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3.1 In chapter 3 of our Discussion Paper, we considered the deductibility of certain items from an award of damages for personal injury. Following an accident, an injured person may receive (i) social security benefits, (ii) payments of money (by way of payment from the responsible person, 1an insurance provider, or some other third party) or (iii) benefits in kind (e.g. local authority care and accommodation). Where the injured person would not have been in receipt of these payments or benefits but for the accident, should these be deducted from an award of damages? If so, which ones, and why?
3.2 As we noted in our Discussion Paper, Scots and English law have diverged on the issue of deductibility despite the fact that the same policy principle - that the award of damages should, as far as possible, return the injured person to the position they would have been in had the accident not occurred and no more - underpins the law in both jurisdictions. We therefore consider that this is an area of law in need of review.2
3.3 The main statutory framework on deductions from awards of damages is section 10 of the Administration of Justice Act 1982:3
“10 Assessment of damages for personal injuries
Subject to any agreement to the contrary, in assessing the amount of damages payable to the injured person in respect of personal injuries there shall not be taken into account so as to reduce that amount—
(a) any contractual pension or benefit (including any payment by a friendly society or trade union);
(b) any pension or retirement benefit payable from public funds other than any pension or benefit to which section 2(1) of the Law Reform (Personal Injuries) Act 1948 applies;
(c) any benefit payable from public funds, in respect of any period after the date of the award of damages, designed to secure to the injured person or any relative of his a minimum level of subsistence;
(d) any redundancy payment under the Employment Rights Act 1996, or any payment made in circumstances corresponding to those in which a right to a redundancy payment would have accrued if section 135 of that Act had applied;
(e) any payment made to the injured person or to any relative of his by the injured person’s employer following upon the injuries in question where the recipient is under an obligation to reimburse the employer in the event of damages being recovered in respect of those injuries;
(f) subject to paragraph (iv) below, any payment of a benevolent character made to the injured person or to any relative of his by any person following upon the injuries in question;
but there shall be taken into account—
(i) any remuneration or earnings from employment;
(ii) any contribution-based jobseeker’s allowance (payable under the Jobseekers Act 1995);
(iii) any benefit referred to in paragraph (c) above payable in respect of any period prior to the date of the award of damages;
(iv) any payment of a benevolent character made to the injured person or to any relative of his by the responsible person following on the injuries in question, where such a payment is made directly and not through a trust or other fund from which the injured person or his relatives have benefited or may benefit.”
3.4 In this chapter, we review the current law as it applies to (i) social security benefits, (ii) payments of money and (iii) benefits in kind.
Background
3.5 Until their repeal in 1997, provisions in section 2 of the Law Reform (Personal Injuries) Act 1948 provided that, for a period of five years, half the amount of certain specified social security benefits would be deducted from an award of damages; after five years had elapsed no deduction would be made. The view was that social security benefits should not be deducted in their entirety because (i) the injured person would usually have made national insurance contributions, thus the benefits were akin to an insurance policy for which the injured person had paid the premiums; and (ii) the state should not reduce the responsible person’s duty to compensate the injured person, by providing the injured person with social security benefits.
3.6 This rationale was doubted in the Pearson Report, which noted that (i) some benefits were non-contributory while some were only partly contributory, and, in any case, national insurance contributions were compulsory and should not be compared to the payment of insurance premiums; and (ii) the idea that state-provided social security should not relieve the responsible person of liability mistook the purpose of the law of tort: which was not to punish the offender for wrongdoing, but to compensate the injured person for their loss.4
3.7 The recommendation of the Pearson Report, and our 1978 report on Damages for Personal Injuries, was that there should be no overlap (i.e. double compensation) between the award of damages and the provision of social security benefits that the injured person received as a result of their injury.5
Current law
3.8 The deductibility of social security benefits is now regulated by section 10 of the Administration of Justice Act 1982 and by the Social Security (Recovery of Benefits) Act 1997. However, as we noted in our Discussion Paper, the 1997 Act has, in practice, incorporated and superseded the provisions of section 10 of the 1982 Act.6
3.9 Schedule 2 to the 1997 Act lists the social security benefits which are to be deducted from an award of damages, grouped under three heads: loss of earnings, cost of care and loss of mobility:
(1) Loss of earnings: universal credit; disablement pension payable under section 103 of the Social Security Contributions and Benefits Act 1992; employment and support allowance; incapacity benefit; income support; invalidity pension and allowance; jobseeker’s allowance; reduced earnings allowance; severe disablement allowance; sickness benefit; statutory sick pay; unemployability supplement; and unemployment benefit.
(2) Cost of care: attendance allowance; daily living component of personal independence payment; care component of disability living allowance; and disablement pension increase payable under section 104 or section 105 of the Social Security Contributions and Benefits Act 1992.
(3) Loss of mobility: mobility allowance; mobility component of personal independence payment; and mobility component of disability living allowance.
3.10 Only like for like deductions may be made. For example, only benefits paid as a result of lost earnings may be deducted from an award of damages for lost earnings; they cannot be deducted from damages for the cost of care or loss of mobility.7 As a result, there can be no deduction from damages awarded under a head which is not listed in schedule 2 - notably, there can be no deduction from damages awarded for solatium.8
3.11 Deductions are to be calculated on the basis of benefits paid before the “relevant period” ends: that is five years from the date of the injury or, if the claim is settled within those five years, the date of settlement.9 After this period, the injured person will receive their full damages entitlement. The responsible person is liable to reimburse the state for the total amount of the listed social security benefits received by the injured person within the relevant period. 10Recovery is made by the Compensation Recovery Unit (“CRU”), which sits in the Department for Work and Pensions.
Responses to the Discussion Paper
3.12 In our Discussion Paper, we set out our provisional view that the law on deductibility of social security benefits from an award of damages for personal injury, as set out in the 1997 Act, is working well and there is no need for reform.11
3.13 However, we did note that the introduction of universal credit has caused difficulties in the recovery of deductible benefits. Universal credit certificates issued by the CRU do not specify the components which make up the award; it is therefore not possible for the responsible person (or, more likely, their insurer) to identify deductible and non-deductible benefits, as set out in schedule 2 to the 1997 Act.
3.14 In such circumstances, the insurer is required first to make payment to the CRU in terms of the whole universal credit award, and then, relying on the evidence given to the court, to seek recovery of those aspects of the award that do not fall within the scope of schedule 2 and are non-deductible.
3.15 In our Discussion Paper, we asked consultees:
“8. (a) Do you consider that there are any problems with the deductibility of
social security benefits from awards of damages?
(b) If so, could you outline those problems? Do you have any solution to suggest?”
3.16 Twenty-five consultees responded to Question 8(a). Eighteen were of the view that there are problems with the deductibility of social security benefits from awards of damages;12 seven were of the view that there was no such problem.13
3.17 Of the 18 consultees who identified problems with the deductibility of benefits, 16 raised the issue of universal credit certificates. Clyde & Co suggest that the introduction of universal credit in 2013 has created a “largely unavoidable risk of double recovery”. The Association of British Insurers share this concern and say that the current system places the onus and cost of avoiding double compensation on insurers.
3.18 Digby Brown spoke of their experience negotiating settlements of claims where the client is clear that the universal credit payments listed in the CRU certificate do not relate to benefits received because of the accident about which a claim is made. They note that the majority of their clients would most likely be unable to provide information specifying which benefits are deductible and which are not. Kennedys Law noted that the universal credit system presents a hurdle to parties reaching settlement, as the lack of clarity about which payments are deductible creates uncertainty when agreeing what the net sum payable to an injured party will ultimately be. Even if settlement can be agreed, the consequent process of appealing to the CRU is lengthy, leaving compensators “without any finality for some time, despite settlement hav[ing] been agreed between the parties.”
3.19 Two consultees expressed some other concern with the deductibility of social security benefits. Action on Asbestos suggested that deducting benefits penalises the injured person, and that the responsible persons should be required to reimburse the CRU for benefits paid to the injured person, but that there should be no corresponding reduction in the award of damages. Zurich Insurance noted that in Scotland, following McManus’s Executrix v Babcock Energy Ltd, 14benefits are only deducted against care where the services are rendered professionally, and not gratuitously. This, in Zurich Insurance’s view, amounts to double recovery.
Discussion
3.20 Of the 25 responses received, 16 raised the issue of universal credit certificates and the associated difficulties of separating out deductible and non-deductible benefits. Consultees suggest that this results in a serious risk of double compensation, as well as increased costs for insurers and a delay in the processing of awards for pursuers.
3.21 Responsibility for the operation of the CRU lies with the Department for Work and Pensions, and we are therefore unable to make any substantial recommendation to Scottish Ministers. Nevertheless, we are of the view that this is an important issue that should be resolved by a change to the universal credit certificates issued by the CRU.
3.22 We therefore recommend that:
Background
3.23 Following an accident, an injured person may receive payments of money. These payments may either be benevolent in nature - being donated by generous parties who are sympathetic to the injured person and wish to help alleviate their loss - or be the fruits of an insurance policy for which either the injured person or the injured person’s employer has paid the premiums.
3.24 In Scotland, the deductibility of such payments is governed by section 10 of the Administration of Justice Act 1982, which implemented some of the recommendations we made in our 1978 report on Damages for Personal Injuries.15 Those recommendations sought to introduce certain principles of English common law - the benevolence exception and the insurance exception - into Scots law. These principles are discussed below.
Current law
3.25 As a general rule, benevolent payments made to the injured person cannot be deducted from an award of damages (the “benevolence exception”). The classic explanation for this is found in the Northern Irish case of Redpath v Belfast and County Down Railway. Commenting on the defendant railway company’s argument that sums contributed by the public to a distress fund from which the injured person had received payments ought to be deducted from the award of damages, Sir Andrew James LCJ said:
“... it would be startling to the subscribers to that fund if they were to be told that their contributions were really made in ease and for the benefit of the negligent Railway Company. To this last submission I would only add that if the proposition contended for by the defendants is sound the inevitable consequence in the case of future disasters of a similar character would be that the springs of private charity would be found to be largely, if not entirely, dried up.”16
3.26 This position was adopted in the English case of Parry v Cleaver, in which Lord Reid, after quoting Sir Andrew James LCJ, added:
“It would be revolting to the ordinary man’s sense of justice, and therefore contrary to public policy, that the sufferer should have his damages reduced so that he would gain nothing from the benevolence of his friends or relations or of the public at large ..”17
3.27 In the consultation that preceded our 1978 report, respondents were unanimously in favour of the benevolence exception applying to Scots law. 18Section 10 of the Administration of Justice Act 1982 enacted the benevolence exception, providing that:
“Subject to any agreement to the contrary, in assessing the amount of damages payable to the injured person in respect of personal injuries there shall not be taken into account so as to reduce that amount—
(f) subject to paragraph (iv) below, any payment of a benevolent character made to the injured person or to any relative of his by any person following upon the injuries in question.”
3.28 Note, however, the caveat to the benevolence exception in paragraph (iv) of section 10, for there must be deducted:
"(iv) any payment of a benevolent character made to the injured person or to any relative of his by the responsible person following on the injuries in question, where such a payment is made directly and not through a trust or other fund from which the injured person or his relatives have benefited or may benefit.”
3.29 This caveat ensures that where the responsible person makes a direct benevolent payment to the injured person as a result of the injury, this payment is to be deducted from an award of damages. The reason for the stipulation that the payment is made directly, and not through a trust or other fund, is to ensure that a fund set up from public subscriptions does not become deductible just because the responsible person has contributed to that fund.
3.30 The rationale for this caveat, which also applies in English law, was well expressed by Lloyd LJ in Hussain v New Taplow Paper Mills:
“If an employee is injured in the course of his employment, and his employers make him an immediate ex gratia payment, as any good employer might, I see no reason why such a payment should not be taken into account in reduction of any damages for which the employer may ultimately be held liable. Employers should be encouraged to make ex gratia payments in such circumstances. If so, then public policy would seem to require that such payments be brought into account.”19
Current law
3.31 There is longstanding precedent in English law, first propounded in Bradburn v Great Western Railway Co,20 that where an injured person receives payment from an insurance policy which they have arranged and wholly contributed to, this should not be deducted from any award of damages (the “insurance exception”). In Bradburn, the rationale for this position was that the injured person:
“... does not receive that sum of money because of the accident, but because he has made a contract providing for the contingency; an accident must occur to entitle him to it, but it is not the accident, but his contract, which is the cause of his receiving it.”21
3.32 The insurance exception was also considered by the House of Lords in Parry v Cleaver. Lord Reid said:
“As regards moneys coming to the plaintiff under a contract of insurance, I think that the real and substantial reason for disregarding them is that the plaintiff has bought them and that it would be unjust and unreasonable to hold that the money which he prudently spent on premiums and the benefit from it should enure to the benefit of the tortfeasor.”22
3.33 At the time of the publication of our 1978 report, there was no direct Scottish authority on the insurance exception.23 In that report, we endorsed the reasoning of the English courts and recommended that the insurance exception be enacted in Scots law.24 Our draft Damages (Scotland) Bill contained the following provision:
“4. Subject to any agreement to the contrary, in assessing the amount of damages payable to the injured person in respect of personal injuries there shall not be taken into account so as to reduce that amount—
(a) any contractual pension or benefit (including any payment under an insurance policy and any payment by a friendly society or trade union)....”25
3.34 A version of this provision was enacted in section 10(a) of the Administration of Justice Act 1982, with the words “any payment under an insurance policy and” excluded.26 The operation of section 10(a) is given further consideration in the section on Other insurance policies below.
Responses to the Discussion Paper
3.35 In connection with the benevolence exception and the insurance exception, we asked consultees:
“9. Do you consider that benevolent payments, or payments from insurance policies which the injured person has wholly arranged and contributed to, should continue not to be deductible from an award of damages?”
3.36 Twenty-six consultees responded to this question,27 all of whom said that yes, such payments should not be deductible from an award of damages. Three consultees added that, in the case of insurance, the cost of premiums should be deductible from the net wage loss contribution.28
Discussion
3.37 While few respondents elaborated on their support for the proposition in Question 9, Direct Line Group provided a rationale for their position, namely that “a prudent decision to arrange and contribute towards benefits of this nature should not be penalised by a mechanism that is able to deduct those benefits from damages”. We agree and, while we recognise that there may be concerns regarding double recovery, we consider that an injured person who has contributed to such a scheme should remain the beneficiary under the policy.
3.38 Three consultees did qualify their answer, arguing that the insurance premiums for the policy arranged and paid for by the injured person should be deductible. However, as this particular question (Question 9) concerns only insurance wholly arranged by the injured person using their own money, the dicta in Parry v Cleaver (see paragraph 3.32) apply and the injured person’s insurance should be left out of account all together.
3.39 We therefore do not recommend any changes to the non-deductibility, from an award of damages, of benevolent payments or payments from insurance policies which the injured person has wholly arranged and contributed to.
Background
3.40 We now turn to the deductibility of payments under an insurance policy to which the injured person has not contributed, or not wholly contributed. This is most common where the injured person’s employer has taken out a permanent health insurance (PHI) scheme. PHI schemes 29typically provide income to employees who are unavoidably absent from work for prolonged periods. Usually, the premiums are paid by the employer, but in some cases the employee may (i) pay the entirety of the premium, (ii) pay part of the premium, (iii) pay tax or national insurance contributions on the PHI scheme as a taxable benefit, or (iv) receive a lower salary because the PHI is taken into account in their total employee benefit package.
3.41 If an employee is absent for a prolonged period,30 the employer makes a claim against the insurance company. Where the relevant conditions are satisfied, the insurance company generally makes payments to the employer, who then makes payments to the employee on a regular basis.
3.42 As noted above, this Commission, in our 1978 report, recommended that the insurance exception apply to Scots law. That recommendation went beyond the position at English common law - which only applied the insurance exception where the injured person had contributed to the cost of the insurance policy 31- by extending the insurance exception to cover money paid under an insurance policy even where the injured person did not contribute to that policy. Our recommendation was that:
“No account should be taken, in the assessment of damages, of contractual benefits payable in consequence of the accident occasioning the injuries, notably money paid under insurance policies ....”32
3.43 As we said in our Discussion Paper,33 the rationale for this conclusion is unclear. While the reasoning that an injured person who prudently insures themselves against risk should be entitled to the fruits of that insurance policy is compelling, it is not clear why an injured person should benefit from payments under an insurance policy to which they have not contributed.
This is even less clear where the person who paid the premiums on the insurance is also the responsible person.34 As such, we are of the opinion that this policy is in need of review.
Current law: The Lewicki/Gaca debate
3.44 In our Discussion Paper, we drew attention to two cases, the Scottish case of Lewicki v Brown & Root Wimpey Highland Fabricators Ltd35 and the English case of Gaca v Pirelli General plc, 36that reached different conclusions on the deductibility of payments from a PHI scheme from an award of damages. In Lewicki, the Inner House, applying section 10 of the Administration of Justice Act 1982, held that payments the pursuer had received under a PHI scheme were not deductible from his award of damages. In Gaca, the Court of Appeal, applying English common law, held that the payments received under the PHI scheme should be deducted from the claimant’s award of damages.37
3.45 In Gaca, the court held that payments the claimant had received under a group personal accident insurance policy should be deducted from the award of damages. The insurance exception did not apply because it was not the claimant, but his employer, who arranged the insurance policy and paid the premiums. Counsel for the claimant argued that the claimant had in fact contributed to the cost of the premiums “since the money which enabled the defenders to pay the premium was the fruit of the labour of their employees, including the claimant”.38 But this argument was rejected by Dyson LJ:
“... The insurance moneys must be deducted unless it is shown that the claimant paid or contributed to the insurance premium directly or indirectly. Payment or contribution will not be inferred simply from the fact that the claimant is an employee for whose benefit the insurance has been arranged.
“. [counsel] cannot identify any evidence which shows that the claimant paid or contributed to the cost of the insurance policy. All he can point to is the fact that the fruits of the claimant's labour enabled the defendants to pay for the insurance. But for the reasons that I have given, that is not enough to avoid the deduction of the benefits from his damages.”39
3.46 In Lewicki, the court was asked to decide whether payments the pursuer had received under a long term disability plan should be considered a “contractual benefit” under section 10(a) of the Administration of Justice Act 1982, or “remuneration or earnings from employment” under section 10(i) of the Act.40 If the former, the payments would not be deductible from the pursuer’s award of damages; if the latter, the payments would be deductible. The court held that the payments should be construed as a contractual benefit and were not deductible.
3.47 The court concluded that whether payments should fall under section 10(a) or section 10(i) will depend on the nature of the payments, to be ascertained from the contractual documents which gave rise to the pursuer’s right to the payments. As the Lord Justice Clerk (Ross) said:
“... A careful consideration of the documents relating to the Long Term Disability Plan does not reveal any provisions which would suggest that benefits payable thereunder should be regarded as remuneration or earnings of employment ..
“I also regard it as significant that the correspondence shows that, when the question of payment under the Long Term Disability Plan first arose, the pursuer was informed that his employers would ‘commence making a claim under the Plan on your behalf’ (No. 17/3 of process). Subsequently, he was informed that his claim for benefit under the Long Term Disability Plan had been approved by the insurers (No. 17/4 of process.) The fact that a claim had to be made was something different to remuneration or earnings of his employment to which he would otherwise be entitled.”41
3.48 Although the case turned on the construction of these documents, the Lord Justice Clerk and Lord McCluskey also commented on the fact that the pursuer had, in their view, contributed indirectly to the insurance policy:
“. In any event he [the pursuer] can be regarded as contributing indirectly in that if he had not been given the benefit of the Long Term Disability Plan as part of his contract of employment the defenders in theory could have paid him a higher salary.”42
“. By offering the pursuer a package containing . a contingent right to Long Term Disability payments in association with the Insurance Scheme, the defenders secured the pursuer's agreement to accept their offer of employment .. If the defenders had offered less in terms of non-salary benefits they might have had to offer a greater salary.”43
3.49 While the most important distinguishing fact between Lewicki and Gaca is that one was an application of section 10 of the 1982 Act and the other of English common law, it is worth noting that obiter dicta in Lewicki suggests that the Inner House would have, in the absence of section 10, found that the pursuer had contributed to the insurance policy indirectly by receiving the benefit of the policy in lieu of commanding a higher wage. Of particular note is this passage, from the opinion of Lord McCluskey: “I derive some comfort in arriving at this conclusion from the fact that the same result would, in my view, have been reached at common law.”44
3.50 In contrast, the English Court of Appeal in Gaca, applying the common law of that jurisdiction, was not prepared to accept that the claimant had contributed to the insurance policy, even indirectly, without evidence of such a contribution. While the argument of counsel in Gaca was not quite the same as the one envisaged by the Lord Justice Clerk and Lord McCluskey in Lewicki, there does appear to be a tension between these two cases that goes beyond the difference in applicable law.
3.51 In our Discussion Paper, we recognised that there is debate about whether Lewicki and Gaca may be reconcilable. We suggested that it was significant that, in Lewicki, the pursuer’s membership of the long term disability plan had been taxed as a benefit;45 whereas there is no such suggestion in the case report of Gaca. In the Discussion Paper, we said that:
“... In the context of the deductibility (or otherwise) of payments received under a PHI-type scheme, we suggest that the key issue is whether the injured employee had, prior to the accident, given some sort of ‘consideration’ for their participation in the scheme and its benefits.
“Having had the benefit of discussion with our Advisory Group, it seems to us that where the evidence shows that an employee actively ‘opted in’ to a scheme, chose to be a member of it and paid a consideration either directly (for example, by having a contribution taken from their wages) or indirectly (for example, where the employee is, under his contract of employment, subjected to tax and NIC on the notional element of wages representing the ‘benefit’ of being a member of the scheme), then the insurance exception as enacted in section 10 of the 1982 Act would entitle them to payments of the scheme benefits without any deduction or set-off from damages for wage loss.”46
3.52 This position is similar to the approach taken by the Employment Appeal Tribunal in Colt Technology Services Limited v Brown 47(chaired by Scottish judge Lady Wise). The claimant was a member of a PHI scheme that entitled him to 75% of his earnings should he become unable to work. The claimant could have instead opted for a membership entitling him to 50% of his earnings and, if the claimant had chosen this membership, he would have received a higher salary from his employer. The employment tribunal concluded that the claimant had contributed to the PHI scheme by virtue of taking a lower salary, a position upheld on appeal:
“It is accepted in this case that the Respondent employer paid all the premiums for the relevant insurance. It is also accepted that there is no contract between the Claimant and the insurance company. The sole question for the Tribunal was whether, on the evidence before it, the Claimant should be characterised as someone who had made an indirect contribution to the cost of the insurance policy premiums by electing to have more than the minimum 50% salary protection and opting for the full 75% cover ..
“It seems to me that the rationale used by the Tribunal for its conclusions is both rational and consistent with the leading authority in Gaca. On the available evidence, had the Claimant elected to take either 50% salary protection or 60% salary protection he would have received additional salary. Although the Respondent’s flexible benefit scheme involved a choice on a range of other matters such as annual leave and type of pension provision and so on, there was no dispute that, in order to receive 75% cover rather than 50% cover, the Claimant was paid less than he would otherwise have received ... The undisputed facts illustrated that the Claimant chose to receive lower salary in return for increased protection.”48
3.53 In both Colt and Lewicki, the injured person had given, albeit indirectly, consideration for their membership of the PHI scheme: in Colt, the claimant elected to take a lower wage than he otherwise might have done; in Lewicki, the pursuer paid tax and national insurance on his membership of the scheme.
Responses to the Discussion Paper
3.54 In connection with the deductibility of payments from a PHI scheme from an award of damages, we asked consultees:
“10. (a) In the context of payments to injured employees arising from permanent
health insurance and other similar schemes, do you consider that clarification or reform of section 10 of the Administration of Justice Act 1982 is required?
(b) If so, could you outline the essential elements of any clarification or reform which you suggest?
(c) In particular, would you favour an approach in which the law was clarified to make it clear that where an employee contributes financially, as a minimum through paying tax and NIC on membership of the scheme as a benefit, then any payments made under that policy should not be deducted?”
3.55 Twenty-four consultees responded to Question 10(a). Nineteen thought that clarification or reform was needed, 49four thought there was no such need,50 and one consultee did not express a clear view.51
3.56 The Senators of the College of Justice said that clarification was necessary owing to the uncertainty generated by the conflicting authorities, Lewicki and Gaca. All remaining consultees (who expanded on their affirmative response to Question 10(a)) said that reform was necessary to ensure that an injured person who contributes to a PHI scheme does not have the payments of that scheme deducted from their award of damages.
3.57 Responding in the negative, both Thompsons Solicitors and Unite the Union told us that Lewicki “stands as good law” and there is therefore no need for clarification or reform. Tom Marshall was of the opinion that the current position “benefits both employee and employer - the employee continues to receive money while incapacitated and the employer can use the money which otherwise it would have paid the injured employee to engage a replacement”. Drummond Miller did not expand on their reasoning for responding in the negative to Question 10(a).
3.58 The Society of Solicitor Advocates, while offering no clear view on whether reform or clarification is necessary, said that payments under a PHI scheme should not be deductible from an award of damages.
3.59 Thirteen consultees responded to Question 10(b). 52Consultees were unanimously of the view that where an employee contributes financially to a PHI scheme - whether directly or indirectly - the proceeds of that scheme should not be deductible from an award of damages. Three consultees53 agreed that where an employee has made no contribution to the scheme, any benefit arising from the scheme should be deductible.54
3.60 Thirteen consultees responded to Question 10(c).55 Consultees were unanimously in favour of the approach recommended in the Discussion Paper: that the law be clarified to make clear that where an employee contributes financially to a PHI scheme - as a minimum by paying tax and national insurance on membership of the scheme - then any payments made under the scheme should not be deducted from an award of damages.
Discussion
3.61 We note that the majority of consultees thought that reform was necessary, and that those consultees were unanimously in favour of the reform that we recommended in the Discussion Paper.
3.62 It is clear from the responses we received that reform of section 10 is widely sought. All consultees who responded to Questions 10(b) and 10(c) were in favour of the approach set out in Question 10(c): that the law make it clear that where an employee contributes financially to a PHI scheme, for example through paying tax and national insurance on membership of the scheme as a benefit, then any payments made under the scheme should not be deducted from an award of damages.
3.63 After consideration of the case law in Lewicki, Gaca and Colt, it seems to us that an injured person should be deemed to have contributed financially to a PHI scheme where they have either (i) made a direct payment to the scheme; (ii) paid tax or national insurance on membership of that scheme as a benefit; or (iii) forfeited the offer of a greater salary with their employer in order to gain access to that scheme, or to increased benefits under that scheme.
3.64 We therefore recommend that:
7. Section 10 of the Administration of Justice Act 1982 should be amended to clarify that where an employee contributes financially to a Permanent Health Insurance scheme, whether by (i) making a direct payment; (ii) paying tax or NIC on membership of the scheme as a benefit; or (iii) forfeiting the offer of additional remuneration or earnings with their employer in order to gain access to the scheme, or to increased benefits under that scheme, then any payments made to the employee under that scheme should not be deducted from an award of damages. Where no such contribution is made, payments made under the scheme should be deductible from an award of damages.
(Draft Bill, section 3)
Background
3.65 Aside from monetary payments, an injured person may receive access to certain benefits, the aim of which is to return the injured person to the condition they would have been in had the accident not occurred. The most substantial benefits are (i) medical treatment and (ii) care and accommodation.
3.66 Medical treatment may be provided by the NHS or arranged privately; likewise, care and accommodation may be provided by a local authority, under a statutory duty, or arranged privately. This gives rise to two questions. First, where the injured person pays for medical treatment or care and accommodation privately, when they could have taken advantage of NHS or local authority services free of charge, should they be entitled to recover their expenses from the responsible person? And, where the injured person receives treatment from the NHS, or a local authority provides care and accommodation, should the responsible person be liable to the state for the cost of these services?
Current law
3.67 Generally in the law of delict, there is a duty upon the injured person to take reasonable steps to mitigate their loss; where the injured person fails to do so, they cannot make a claim against the responsible person for any expenses incurred.
3.68 However, section 2(4) of the Law Reform (Personal Injuries) Act 1948 directs the court that, where the injured person has opted for private medical treatment, the court should disregard the possibility of taking advantage of NHS treatment in assessing whether the injured person has taken reasonable steps to mitigate their loss.
“2 Measure of damages
(4) In an action for damages for personal injuries (including any such action arising out of a contract), there shall be disregarded, in determining the reasonableness of any expenses, the possibility of avoiding those expenses or part of them by taking advantage of facilities available under the National Health Service Act 2006 or the National Health Service (Wales) Act 2006 or the National Health Service (Scotland) Act 1978, or of any corresponding facilities in Northern Ireland.”
3.69 Section 2(4) has generated a great deal of discussion in previous law reform projects. The Pearson Report recommended its repeal and replacement with a provision that “private medical expenses should be recoverable in damages if and only if it was reasonable on medical grounds that the plaintiff should incur them”.56 Our 1978 report recommended a similar, but slightly wider, replacement: with the reasonableness of the pursuer opting for private medical treatment to be assessed generally, rather than solely on medical grounds.57
3.70 In contrast, the Law Commission of England and Wales, in its 1999 report, recommended that section 2(4) be retained.58 The Commission concluded that private treatment offered advantages, such as shorter waiting times and greater choice in the provision of their treatment, that should not be denied to injured persons.59 The Commission took the view that “these advantages are very closely connected with ensuring the claimant is returned to a position as near as possible to his or her pre-accident state”.60
Responses to the Discussion Paper
3.71 Our initial position, as set out in our Discussion Paper, was that section 2(4) should remain in force. 61We therefore asked consultees:
“11. Do you agree with the proposition that section 2(4) of the 1948 Act should remain in force?”
3.72 Twenty-seven consultees responded to Question 11, of which 26 responded that section 2(4) should remain in force.62 One consultee, the Medical and Dental Defence Union of Scotland (“MDDUS”) suggested repeal.
3.73 In their response, MDDUS suggest that section 2(4) should be repealed due to the “substantial cost of care packages factored into damages awards” via the provision. They argue that section 2(4) perpetuates a false assumption that the majority of care will be provided by the private sector, and that repeal would allow the NHS to recover more funds from responsible persons.
3.74 In favour of retaining section 2(4), a number of consultees mentioned the waiting times associated with NHS treatment. Unite the Union noted the increase in NHS waiting times since the COVID-19 pandemic, especially in relation to physiotherapy, orthopaedic and mental health services. Thompsons Solicitors said that “rehabilitation treatments ... [are] essential at an early stage to maximise the chance of optimal recovery from trauma related injury. In our view it remains an issue of what is reasonable and we consider it is entirely reasonable for injury victims to seek to maximise their recovery”.
3.75 Several consultees also noted that section 2(4) ensures that injured persons are not required to justify decisions regarding their own healthcare. The University of Aberdeen School of Law noted that “there may be significant differences between NHS healthcare services and private healthcare services ... including differences in waiting times, convenience of facilities and patient autonomy over treatment options” and that section 2(4) “prevent[s] the responsible person from arguing that the injured person’s choice not to use the NHS is a failure to mitigate their losses”. Action on Asbestos emphasised that “the injured person must have access to those services that offer the best chance of rehabilitation or recovery and should not be restricted only to those services provided by the NHS”.
Discussion
3.76 We recognise concerns, expressed in the Pearson Report, our own 1978 report and in the response from MDDUS, that section 2(4) risks overcompensating the injured person where the court makes an award to cover the costs of private medical treatment that the injured person does not in fact make use of. However, we are persuaded by the majority of consultees that to repeal section 2(4) would unreasonably curtail the freedom of the injured person to make decisions regarding their own healthcare.
3.77 MDDUS told us that section 2(4) perpetuates the assumption that the majority of injured persons utilise private medical treatment. We are not convinced that this is the case. The case law is clear that the courts will not award damages for expenses that they are not convinced the pursuer will actually incur.63 While we recognise that there may be distinct instances where injured persons seek damages for services to which they will make no recourse, this is a matter to be determined by the courts on the evidence. If, for any reason, a defender prefers an extra-judicial settlement, then it is for the parties to negotiate what is reasonable.
3.78 Supporting this proposition, Thompsons Solicitors told us that “in practice, no significant problems are encountered. Reasonableness is a well-worn test in the assessment of damages and a concept with which practitioners, Counsel and the judiciary are very familiar. It provides for flexibility and proportionality”.
3.79 As many consultees told us, the earlier treatment begins, the more likely it is to lead to optimal recovery. Without the option of private treatment, injured persons may face long waiting lists prior to receiving the treatment they require and, in turn, have their chances of a full recovery reduced.
3.80 For these reasons, we are not convinced that a failure to opt for NHS treatment is unreasonable, excessive, or overtly prone to overcompensation. We recognise the utility of section 2(4) and its effect in ensuring injured persons have recourse to private medical treatment.
3.81 We therefore recommend that the provisions of section 2(4) remain in force. However, we note that the 1948 Act is now outdated and many of its original provisions have been repealed. Therefore, in order to modernise the law and ensure accessibility, we recommend that:
(Draft Bill, section 4)
The person who is liable for the delict. This may be the individual who caused the accident or that person’s employer or principal.
Scottish Law Commission, Tenth Programme of Law Reform (2018) Scot Law Com No 250, para 2.39.
Note that s 10 applies only to Scotland.
Pearson Report, vol 1, paras 471-72.
Ibid, para 482; Scottish Law Commission, Damages for Personal Injuries: Report on (1) Admissibility of Claims for Services and (2) Admissible Deductions (1978) Scot Law Com No 51, para 90.
Discussion Paper, paras 3.17-3.19.
Social Security (Recovery of Benefits) Act 1997, s 8(1).
Solatium is the portion of damages awarded to compensate the injured person for injury to feelings or reputation, pain and suffering, or loss of expectation of life, incurred as a result of their injury.
Social Security (Recovery of Benefits) Act 1997, ss 1(1)(b) and 3.
Social Security (Recovery of Benefits) Act 1997, s 6(1).
Action on Asbestos, Association of British Insurers, Association of Personal Injury Lawyers (APIL), Aviva Insurance, Clyde & Co, Ronald Conway, DAC Beachcroft, Digby Brown, Direct Line Group, Forum of Insurance Lawyers (FOIL), the Forum of Scottish Claims Managers, Kennedys Law, Law Society of Scotland, Medical and Dental Defence Union of Scotland (MDDUS), NFU Mutual, Society of Solicitor Advocates, Stagecoach Group, and Zurich Insurance.
Drummond Miller, Faculty of Advocates, Senators of the College of Justice, Thompsons Solicitors, Tom Marshall, Unite the Union, and University of Aberdeen School of Law.
[1970] AC 1, p 14.
(1978) Scot Law Com No 51, para 59. There was already some authority for the benevolence exception at sheriff court level: see Dougan v Rangers Football Club Ltd 1974 SLT (Sh Ct) 34, p 37 per Sheriff Irvine Smith.
[1970] AC 1, p 14.
Although Lord Reid in Parry v Cleaver, at p 14, referred to an old Scottish case, Forgie v Henderson (1818) 1 Murray 410, where the Lord Chief Commissioner (Adam) directed the jury that payments the pursuer received from a friendly society in consequence of the pursuer’s injuries should not be deducted.
(1978) Scot Law Com No 51, paras 69 and 72.
See para 3.3 above for the provisions as enacted.
Action on Asbestos, the Association of British Insurers, the Association of Personal Injury Lawyers (APIL), Aviva Insurance, Clyde & Co, Ronald Conway, DAC Beachcroft, Digby Brown, Direct Line Group, Drummond Miller, the Faculty of Advocates, the Forum of Insurance Lawyers (FOIL), the Forum of Scottish Claims Managers, Horwich Farrelly Scotland, Kennedys Law, the Law Society of Scotland, Tom Marshall, Stuart McMillan MSP, NFU Mutual, the Senators of the College of Justice, the Society of Solicitor Advocates, Stagecoach Group, Thompsons Solicitors, Unite the Union, the University of Aberdeen School of Law, and Zurich Insurance.
The Association of British Insurers, Aviva Insurance, and the Forum of Scottish Claims Managers.
PHI is used here as a shorthand, but there are many different schemes; for example, permanent health insurance, group personal accident insurance, long term disability income, group disability insurance, and group income protection.
See e.g. Parry v Cleaver, p 14; Hussain v New Taplow Paper Mills [1988] AC 514, p 527; Hodgson v Trapp [1989] AC 807, p 819; Gaca v Pirelli General plc [2004] EWCA Civ 373, [2004] 1 WLR 2683, paras 41-59.
(1978) Scot Law Com No 51, para 72. This recommendation was enacted as section 10(a) of the Administration of Justice Act 1982.
e.g. where the injured person’s employer is liable for the injury, and the injured person’s employer paid the premiums on a PHI scheme of which the injured person is a member.
For a fuller consideration of these cases, see paras 3.39-3.56 of the Discussion Paper.
[2004] 1 WLR 2683, para 49.
See the provisions at para 3.3 above.
Ibid, p 205 per the Lord Justice Clerk (Ross).
Ibid, p 208 per Lord McCluskey. It should be borne in mind that these remarks are obiter dicta and do not mean that the court would have found an indirect contribution in any case where a PHI scheme was present. “Obiter dictum” is a Latin phrase meaning “that which is said in passing” and is used in a legal context to describe a remark in a judgment that is not legally binding.
See the judgment of Lord Prosser in the Outer House: Lewicki v Brown & Root Wimpey Highland Fabricators Ltd 1996 SLT 145, pp 146-47.
Discussion Paper, paras 3.49-3.51.
Ibid, paras 34-35 per Lady Wise.
The Association of British Insurers, the Association of Personal Injury Lawyers (APIL), Aviva Insurance, Clyde & Co, DAC Beachcroft, Digby Brown, Direct Line Group, the Faculty of Advocates, the Forum of Insurance Lawyers (FOIL), the Forum of Scottish Claims Managers, Horwich Farrelly Scotland, Kennedys Law, the Law Society of Scotland, Stuart McMillan MSP, NFU Mutual, the Senators of the College of Justice, Stagecoach Group, the University of Aberdeen School of Law, and Zurich Insurance.
Drummond Miller, Tom Marshall, Thompsons Solicitors, and Unite the Union.
The Society of Solicitor Advocates.
The Association of British Insurers, the Association of Personal Injury Lawyers (APIL), Aviva Insurance, Direct Line Group, the Forum of Scottish Claims Managers, Horwich Farrelly Scotland, Kennedys Law, the Law Society of Scotland, NFU Mutual, the Senators of the College of Justice, Stagecoach Group, the University of Aberdeen School of Law, and Zurich Insurance.
The Association of British Insurers, the Forum of Scottish Claims Managers, and NFU Mutual.
Cf the English Court of Appeal in Gaca.
Aviva Insurance, Clyde & Co, DAC Beachcroft, Digby Brown, Direct Line Group, Drummond Miller, the Faculty of Advocates, the Forum of Insurance Lawyers (FOIL), the Forum of Scottish Claims Managers, Kennedys Law, NFU Mutual, the Senators of the College of Justice, and Stagecoach Group. Drummond Miller, while opposed to any reform, expressed the view that if reform was to happen then “there could be benefit from clarification as suggested”.
Pearson Report, vol 1, para 342.
Scottish Law Commission, Damages for Personal Injuries: Report on (1) Admissibility of Claims for Services; (2) Admissible Deductions (1978) Scot Law Com No 51, paras 81-83.
Law Commission of England and Wales, Damages for Personal Injury: Medical, Nursing and Other Expenses; Collateral Benefits (1999) Law Com No 262, para 3.18.
Action on Asbestos, the Association of British Insurers, the Association of Personal Injury Lawyers (APIL), Aviva Insurance, Clyde & Co, Ronald Conway, DAC Beachcroft, Digby Brown, Direct Line Group, Drummond Miller, the Faculty of Advocates, the Forum of Insurance Lawyers (FOIL), the Forum of Scottish Claims Managers, Horwich Farrelly, Kennedys Law, the Law Society of Scotland, Tom Marshall, Stuart McMillan MSP, NFU Mutual, the Senators of the College of Justice, the Society of Solicitor Advocates, Stagecoach Group, Thompsons Solicitors, Unite the Union, the University of Aberdeen School of Law, and Zurich Insurance.
See e.g. Harris v Brights Asphalt Contractors Ltd [1953] 1 QB 617, p 635; Lim Poh Choo v Camden and Islington Area Health Authority [1980] AC 174, pp 187-88; Woodrup v Nicol [1993] PIQR Q104, Q114-15; Fletcher v Lunan [2008] CSOH 55, 2008 Rep LR 72, para 9; Hill’s Guardians v Highland Health Board [2016] CSOH 146, paras 2425.