The Court of Appeal last week handed down its decision in Swift v Carpenter  EWCA Civ 1295. The issue at stake was the valuing of claims for damages where an injured claimant is obliged to purchase alternative accommodation as a consequence of the injuries suffered. The scope for such an award arises in any claim for long term disability where mobility is affected. Insurers will need to re-assess their approach to such claims and what follows is some practical guidance on the implications of the judgment and we set out the methodology for calculating awards for special accommodation going forwards.
It is wrong as a matter of principle to award a claimant the full, capital cost of special accommodation, as that results in over-compensation (or 'windfall') because, at the claimant’s death, his or her estate would benefit from an asset which had enhanced, not diminished, in value.
How then to provide for the cost of the necessary alternative accommodation without the windfall arising?
The Roberts v Johnstone solution – and why it stopped being fit for purpose
The established approach was to award a claimant the 'lost' return on capital which must instead be used to fund the purchase of special accommodation. The calculation was based on the difference in the price between the accommodation the claimant is currently living in and the price of the alternative 'new' accommodation that is required as a consequence of the injury. The discount rate was then applied to that difference in price and then a life multiplier was applied.
But when the Lord Chancellor set a negative discount rate, one of the more stark consequences was that the Roberts v Johnstone calculation produced no award, because a claimant could not establish a loss of investment.
The decision in Swift v Carpenter
The Court of Appeal held that the decision in Roberts v Johnstone represented authoritative guidance rather than legal principle. The Court of Appeal could therefore depart from it. Furthermore, the decision should be departed from on this occasion because the Roberts v Johnstone approach no longer achieved fair and reasonable compensation for the claimant.
The new methodology for calculating the appropriate award for this head of loss should be one based on the additional capital cost of the property less the market value of the reversionary interest in the property.
How to calculate damages for the accommodation award
Adopting the figures in Swift v Carpenter the methodology is as follows:
a) Deduct the value of the property now required (£2,350,000) from the value of the property owned but for the accident (£1,450,000). This is the additional capital required
b) Identify the claimant's life expectancy post-accident either from Table 2 of the Ogden Tables or expert medical evidence. This was determined as 45.43 years
c) Apply the appropriate discount figure to the life expectancy. In Swift v Carpenter the appropriate discount rate was held to be 5% which can be represented as 1.05. The discount rate (1.05) is then multiplied with itself - 45.43 times (the life expectancy). This can be done using the Xʸ function on a calculator. The resulting figure is 1.089
d) The value of the reversionary interest is then calculated by multiplying the totals of a) and c)
£900,000 x 1.089 = £98,087.27
e) The claimant's accommodation award is the additional capital cost of the property less the reversionary interest in the property:
£900,000 - £98,087.27 = £801,912.73
The claimant still has to fund the reversionary interest (in this case £98,087.27) from other heads of damage awarded.
What this means
The Court of Appeal acknowledged that this approach would not be appropriate in all cases. However, the decision should be regarded as 'enduring' for longer lives during conditions of negative or low positive discount rates.
There is the possibility of adopting a different approach for short life expectancy cases where the value of the reversionary interest (and therefore the deduction from the capital sum) will be greater.
The decision provides certainty and clarity in an area which has been much argued particularly since the discount rate was reduced in 2017.
The Court of Appeal stated the guidance should only be revisited in response to "really significant changes" and "…it will rarely if ever be right for that guidance to be departed from by a first instance court".
While it is understood the Respondents are considering an appeal, this closely reasoned judgment will be the prevailing guidance for the foreseeable future on any claims for long term disability where mobility is affected In such cases, Insurers should closely review and revise as appropriate:
- schedules of loss
- offers made and
- reserves held.