Damages ruling may lead to rise in insurance premiums

Landmark court case has potential to increase insurers' personal injury compensation payouts

PUBLISHED : Tuesday, 15 January, 2013, 12:00am
UPDATED : Tuesday, 15 January, 2013, 4:16am

Insurers are anxiously awaiting a court ruling on damages claimed by two patients from the Hospital Authority after they were left paralysed following alleged mistaken medical procedures when they received treatment at hospitals.

The High Court case finished on Friday and a ruling is now expected in several weeks that could, insurers fear, lead to a substantial increase in damages and compensation claims arising from similar incidents.

If that happens then insurers will face higher compensation payouts and customers may need to pay higher premiums for policies covering personal injuries.

A key issue in the landmark court case was whether the judge would stick to applying the standard 4.5 per cent expected investment return on the compensation sum awarded for personal injuries, or whether it would fall in line with the outcome of a Guernsey court case which saw the use of a lower expected return, and therefore a higher initial lump sum compensation.

If a lower return is used, the compensation awarded will be higher.

Typically, hospitals and doctors purchase liability insurance to protect themselves from claims arising from medical mistakes. This is why insurers are concerned about the case as they have to pay the compensation.

The outcome could also affect how compensation awards are calculated for all other personal injuries arising from such events as car accidents or workplace accidents. In all these cases it is for the High Court to determine how much compensation should be paid, and to arrive at a lump sum figure the court will need to consider what return could be generated by the lump sum.

In the case of Hong Kong claims the return that has been applied by the Court has been set at 4.5 per cent since a ruling was made in 1996.

Is that figure still appropriate?

Not if you put the money in a bank deposit, which will give you zero interest at present. Not if you invest it in a bond fund, which may generate a return of around 2 per cent. And not if you were invested in stocks last year, which saw a gain of 23 per cent as measured by the rise in the Hang Seng Index.

But of course shares go down as well as up, and an accident victim dependent on a compensation payout to fund his needs for the rest of his life would not be advised to invest it in the stock market.

And of course, don't forget the value of the award will also be eroded by inflation.

This is why in this landmark court case, the plaintiffs argued the judge should use a lower expected return of minus 0.5 per cent to plus 1 per cent to determine the future income that might be generated by the investment of a lump sum compensation award.

And of course the lower the rate used for the calculation, the higher the award will have to be to ensure that enough income is generated.

If the judge accepts the argument, payouts will become much higher.

Should Hong Kong still maintain using 4.5 per cent to calculate the compensation for personal injury victims? Like the insurers, let's watch the result of the ruling.