Periodical Payments | Are there benefits over a lump sum settlement?

Andrew McBride, Consultant, in our Serious Injury team, in the first of his two-part blog on the subject of period payment orders, discusses their benefits over a lump sum settlement.

A seriously injured person may never return to work and may need lifelong care. On the basis of the traditional ‘’one bite of the cherry’’ approach, the seriously injured person will receive a one-off lump-sum and will have to make the best of that, no matter what happens. Right?

The short answer is ‘No’. Historically injured individuals received a one-off lump-sum payment. In the 19th century, a working man (or woman) would receive a few hundred pounds for the loss of a limb (if they were able to claim at all). Thankfully matters have developed since then and awards now for the most seriously injured can run into millions of pounds. Those awards are made up of many different areas (known as ‘’heads of loss’’) but awards for the cost of future care in particular can in, in the most serious cases, amount to several millions of pounds. The problem is how to ensure that these sums will continue to meet the costs of lifelong care. Those costs can increase substantially when wage inflation is high – as has been seen recently.

The solution was originally set out in the Damages Act 1996, as amended by later legislation and now contained in Part 41 of the Civil Procedure Rules and its practice direction. As part of a settlement an injured claimant can now receive, a yearly payment which increases by reference to a published yearly index of carers earnings. This is designed to ensure that the claimant will not run out of money and therefore run out of care. These yearly payments are referred to, by lawyers, as ‘periodical payments’ or PPOs ( Periodical Payment Orders).

For and Against

There are advantages and disadvantages to periodical payments and a careful decision is required at the time of settlement by reference to legal and financial advice – and the wishes of the injured individual.

The main advantages are that the yearly periodical payments:

1. will last as long as the claimant lives
2. are tax-free
3. will keep pace with wage inflation
4. remove the risk, time, trouble and cost of investing
5. provide some protection for vulnerable claimants – and many with serious injuries fall into that category.

There are however disadvantages:

1. there is an undoubted loss of flexibility and periodical payments may reduce the ability to meet a large or unexpected capital expense
2. they lack the certainty of a lump sum
3. a good investment strategy could outperform the index
4. if a lump sum is invested in a Personal Injury Trust, there is an absolute guarantee of statutory entitlement to benefit
5. finally periodical payments mean a continuing relationship of some kind with the culpable defendant

The final decision is one for the court which will take into account the scale of payments depending upon any contributory negligence, although the judge will also bear in mind, and can be expected to give considerable weight to, the preferences of both parties, including the nature of any financial advice received by the claimant.

Impact of Contributory Negligence

Where there is only a partial recovery because of fault on the part of the claimant – what lawyers call ‘contributory negligence’- this can pose a problem because the annual periodical payments, reduced by the contributory fault percentage, are unlikely to be able to meet the full yearly cost of care.

Things can start to get complicated, but there are solutions including:

1. using part of the lump sum award to make up any shortfall;
2. agreeing (or ordering) that the claim for future loss of earnings should also be met by way of future periodical payments; or
3. applying what is known as a ‘reverse indemnity’.

We will look at some of those aspects in more detail in my second blog (to follow).

Future-Proofing

The future continuity of payment must be reasonably secure and rules dictate how that is satisfied. There is power to vary a periodical payment order in the event of a serious deterioration or significant improvement. One example of deterioration might be a situation in which a claimant’s well-controlled epilepsy at the time of settlement, subsequently deteriorates to become uncontrolled. That would have significant implications for the level of required care, for example. Another example might be a situation in which a claimant, currently cared for at home, might face such a deterioration that a move to much more expensive nursing home  care would be required. In such a case – Martin v Salford  – a variable periodical payment was ordered.

Fatal Claims

Periodical payments are theoretically available in Fatal Accident Act cases, but in practice are seldom used and generally speaking not in the claimant’s best interests.

In Closing

In conclusion, periodical payments increase the likelihood of the claimant being able to meet the full extent of future needs resulting from the injuries suffered. The usual order relates to the future costs of care, but other heads of loss should be considered where there is a partial recovery or in times of economic uncertainty.