Medical multiples

A ground-breaking judgment was made last year in the Irish High Court, which, if left unchallenged, substantially raises the value of catastrophic injury claims under Irish jurisdiction.

The decision in McEneaney v Monaghan County Council and Coillte Teoranta is of enormous significance to many in the insurance industry, particularly insurers and their reinsurers. The judgment has had an inflationary effect on three distinct headings of claim, namely general damages, the discount rate and future medical costs.

The case is being appealed, but sources say the judgment is unlikely to be overturned and insurers are being urged not to proceed with the appeal.

Ideally the insurance industry should co-operate and strive towards achieving the pre-McEneaney discount rate of 4%.

In reality, it may have to accept a compromise of 3.5% or thereabouts. Indeed, the argument for increasing the discount rate is somewhat assisted by the relatively low level of inflation experienced and anticipated in Ireland.

On the future medical expenses issues, efforts will have to be made to move the discount rate back to a positive rate of at least 2.5%. The McEneaney judgment has, with one fell swoop, resulted in a major uplift in insurers' reserves. This had the obvious knock-on effect on reinsurers, already reeling from the events of 11 September. However, we can take comfort from the fact that the McEneaney judgment would, in all likelihood, have been more favourable to insurers had the defendants introduced their own independent experts to rebut the plaintiff's evidence.

The case involved a car accident in which the 21-year-old driver, Brendan McEneaney, suffered injuries that left him paraplegic.

Mr Justice O'Sullivan assessed the damages and awarded McEneaney a total of ¤3.03m (£1.85m). The judgment relating to future medical expenses has the most far-reaching consequences for insurers.

Future care
It was said that the cost of medical care had, for many years, been running at a rate of inflation far higher than the consumer price index. It was contended, therefore, that a multiplier that might be considered sufficient when applying to one's future loss of earnings did not adequately apply in respect of future medical care.

In support of this contention the court heard evidence that the state-owned Voluntary Health Insurance company (VHI) had raised premiums by 6% in the year 2000 and 9% in 2001, specifically due to the increased cost of providing healthcare.

In assessing the cost of future medical care the appropriate yield on the investment of a lump sum should be considered -0.5%. This substantially increased the applicable multipliers as shown in the table.

In explaining the discount rate let us first consider a rather simplistic scenario. If a 45-year-old man was rendered paraplegic and thus unable to work to normal retirement age of 65 years, the appropriate multiplier (ie, the capital value of each E1 (61p) per week loss of earnings) to compensate him for his earnings loss would be 20 years x 52 weeks, that is, E1,040 (£635). However, such a multiplier does not take account of anticipated salary increases and the recipient could increase his ultimate yield through investment of the lump sum.

To address these points the courts have assumed a discount rate to apply when assessing the capitalisation of future

losses. In effect the lower the discount rate the higher the multiplier. For many years the courts have heard conflicting arguments from economists as to the determination of a discount rate. In the 1980s, the discount rate moved to 4% and effectively remained in place until the McEneaney decision, when Justice O'Sullivan accepted the evidence of McEneaney's economists and reduced the discount rate to 2.5%.

The effect of the reduced discount rate has been to substantially increase the multiplier to be utilised when assessing future losses

These figures reveal the very substantial increase in future losses that insurers are now facing (See box left and below).

In the event of a Supreme Court decision in McEneaney's favour, insurers will be faced with the impossible task of renegotiating these discount rates at future High Court hearings. There is anecdotal evidence that Justice O'Sullivan has already indicated from the bench that he does not feel bound by the 2.5% discount rate, in the event that he is presented with contrary expert evidence. n

Peter Haran is managing director at Garwyn Ireland Ltd, Dublin