Periodical payments offer injured claimants assurances that their long-term care will be paid for. Yet controversy is looming over how compensation is worked out, reports Jon Robins

It is only a matter of months into the new regime of periodical payments, and commentators are likening the growing antagonism between defendant and claimant camps to the costs war that quickly engulfed the profession when recoverability was introduced into the conditional fees scheme a few years ago.


Since April, courts have had the power to order that damages for future pecuniary losses are wholly or partly in the form of periodical payments, rather than as a lump sum as previously. The court has no power to make such orders for past loss or damages for pain, suffering and loss of amenity. In every case, the courts are directed that they ‘shall consider whether to make’ a periodical payment order (PPO) under the Damages Act 1996 and they also have the power to impose such an order even if parties do not agree. In most cases where such an order is made, it will accompany a lump sum for pain, suffering, loss of amenity and past loss.


The fault line between the two camps has emerged over how payments should keep up with inflation. A test case is already in the pipeline and expected to appear in the courts in October over whether payments should be linked to the retail price index (RPI) or another such index.


‘As far as we are concerned, the whole philosophy of PPOs is to achieve a better method of compensation that more wholly meets the needs of injured people. If the actual needs of injured people are going to escalate at rates in excess of RPI, then tying rates to the index represents under-compensation,’ argues Allan Gore QC, president of the Association of Personal Injury Lawyers (APIL).


‘It brings about a situation where the compensation will be inadequate to provide for assessed needs and the inadequacy will escalate with time because that shortfall will grow greater with each successive year.’


The indexation issue will be the subject of litigation and the chances are the case will go straight to the Court of Appeal, the silk predicts. Grahame Codd, a brain and spinal injury specialist with national law firm Irwin Mitchell, argues that problems will arise if annual payments under PPOs are indexed to the RPI (around 2.5% per annum) whereas in reality care costs are likely to increase at a higher rate every year (around 4-4.5% per annum). ‘That’s a significant shortfall which, over the years, will eat away at any other capital the claimant may have set aside for other essential needs, or reduce his ability to pay for his care support,’ he says.


Michael Hardman, a defendant insurance lawyer at the Liverpool office of Berrymans Lace Mawer and a member of the Forum of Insurance Lawyers, is mindful of the ‘costs debacle’ over conditional fees, which occurred on the back of what was in principle a good idea. ‘I hope that we aren’t going down the same route,’ he says. ‘I’m afraid to say that I’m not confident.’


Unsurprisingly, the lawyer is not persuaded by the claimant argument. ‘I understand where they are coming from, but what they are doing is picking on one head of damages and saying because care costs have increased faster than RPI, therefore they are bound to do so in future,’ he counters. ‘If we are going to run that argument, then a lot more research and investigation needs to be carried out before proposing putting another approach in tablets of stone.’


Multipliers for lump sums are assessed on RPI as well, so this is ‘an illusory concern in relation to comparisons’, argues Andrew Ritchie, a barrister at 9 Gough Square in London, who is also on the APIL executive.


Mr Hardman says research has not been done properly to analyse the reason for the historical differential between RPI and costs of care. ‘The indexes being suggested include NHS pay rates for management and administration grades, which I suspect have increased a lot faster than those for the people who do the caring,’ he adds.


One of the main advantages of periodical payments over the traditional lump sum is the guarantee that payments for the claimant’s future needs will continue for the whole of his life. Rosamund Rhodes-Kemp, head of clinical negligence at London firm Bolt Burdon Kemp, says one benefit for certain claimants, such as brain-injured clients, is that the statistical evidence about life expectancy is ‘almost certainly out of date’ and they are likely to outlive estimates. Consequently, such an order is ‘great for securing their payment for care for the rest of their lives’.


Ms Rhodes-Kemp was one of the first lawyers to take a case successfully to court under the new system when she secured up to £4.5 million in staggered payments for a baby who suffered from cerebral palsy as a result of lack of oxygen at birth.


Yet she has reservations about the regime and, in particular, how inflation could undermine provision for care. How did she advise her client? ‘We were very torn,’ she says. The baby’s life expectancy was considered to be 25 years by the defendants. ‘We suspected he would live to his mid-40s, or even into his 50s,’ she says. ‘In the end, we negotiated quite high annual fees to buttress against indexation.’


In another recent case (Walton v Calderdale Healthcare NHS Trust [2005] EWHC 1053 (QB)), the High Court ordered the defendant to pay £50,548 a year on account of the claimant’s future care costs. The claimant was 19 years’ old with a life expectancy of about 70 years, and a financial adviser was concerned about the risk that a conventional lump sum would run out.


Mr Gore has advised on ten cases where PPOs have been considered. He reckons that the courts have yet to impose an order on reluctant parties. ‘But Lord Justice Dyson has on a public platform suggested that the perspective of the judiciary in higher-value cases involving future loss is that PPOs will become routine,’ the silk continues. ‘So they are clearly popular with both the judiciary and government.’


The arrival of periodical payments has revived interests in other arrangements. The structured settlement market has been ‘stimulated by the introduction of periodical payments’, reports Mr Codd. In particular he points to big players from North America, AIG and Canada Life, who are new entrants into the personal injury annuities market in the UK. ‘From a tactical point of view, there is now this extra feature in negotiations. There are risks of litigation on both sides, as before, but insurers don’t want PPOs imposed on them,’ he says. ‘The cost of providing an income stream indexed to RPI, or any other index, is likely to be higher than the cost of buying off the claim on a conventional lump sum basis. So the prospect of a PPO concentrates minds on looking at alternative solutions, in particular structured settlements.’


For defendant insurers, the open-ended nature of periodical payments is a problem. They work well for public-sector entities which do not have ‘problems with regard to security for payments because they don’t have to reserve and their budgets are year-on-year revenue’, says Mr Hardman.


Under the Damages Act, the court needs only be satisfied that the continuity of funding is ‘reasonably secure’. He continues: ‘They work well for government bodies – and that is why they have been brought in – but the government could have been more helpful to others such as insurers over the question of funding.’ At the moment, he says, only a small number of financial products are capable of meeting the payments likely to be ordered.


Critics argue that the new regime was motivated more by providing a politically expedient fix for ministers than providing a better deal for the injured. ‘It can’t have been a coincidence that we have periodical payments coming at a time when the government is anxious to show that compensation levels aren’t getting out of hand,’ comments Ms Rhodes-Kemp. ‘With a quick wave of the wand, they appear to reduce the compensation paid out.’


Jon Robins is a freelance journalist