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You are here: BAILII >> Databases >> The Law Commission >> Pre-Judgment Interest on Debts and Damages (Report) [2004] EWLC 287(APPENDIX_E) (23 February 2004) URL: http://www.bailii.org/ew/other/EWLC/2004/287(APPENDIX_E).html Cite as: [2004] EWLC 287(APPENDIX_E)

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APPENDIX E

THE IMPACT ON CLINICAL NEGLIGENCE CLAIMS

E1.     In order to assess the impact of our proposals on clinical negligence claims we contacted three medical defence organisations (MDOs): the National Health Service Litigation Authority (NHSLA), the Medical Defence Union (MDU) and the Medical Protection Society (MPS). All three institutions provided us with data on personal injury claims they had paid in recent years.
E2.     The data we were given are set out in Tables 1 and 3 below. As can be seen, they show the damages paid by age of case, banding cases together in three year intervals, with all claims of 21 years or more at the end. Tables 2 and 4 show the effect of compound interest on these payments. At the end of this appendix, we provide details of the methodology used to calculate the compound interest due on continuous loss figures.

ASSUMPTIONS

E3.     In undertaking these calculations we made certain assumptions. All of the cases in the three year bands were assumed to have settled or been adjudicated at the middle of the band. Figures in the band of 0-3 Years are therefore calculated as settling on 1.5 years.
E4.     These assumptions do not apply to the last set of figures, which represented cases of 21+ years duration. For this band we assumed that the cases in question closed after 26 years duration. Whilst each of the MDOs was able to point to a case that had lasted longer than this we consider that these cases stick in the memory because of their unique nature. Most cases in the 21+ bracket had closed by 26 years. We also considered that the, admittedly exponential, effect of compound interest in the cases of greater than 26 years duration would be offset by the number of cases which were under that figure.
E5.     All the data provided by the MDOs related to cases closed in 2001-2002. All cases are therefore assumed to have started on 1 April of the year in question and closed on 1 October 2002. This is with the exception of the cases in the 21+ years bracket which are assumed to have started on 1 April 1976 and closed on 1 April 2002.
E6.     In addition, the MDU provided us with figures on interim payments, which have a potentially substantial impact in reducing the compound interest due. The figures given below, however, do not take interim payments into account.
E7.     After looking at the MDO data we realised that it was often not possible to tell what proportion of total damages was taken up by past pecuniary loss, to which compound interest should be applied. After considering the data we had, our best estimate was that on average 16% of total damages represented past pecuniary loss, and the MDOs agreed with this figure.

Although this proportion may be greater in low-value claims and smaller in longer and higher-value claims, the figures below are calculated using the 16% figure.

E8.     It is very difficult to discover how much interest is actually paid in clinical negligence claims at present. All three MDOs told us that interest is rarely calculated with any accuracy. It is usual for the parties to agree rough and ready figures at the end of the case. The files often do not distinguish between damages and interest. There are many factors that affect the interest payable including: whether loss did in fact arise continuously, or whether losses were greatest towards the beginning or end of the period; whether any penalty was imposed for delay in bringing the claim; or whether interim payments were made. Sometimes the calculations may be greater (or less) than the rules would suggest if, for example, lawyers have failed to track rates over time; have applied the half-rate rule inaccurately; or have used a figure that is not the special investment account rate.
E9.     As a result of these factors, we decided not to attempt to compare compound interest with the interest currently granted. Instead we assume that the losses arose evenly over time; that no penalties were imposed; and that no interim payments were made. We then compare the interest that would have been granted had the special investment rate been correctly applied, compared with the interest that would be granted under our proposals.

TABLES

National Health Service Litigation Authority (NHSLA)

E10.     Due to changes in the structure of claim handling within the NHS, the NHSLA were only able to give us figures for cases of over 9 years' duration. These cases were dealt with by the NHSLA directly under their Existing Liabilities Scheme, rather than being handled by NHS Trusts. They were all closed in 2002. In interpreting the tables it should be remembered that they do not include figures for cases up to 7 years' duration, which show a reduction in interest owed. Nor do they include cases of 7-9 years' duration, which show a markedly lower increase in interest than the figures below would suggest at first glance. Whilst we did not receive specific information on shorter cases, other studies into NHS costs show that total liabilities for 2001/02 totalled £446 million.^[1]

TABLE 1: CLAIMS OVER 9 YEARS OLD CLOSED BY NHSLA IN 2002 UNDER EXISTING LIABILITIES SCHEME

Claim Age	Total Damages	Damages in Period as % of Total Damages
9-12 Yrs	£69,347,879	36.0%
12-15 Yrs	£60,361,464	31.3%
15-18 Yrs	£14,574,856	7.5%
18-21 Yrs	£16,369,030	8.5%
21+ Yrs	£32,162,076	16.7%
Total	£192,815,305	100.0%

TABLE 2: EFFECT OF APPLYING COMPOUND INTEREST AT BASE +1% COMPARED WITH SIMPLE INTEREST AT SPECIAL INVESTMENT RATE

Claim Age	Total Damages	Increase in Interest as a % of Damages	New Total Damages	Cost of Compound Interest	Increase in Period as % of Total Increase
9-12 Yrs	£69,347,879	0.98%	£70,028,620	£680,741	3.6%
12-15 Yrs	£60,361,464	2.36%	£61,785,577	£1,424,113	7.5%
15-18 Yrs	£14,574,856	6.14%	£15,469,728	£894,872	4.7%
18-21 Yrs	£16,369,030	12.34%	£18,389,511	£2,020,481	10.6%
21+ Yrs	£32,162,076	43.83%	£46,257,316	£14,095,240	73.7%
Total	£192,815,305	9.91%	£211,930,752	£19,115,447	100.00%

E11.     These tables suggest that our proposals would add £19.1 million a year to the cost of NHS clinical negligence claims. If we assume that that the total amount spent on such claims is £446 million, this represents an increase of 4.3%.

Medical Defence Union and Medical Protection Society

E12.     Both the MDU and the MPS were able to supply us with figures for cases settled in both 2001 and 2002. After consulting both organisations we agreed that MDU and MPS have broadly comparable portfolios and as such they were happy for us to amalgamate the data they provided to give a larger and more representative sample base. The figures below are for both MDU and MPS. Unlike the NHSLA tables, they cover two years.
E13.     For simplicity's sake we have calculated interest on the basis that the cases closed on 1 October 2002 and not, as would have been appropriate in some cases, 2001. The change in figures would, however, be small and we consider that the tables below are still acceptably accurate.

TABLE 3: ALL CLAIMS CLOSED BY MEDICAL DEFENCE UNION AND MEDICAL PROTECTION SOCIETY IN 2001 AND 2002

Claim Age Total	Damages	Damages in Period as % of Total Damages
<3 Yrs	£2,824,775	3.2%
3-6 Yrs	£31,710,853	35.9%
6-9 Yrs	£27,375,267	31.0%
9-12 Yrs	£10,670,985	12.1%
12-15 Yrs	£3,045,390	3.4%
15-18 Yrs	£1,916,027	2.2%
18-21 Yrs	£1,658,909	1.9%
21+ Yrs	£9,141,665	10.3%
Total	£88,370,871	100.0%

TABLE 4: EFFECT OF APPLYING COMPOUND INTEREST AT BASE +1% COMPARED WITH SIMPLE INTEREST AT SPECIAL INVESTMENT RATE

Claim Age	Total Damages	Increase in Interest as a % of Damages	New Total Damages	Cost of Compound Interest	Increase in Period as % of Total Increase
<3 Yrs	£2,824,775	-0.07%	£2,822,679	-£2,096	-0.05%
3-6 Yrs	£31,710,853	+0.004%	£31,711,968	£1,115	+0.03%
6-9 Yrs	£27,375,267	+0.37%	£27,477,713	£102,446	+2.22%
9-12 Yrs	£10,670,985	+0.98%	£10,775,726	£104,741	+2.27%
12-15 Yrs	£3,045,390	+2.36%	£3,117,228	£71,838	+1.56%
15-18 Yrs	£1,916,027	+6.14%	£2,033,680	£117,653	+2.55%
18-21 Yrs	£1,658,909	+12.34%	£1,863,697	£204,788	+4.45%
21+ Yrs	£9,141,665	+43.83%	£13,148,025	£4,006,360	+86.97%
Total	£88,343,871	5.21%	£92,950,716	£4,606,845	100.00%

E14.     The tables show that compound interest will add between 4-5% to the total costs, resulting in an increase across the two organisations combined of £4.6 million in two years, or £2.3 million in one year.

Overall costs

E15.     These tables do not include the cost of meeting NHS claims in Wales. Published data suggests that the cost of clinical negligence in Wales is around a tenth of that in England. In 2001-02, the Welsh Risk Pool re-imbursed health authorities and NHS trusts around £46.3 million in respect of clinical negligence and personal injury claims.^[2] This compares with an annual expenditure in England of £446 million.^[3] Assuming that English and Welsh case profiles are similar, this would suggest that Welsh expenditure would be around £1.98 million.
E16.     Based on these figures our best estimate is that our recommendations would add between £20 million and £25 million to the cost of clinical negligence claims each year. These sums would be reduced if judges exercised their discretion to disallow payments or if defendants made interim payments.

GENERAL METHODOLOGY

E17.     The methodology for calculating compound interest, subject to the assumptions laid out above, is easiest viewed on a month by month basis. For each month interest is calculated at 1/12 the full rate for that year on the sum that had arisen at the start of the month and is added to that sum. Interest is then calculated on the sum arising during that month at half the monthly interest rate to account for the continuous nature of the loss. Finally the capital sum that has arisen during the month needs to be added. The calculation is then repeated for each month, changing the rates each year. This is best explained by an example.

Example

E18.     An accident occurs on 1 April 2000 and is settled on 31 March 2003, giving rise to total past pecuniary loss of £36,000 (£12,000 per year). The interest rates for each year (a year being 1 April – 31 March) are the base rate in force on 15 February prior to the year commencing +1%. These are 7%, 6.75% and 5% for the years beginning 1 April 2000 – 2002 respectively. April 2000
E19.     No capital is owed at the start of the month (1 April 2000). By the end of the month (30 April 2000), £1,000 is owed. In addition interest has accumulated on that figure for one month (at ½ the full rate for the month to take account of the fact that it is continuous).

£1,000 + (£1,000 x 1/12 x 7/100 x ½) = £1,002.92 May 2000 – March 2001

E20.     In May, £1,002.92 is owed at the start of the month and must be taken into account along with a month's interest at the full rate. In addition the monthly accumulation also occurs with interest (at half the rate).

(£1,002.92 + (£1,002.92 x 1/12 x 7/100)) + (£1,000 + (£1,000 x 1/12 x 7/100 x ½)) = £2,011.68

E21.     For June 2000 – March 2001 the same calculation as the one shown in May 2000 occurs, but the figure owed from the start of the month changes each month (so for June 2000 that figure is £2,011.68). The figure at the end of March 2001 is therefore £12,428.72.

April 2001 – March 2002

E22.     With £12,428.72 owing at the start of the second year the same calculations are used as applied for April 2000 – March 2001, but with the monthly interest rate at 1/12 of 6.75%. This gives a figure of £25,707.22 at the end of the second year.

April 2002 – March 2003

E23.     Again the calculations above are repeated with the new monthly interest rate for the third year being 1/12 of 5%. This gives a final figure of capital and interest of £39,328.19. The interest alone is £3,328.19.