How will the Ogden decision affect Contractor’s Liability Insurance?

A common question asked by contractors when arranging their Public liability insurance, is how much should they hold. Unlike Employers Liability Insurance which has a statutory minimum of £5m, often there is little or no guidance provided to a contractor on what Public Liability limit to hold. With the changes to the Ogden Rate affecting the insurance industry, its customers and claimants, contractors need to start talking to their insurance advisor about their Public Liability limit and whether or not it is sufficient in the event of a large liability claim.

But what is the Ogden Rate?

The Ogden Rate, as known as the Discount Rate forms part of the courts calculation to determine the level of award given in respect of cases involving serious injury.

When determining a claim settlement for injury the following components are taken into consideration:

• Future loss of earnings
• Future ongoing cost of care
• Compensation for pain and suffering
• Legal and professional fees
• Financial support towards activities that can no longer be performed as a result of the injury for instance caring for dependence

When assessing future loss of earnings, the courts multiply the amount they consider the claimant will lose each year by factors such as their age and their projected mortality rate.

In serious injury cases, the amount allocated towards loss of earnings and the future costs of care can be high, as the settlement is designed to provide financial stability over many years. As a result when such an award is made in a lump sum, it can equate to a considerable amount of money being paid by an insurer.

An allowance is made by the courts in respect of future losses to reflect the fact that the claimant will be able to invest the lump sum awarded and earn interest on that investment over a period of time.  The settlement amount is therefore ‘discounted’ by the amount of interest the claimant can expect to earn over that period, and it is this Ogden Rate aka Discount Rate which is now subject to changes.

Why has the Ogden Rate been changed?

The change has been introduced to ensure that claimants are more appropriately compensated over the remainder of their lives following an injury. The Ogden Rate is linked to returns on low risk investments, typically Index-Linked Gilts, but the rate hadn’t previously been adjusted since 2001, despite interest rates falling during that time. The return on gilts and government bonds has also fallen significantly during this time.

The rate has changed from 2.5% to -0.75% and its reduction is designed to reflect the fact that less investment income is available today compared to when the rate was last adjusted.

Rather than a lump sum being awarded with a discount applied, the indemnity settlement will be increased, as the view has been taken that over the long term there is predicted to be a negative return on investment income.

How will the change effect liability claims payments?

The ultimate effect that the change will have is an increase to the costs awarded on personal injury. The change is most significant for claims involving younger claimants, for whom the claim settlement needs to cover the greatest length of time.

For instance, the award made to a 22 year old apprentice with a serious life-changing injury will move from £6.5m under the old Discount Rate to approximately £14m under the new one.

Example claimant Settlement before Settlement after the rate change

• 27 year old builder with a severe spinal cord injury £2.791m to £6.325m
• 23 year old male claimant who sustained brain injury £7,6m £19.3m

I have a large ongoing injury loss with one of my employees. What will this mean for our business?

The most immediate change will be that the reserve on that claim is likely to increase to reflect the new cost of settlement. There will be no other change to the process of handling or settling the claim.

What will this mean for my insurance renewal premium?

Unfortunately price increases are generally needed to fund the cost of these changes and any revised claims costs will form part of the calculation when an insurer is setting a premium. A number of insurers have indicated a rate increase between 10%-15% on the liability aspect of an insurance premium, this is particularly going to affect those with Contractors Liability Insurance Policies

Should I increase my Public & Employers Liability Limit?

One of the major implications of the Ogden decision relates to the adequacy of Limits of Indemnity for Public & Employers Liability Insurance. An Increasing number of contracts are stating that the previously accepted limits of indemnity are no longer acceptable due to the potential for large liability claims to surpass these limit. It is likely that this will impact the construction industry and its contractors the most, who will see the changes to the tending process on large construction or local authority projects. As a result we feel that it is important to advise our clients within the construction or manufacturing industry, of any potential underinsurance.

How Clarke Williams Help 

If you are unhappy with the premium put forward by your current insurer speak to one of our advisors about conducting a market exercise to ensure that you are paying the most competitive premium.

It may be the case that your current insurer is unable to provide increased liability limits. At Clarke Williams Insurance Brokers, we have significant experience in providing clients will large liability limits, both for commercial and construction business.

For more information on Excess Layer Insurance click here or speak to one of our advisors.