A review of lump sums and periodical payment orders
The ongoing consultation from the Law Reform Commission of Hong Kong (LRC) is considering whether reform is needed to give court’s the power to make periodical payment orders (PPOs) for future costs in personal injury cases. The LRC’s primary concern is whether, by way of legislation, the court should be given the power to make PPOs. There are however wider concerns as to whether PPOs are the answer to the problems with lump sums, and we should be mindful of lessons learned in other jurisdictions.
Pros and cons of lump sums and PPOs
In Hong Kong, the court can currently only compel parties to settle personal injury cases by way of a ‘lump sum’. As a result, claimants are left to invest and spend as they choose over the remainder of their life, and the amount awarded is not susceptible to further reviews.
Lump sums offer a finality to litigation and allows claimants the freedom to spend and invest as they choose. However, the lump sum approach is not without its failings, and has been criticised for being too imprecise. It cannot accurately reflect future events, such as the actual death of a claimant, deterioration or improvement of a condition, or changes to the economy. These uncertainties often result in the award being too high or too low. Furthermore, there is always the risk that the claimant will run out of money.
One option to address these concerns is to introduce PPOs. They are already used in several jurisdictions and require the compensator to make regular payments over the remainder of a claimant’s life. Whilst there are many reasons to recommend PPOs, they are not without problems.
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Pros of PPOs |
Cons of PPOs |
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Removes need for courts to predict uncertainties |
A lump sum brings finality of the proceedings |
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Index link compensation awards |
It could be a financial straitjacket if there is an underestimation |
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Provides secure, steady income stream |
A lump sum more easily meets accommodation needs i.e. a property purchase |
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PPOs provide a closer match between the damages and actual expenditure |
A lump sum gives autonomy to spend on personal needs or preferences |
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Removes investment return risks |
Guarantee arrangements are so far only available in respect of employees’ compensation and motor insurance |
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No windfall to the estate |
There may be extra administrative costs over the lifetime of the PPO |
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Faster resolution of disputes where there is contested life expectancy |
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protection against risks of dissipation of the award by family members |
The UK experience
In the UK, parties can choose whether to settle by way of lump sum payment or a PPO. The court also has the power to impose a PPO on the parties. In practice PPOs are rarely used, with claimants and defendants generally favouring lump sums in the majority of lower value claims. PPOs are however ‘the norm’ for all very high value NHS claims (i.e. claims against the public sector hospitals, akin to the Hospital Authority in Hong Kong), particularly those cases involving such tragedies as brain damaged children, where future losses are high and issues such as life expectancy cannot easily be determined. Interestingly, PPOs are not as widely used by other compensators in clinical negligence or personal injury claims.
Effective from March 2017 the discount rate in the UK was reduced from 2.5% to -0.75%. This has had a dramatic increase in the value of future losses where settlements are by way of lump sum award. We had expected, for example, a reduction in PPOs in NHS cases with claimants wanting to take advantage of the significant increase in the size of a lump sum award. This has not materialised and financial advisors are still advising claimants pursuing claims against the NHS to settle by way of PPO, primarily due to the tax free benefits (see commentary below regarding taxation on compensation awards in Hong Kong) and the certainty of annual payments for the whole of a claimants life, particularly where a claimant has a life expectancy to age 70 and is settling a claim at age 10. Whilst the UK has a low discount rate claimants (apart from those pursuing a claim against the NHS) are unlikely to want to settle claims by way of PPO. The methodology for determining the appropriate discount rate in England is currently under review.
It is positive to see that the LRC are alive to this issue and are seeking comments on the mechanism that should be adopted for the formulation of the discount rate.
Next steps
The LRC’s sub-committee will be accepting comments on the consultation paper until 24 August 2018. There is currently no fixed timetable for the next stages, but due to the complex considerations that apply, we expect it will take some time. Looking at previous consultations we can foresee years before any possible changes are made.
Comment
We anticipate insurers being cautious about the introduction of PPOs. However, it seems in practice where the option for a PPO is voluntary, there is little uptake. There are clear benefits to PPOs in the right cases, and provided there are adequate protections in place for both claimants and defendants. Being voluntary would certainly be the preferred option, allowing parties to choose whether a lump sum or a PPO is in their best interests.
In terms of incentives for claimants to prefer a PPO, it is worth noting that the taxation situation is different in Hong Kong, where unlike the UK there is no capital gains tax and no dividend tax imposed on income generated by investment. Compensation awarded in Hong Kong, be it a lump sum or PPO, as well as income generated from the invested compensation, will be tax free, so we expect injured parties in Hong Kong will continue to prefer a lump sum.
From a healthcare perspective, lack of compulsory insurance, or pool of funds to protect claiming parties, is a concern that the government would need to address so as to protect claimants against risks of compensators going bankrupt or indemnity providers going into administration.
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