Structured settlements: worth a look?

This article is written with the benefit of recent personal experience of settling a case by way of a structured settlement. It explores the current legal position relative to structured settlements, the types of case that are suitable for structured settlement and the practical steps that require to be taken.

The majority of personal injury claims are settled by way of payment of a lump sum to the injured party. However, there are occasions where a structured settlement may be more appropriate. A structured settlement is an agreement whereby at least part of the damages is paid to the pursuer by means of a continuing series of regular payments to the injured person, often for the rest of his or her life.

Section 2 of the Damages Act 1996, as it applies to Scotland, empowers a court, without prejudice to any other powers, to award damages in the form of a structured settlement, provided that the parties consent. In Scotland, unlike in England, the court at present has no power to impose periodical payments on the parties, and therefore both parties must agree to settlement by way of periodical payments. However, the power to impose periodical payments may not be far off. Following consultation, the Scottish Government has announced its intention to put the Scottish courts on the same footing as the rest of the UK by introducing powers to impose an order for periodical payments without the parties' consent.

When should they be used?

Periodical payments are generally only appropriate in personal injury claims where the injuries are severe and where a substantial component of the sum sued for relates to future costs such as care, equipment needs and therapies. In addition they are only appropriate where the defender can guarantee the security of periodical payments.

The theory behind the more traditional lump sum settlement is that the pursuer should receive a sum that, if invested at a set rate of return, will be sufficient to enable them to purchase the care and equipment they will need for the remainder of their life. In theory, by the end of the pursuer’s life, the lump sum and the interest derived therefrom will be exhausted.

The lump sum calculation is based on a rate of return set by the Lord Chancellor at 2.5%, which is now outdated and fails to reflect significant changes in economic circumstances since that rate was set in 2001. The calculation is also dependent on predictions of the individual’s life expectancy. Life expectancy experts often disagree, and there may be a difference of many years between each expert's calculations. Further, life expectancy tables are regularly revised, and medical advances mean that the trend for life expectancy is generally upwards, even for the severely disabled.

Inevitably, settlements involve compromise on life expectancy, which, from the pursuer’s perspective, can result in a substantial risk of undercompensation.

A further disadvantage of the lump sum method is that the pursuer bears all of the risk associated with the investment of the lump sum, and will also incur professional fees and administrative costs associated with managing the investment of a lump sum. At present, these fund management costs are not recoverable as a head of claim. Finally, tax is paid on the investment income, although not on the lump sum itself.

There are several advantages of periodical payments from the pursuer’s perspective. The instalments are tax-free. The pursuer will have a guaranteed income, usually until the end of their life. They need not worry about the risks involved in investing the damages to guarantee that their future care costs can be met. Effectively, the burden is shifted to the defenders to ensure the payments are made.

Case study

I had the opportunity to experience how structured settlements are dealt with in practice when Digby Brown was instructed by the parents of a child with cerebral palsy as a result of clinical negligence at birth. Liability was admitted. The defenders were an NHS trust. All the medical evidence confirmed that the child would require 24-hour care for the remainder of his life, and from the age of seven would require two carers to provide this. However, his life expectancy was uncertain. It was clear from an early stage that this was likely to be an appropriate case for periodical payments.

As periodical payments are relatively rare in Scotland and more common south of the border, we instructed an independent financial adviser based in England with expertise in periodical payment agreements, to provide our clients with a report confirming the advantages and disadvantages of a lump sum settlement compared to periodical payments.

The expert was provided with our schedule of damages, confirming our valuation based on the traditional multiplier/multiplicand approach. He carried out cash flow modelling which confirmed that even if we obtained the maximum level of damages possible and if this were invested in low to medium risk investments, the lump sum would be exhausted approximately nine years prior to the child’s expected demise.

Not surprisingly, our clients instructed us to seek settlement which provided that the future costs were paid as guaranteed periodical payments rather than the riskier lump sum award.

Fortunately the defenders were amenable to settlement by way of periodical payments. Agreement was reached on the basis of a smaller lump sum which incorporated heads of loss such as solatium, accommodation costs and loss of earnings, and a periodical payment agreement for future care costs, equipment and therapy costs.

Both pre- and post-settlement there has been a significant amount of additional work to be done in relation to the drafting of the periodical payment agreement. The case of D’s Parent and Guardian v Greater Glasgow & Clyde Health Board [2011] CSOH 99; 2011 SLT 1137; 2012 SCLR 124 is instructive in this regard and in relation to periodical payments in general. Attached to the judgment is a style agreement and style joint minute that can be adapted to your client’s particular circumstances.

Bear in mind at this point that it is essential to obtain full advice from an IFA and a taxation expert with experience of periodical payment agreements. Rules on taxation vary from year to year and it is essential to verify the current treatment of periodical payments with a tax expert.

How to index?

It is necessary to link the periodical payments to an appropriate index to prevent payments being eroded by inflation. The case of Thompstone v Tameside and Glossop Acute Services NHS Trust [2008] 1 WLR 2207 provides authority that future care costs should be linked to wages inflation, specifically carers’ wages inflation, as opposed to the retail price index.

The most widely accepted method of indexation for care costs is to increase these in line with the ONS Annual Survey for Hours and Earnings (ASHE) for the occupational group of “care assistants and home carers” (ASHE 6115). This is the index approved in the Thompstone judgment. However, be aware that current thinking is that this is a volatile index and there may be other more appropriate indices for care costs. Comparison of indices show that in fact, in the period since the Thompstone case was decided, pursuers south of the border would have been better off if their care costs had been linked to the RPI as opposed to ASHE 6115, due to a decline in carers’ earnings. This may reflect a short term dip rather than a long-term trend, but it underlines the necessity of obtaining specific advice from a financial expert on this point, prior to agreeing the indexation of payments.

A further point to bear in mind is whether the full periodical payment should be linked to ASHE or whether, due to the heads of loss included in the periodical payment, it may be more appropriate to split off part of the payment such as future equipment costs and link this to the RPI. Again advice will be required from your expert on this point.

From the pursuer’s perspective it is vital to ensure the inclusion of a “ratchet clause” in the agreement. This is a clause which means that the annual payments cannot be reduced, for example by wages deflation. There is provision for a ratchet clause in the style agreement appended to D’s Trustees v Greater Glasgow & Clyde Health Board. Our advisers tell us this type of clause is not typically found in English PPO agreements.

Security of payments

Claimants' advisers must be satisfied that the periodical payments will be secure for the claimant’s lifetime. Under s 2(3) of the Damages Act 1996 as amended for England & Wales and Northern Ireland, the court “cannot make an order for periodical payment unless satisfied that the continuity of the payments under the order is reasonably secure”. This includes where the source of the payment is a government or health service body. However that provision does not apply in Scotland. It is therefore necessary to satisfy yourself and the court on this point by taking advice from your experts.

A warning for advisers

As mentioned at the outset of this article, the Scottish Government has announced its intention to put Scottish courts on the same footing as their counterparts in England & Wales and Northern Ireland, by providing them with powers to impose an order for periodical payments without the consent of the parties. In the meantime, a word of warning from Lord Stewart in D's Parent and Guardian to those advising claimants: “Lawyers who fail to address the merits of compensation by periodical payments could now be liable in professional negligence for resulting losses.”