A record £13.7m in compensation following a motor claim - could you be next?

The record £13.7m compensation payment to Guernsey cyclist Manny Helmot has sent a shiver down the collective spine of Britain’s insurance industry. Tradex, the insurer on the wrong end of the historic judgment, has not ruled out launching an appeal, and despite mounting interest charges, remains, at the time of writing, locked in talks with its legal advisers.

But while Tradex licks its wounds and mulls over its options, the rest of the industry is digesting the ruling and coming to terms with the possible consequences of the unprecedented award.

From initial fears that the Helmot ruling could open the floodgates to higher compensation payouts here, the general consensus among insurers and most lawyers is that the ruling is ‘Guernsey-specific’ and unlikely to be applied in the UK.

That said, it is clear that the precedent set by the ruling will be argued in UK courts as relevant in all compensation cases. It will also increase pressure on the UK government to review and revise the current guidelines for calculating compensation payouts, which if successful will cost the UK insurance industry hundreds of millions of pounds.

Manny Helmot, a former Commonwealth Games cyclist, was left permanently injured after he was hit head-on by a car while training in 1998. The driver of the car, Dylan Simon, was convicted of dangerous driving and banned. Helmot, who spent 36 months in hospital, lost the use of his right arm, was rendered partially blind and suffered brain injuries that ended his cycling career.

He will never be able to work, drive or ride a bicycle, and requires 24-hour care. His mother, Rose Helmot, was forced to give up work to look after him and has had to convert her home in Guernsey to meet his needs.

The record payout followed an earlier award of £9.3m in January, which Helmot’s lawyers appealed on the basis that the sum was not enough to cover his long-term care.

Tradex and its reinsurers had launched a counter appeal to reduce that award but, as we now know, the court rejected their argument and increased the initial award by almost 50%, to reflect the amount Helmot and his family will need to spend on care over his lifetime and to take into consideration his loss of earnings.

Guernsey judge clipped 1% off UK rate

In Guernsey, only a lump sum award can be made in this type of case. There is no scope to award periodical payments, which are used for personal injury claims in the UK and are designed to make the amount of compensation awarded match more closely the amount required for care.

At the heart of the legal argument in this case was the level of the so-called discount rate, the assumed rate of return on an investment, on which courts base compensation awards.

Under the terms of the 1996 Damages Act, the Lord Chancellor (the Justice Minister in Scotland) has the power to fix the discount rate for lump sum damages cases in the UK. The discount rate has been set at 2.5% since 2000.

Guernsey, as a separate legal jurisdiction, is not bound by the Lord Chancellor’s rate, and so Judge Jonathan Sumption QC, the judge in the Helmot case, was able to effectively set his own much lower discount rate of minus 1.5 per cent.

By doing so Judge Sumption was, on the face of it, convinced by the argument that the current discount rate is out of date.

Legal precedent calls for compensation awards to be high enough to enable recipients to invest in risk-free investments, such as index-linked gilts (government securities). Since the credit crunch, rates for gilts have tumbled, and against a backdrop of record low interest rates, rates of return on other types of safe investments, such as savings accounts, are even lower. Consequently, pressure has increased for the discount rate to be amended.

But will this ruling set a precedent leading to a lower discount rate and larger compensation awards? Gordon Dawes, partner with Mourant Ozannes, the law firm that successfully represented Helmot, believes it will.

“The ruling will have a direct impact in any common law jurisdiction where you don’t have a Damages Act. Those jurisdictions will look to this ruling and follow it.

“In England, Scotland, Wales and Northern Ireland, the ruling will be used to bring additional pressure on the Lord Chancellor and Scottish Justice Minister to amend this rate, because it is palpably wrong and unsupportable. This judgment illustrates why.

“Jonathan Sumption is a highly respected jurist, and will be referred to in future personal injury damages cases.”

Stephensons Solicitors partner and head of litigation Andrew Welch disagrees. “This ruling is very Guernsey-specific, and as such not binding on English, Welsh, Northern Irish or Scottish law.

“When the court adopted the multipliers and discount rates that it did in this case, it was taking into account the special economic conditions in Guernsey, where some costs, such as medical fees and general inflation, can be higher.

“The case could be used to argue that English law is behind the times now and needs to be revisited and brought in line with the decision in Guernsey, but that would require secondary legislation in this country. At the very least, it would need a decision by a very senior court, such as the Supreme Court. So I don’t think this ruling extends beyond Guernsey.”

AXA managing director of claims David Williams agrees with Welch, but warns that lawyers arguing compensation claims cases across Britain will use the Helmot ruling to urge judges to disregard the current discount rate.

“We need to be ready to respond to this, which is why it is important for insurers to take so much interest in this case, and be aware of the differences between general and wage inflation in the Channel Islands as opposed to on the mainland,” he says.

Government is biggest payer

It is worth pointing out that the level of the current discount rate, set when the economy was in considerably better shape than it is now, has been unsuccessfully challenged in the UK courts before. But more importantly, as Welch points out, any change in the current rate requires the consent of government.

Crucially, it is this last fact that is likely to minimise the impact of the Guernsey judgment. There is a rather obvious conflict of interest in that the government, through the National Health Service and Ministry of Defence, is the largest payer of compensation claims and also sets the rate on which these awards are based. You don’t have to be a cynic to realise the government has a vested interest in keeping the rate at its current level.

“Of course it is not in the government’s interest, especially now when money is so tight, to review the discount rate,” Dawes says. “It’s like asking the turkeys to vote for Christmas – they just aren’t going to do it. But the current rate of return is unjustifiable and should be reviewed.”

Another legal source adds: “There is absolutely no political driver to reduce the current discount rate. The Jackson Review is looking to reduce litigation costs. The last thing the government is going to do is introduce legislation to increase them because of a ruling in Guernsey.”

But if the impact of the Helmot case is minimal in terms of future claims cases in the UK, insurance premiums in Guernsey are likely to rise significantly following the ruling. As Tradex claims director Bob Still philosophically, and succinctly, puts it: “Well, there’s precious little reason for premiums to go the other way.”

Still’s assessment is shared by AXA’s Williams. “I would imagine all insurers will be looking carefully at their rating for Channel Islands risks. I would expect reinsurers to be asking specific questions about a company’s exposure in that regard as we go in to this year’s reinsurance renewal season.” IT