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26 February 2013
In assessing damages in a personal injury case, the court has always relied on the presumption that the victim would protect his or her award by making investments with it. For nearly two decades, the court has assumed that such investments would generate a 4.5% rate of return, net of inflation, and accordingly, the damages awarded to the victim would be discounted to reflect the return.
But times have changed. In the wake of the global financial crisis and the eurozone debt woes, the investment landscape has become much less rosy than two decades ago. Most investment tools can no longer guarantee positive returns. As a result of significant changes in the economic environment, various common law jurisdictions have in recent years revised the net rate of return (also commonly referred to as 'discount rate') adopted by their courts in personal injury actions. The opportunity to do the same in Hong Kong arose when the 4.5% net rate of return became an issue under challenge in two personal injury cases involving the Hospital Authority and its patients.
In a landmark decision of February 7 2013, the court significantly lowered the net rate of return and held that different rates should apply to victims of different needs. The ruling is expected to have a far-reaching impact on the assessment of insurance payouts and insurance policy premiums for future personal injury actions in Hong Kong.
In both Li Ka Wai (A Minor) v Hospital Authority(1) and Yuen Hiu Tung (A Minor) v Hospital Authority(2) the victims concerned were infants who had suffered from severe spastic quadriplegia, cerebral palsy, severe mental retardation and near-total blindness as a result of episodes of cardio-respiratory arrest. Both children require specialised treatment and therapies and will never be able to lead an independent life.
The two cases were heard together by Judge Bharwaney of the Court of First Instance to determine the proper net rate of return to be applied to damages awards in personal injury actions involving claims for future losses and future expenses.
Ever since the Court of Appeal's 1996 decision in Chan Pui Kee v Leung On,(3) Hong Kong has followed the approach of the House of Lords in Cookson v Knowles(4) by applying the net rate of return of 4.5%.
Recent House of Lords decisions have lowered the net rate of return in England and Wales from 4.5%. The court in Thomas v Brighton Health Authority(5) and Wells v Wells(6) reduced the rate to 3% and 2.5%, respectively. The rate was revised under the presumption that the plaintiffs would protect damages awards by purchasing risk-free Index Linked Government Stocks (ILGS), and by taking into account persistent rising inflation and low interest rates.
The present net rate of return in England and Wales and Northern Ireland is fixed at 2.5% by the lord chancellor under the Damages (Personal Injury) Order 2001 by making reference to the redemption yields of ILGS.
On March 7 2012 the Privy Council in Simon v Helmot(7) upheld a decision of the Court of Appeal of Guernsey which held that the net rate of return in Guernsey, to be used to calculate non-earnings related future losses, was 0.5%, and that the net rate of return for calculating earnings-related elements of future losses was a negative rate of -1.5%. These revised rates resulted in a substantial increase in the damages awarded.
Simon v Helmot provided the impetus to the plaintiffs in Li Ka Wai and Yuen Hiu Tung to make applications to the Hong Kong court to test the validity of the 4.5% net rate of return. To achieve that, the court gave leave for parties to adduce actuarial and economic evidence.
The court considered a joint report prepared by experts nominated by the parties. The joint report highlighted a string of macroeconomic factors that have weighed on investors since 1995, including:
In addition, the court considered data which shed light on the historical performance of a wide range of investment vehicles, including the performance of the Hang Seng Index, HK Bond Index, MSCI HK Index and MPF Schemes. The court also took account of wage inflation as compared to price inflation.
The court concluded that the application of one single discount rate across the board would not always produce a fair result for victims in personal injury cases. It held that different rates should apply to victims with different needs. The rationale behind this is that victims with needs which stretch over a longer period of time would generally prefer an investment portfolio which can generate stable, long-term growth, whereas victims with needs over a shorter period of time would tend to favour riskier investments in the hope of obtaining a quick, high rate of return.
Taking account of the actuarial and economic evidence put before him, the judge held that:
The judge made no attempt to hide the fact that his ruling will drive up the costs of insurance. Lower discount rates would likely mean more substantial damages awards in future personal injury cases, higher insurance payouts and higher premiums for policies covering personal injuries. The decision affects a wide spectrum of cases, ranging from medical negligence and car accidents to workplace injuries. The prospect of footing the bill for awards with daunting figures may lead smaller insurance companies to re-adjust their policies and re-prioritise their businesses. It will be interesting to see how this landmark decision will affect Hong Kong's highly competitive insurance market.
(1) HCPI 671/2007.
(2) HCPI 228/2010.
(3)  2 HKLR 401.
(4)  AC 556.
(5)  All ER 481.
(6)  1 AC 345.
(7)  UKPC 5.
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