Are your current liability limits high enough to protect your business?
You may have read stories in the press about a change to the Discount Rate, often referred to as the Ogden rate.
The discount rate is applied to lump-sum payments made by insurance companies to claimants following injuries sustained in motor accidents, accidents suffered at work or on another’s premises. The discount rate is used to calculate the figure by which the total award can be reduced to take into account the effect of the interest earned on the lump sum payment over the time it is intended to be used for.
On 27th February 2017, the Lord Chancellor announced a cut in the discount rate, moving it from +2.5% to -0.75%.
What does this mean?
The old system assumed that a claimant would expect to invest their money at an average 2.5% rate of return /interest over the period it was needed and so generate an increase in the value of the overall amount over time. The new rate assumes the claimant will actually invest at a loss and so the amount awarded needs to be even higher than the figure the court thinks the claimant actually needs.
Whilst it is absolutely right that claimants receive a fair settlement of claims following an injury, the decision to change the discount rate so dramatically has big implications on future claims settlement figures. This change will apply to all claims settled on or after 20th March 2017, regardless of when the loss occurred.
What are the implications?
Whilst the change in rate doesn’t appear to be that big, when it is applied to the sorts of sums awarded to claims involving life changing injuries it makes a considerable difference. The real life example below clearly demonstrates the impact.
A 29 year old male construction worker suffered a significant head injury which required brain surgery and needs 24/7 care. The cost of this care is estimated at £150,000 per annum for the rest of his life.
Based on a typical life expectancy, the old Discount Rate of +2.5 per cent generated a total potential payment of £7,500,000 to cover the costs of his future care and expenses. Using the new discount rate of -0.75 per cent significantly increases this figure to £14,500,000 – which is almost double the amount generated under the old Discount Rate!
Using this example, if the insured was only covered for £10,000,000 under their liability insurance, their business would have been responsible for the shortfall of £4,500,000, rendering most SME businesses bankrupt.
| Potential payment before | Potential payment after |
|
£7,500,00 +2.5% |
£14,500,000 +0.75% |
*Milessmith Guide to the discount rate change
How does this affect my business?
The Ogden rate cut will affect business in two distinct ways.
The first and most immediate effect is that insurers have to increase their premiums to ensure they have adequate reserves to meet these new higher claim amounts. You may have already seen this on fleet and car insurance premiums.
Secondly, firms will now have to re look at the limits of indemnity that they buy to ensure that they still have enough cover to meet these new awards.
Looking at the example above, it is clear that one serious injury claim from an employee or member of the public who subsequently requires long term future care could easily wipe out a £10,000,000 liability indemnity limit.
This means that where a £10,000,000 limit of indemnity for Employers Liability or a £5,000,000 limit for Public Liability may have once looked perfectly adequate, in light of this new ruling these limits might not be enough and in the event that a court awards a higher amount your company would be expected to fund the shortfall.
What should I do?
We recommend that you contact us today to discuss your current limits of indemnity. We can work with you, looking carefully at your business risks and liabilities and help you calculate limits of cover that you are comfortable with. Higher limits of Indemnity are not nearly as expensive as you might imagine, but they could make the all the difference.
For advice and peace of mind contact us today on 0208 669 0991
