as legal advice.
Contact our Personal Injury Solicitors, Glasgow
Should you require any further information with regard to Damages in a Personal Injury Claim, contact our litigation team on 0141 221 1919.