Insurance: An In-depth Analysis of Swift v Carpenter
A Brief History of Insurance Contributions to Specialised Accommodation
Historically, insurance firms have not been obligated to compensate personal injury claimants for the full capital cost of specialised accommodation. This is despite the fact that catastrophically injured victims typically require more expensive accommodation to meet their more complex needs. The reasoning behind not compensating claimants the full cost of specialist accommodation required harkens back to Wells v Wells. This 1998 House of Lords decision affirmed that damages should financially place the claimant where they would have been had the accident not taken place. The Court of Appeal was already one-step ahead in this line of thought, however.
Almost a decade prior in Roberts v Johnstone, the formula set for calculating insurance already excluded full contribution towards the purchase of specialised property. Instead, insurance for accommodation was predicated on the lost return of capital the claimant would have to invest to buy the property. The respective formula was capital difference x discount rate x lifetime multiplier. Because property is an appreciating asset, it was thought that allowing full insurance contribution to purchase specialised property resulted in overcompensation. This overcompensation would be a windfall in the claimant’s estate.
The application of the Roberts v Johnstone decision has resulted in less than significant contributions to funding the costs of specialised accommodation. Catastrophically injured victims would at times take out loans to help fund the cost of accommodation more suited to their needs. This problem was compounded when the Government altered the discount rate multiplier to -0.75% in 2017, however this was increased to -0.25% in 2019. In some instances, the Roberts v Johnstone formula would result in no accommodation compensation for catastrophically injured victims. The recent Swift v Carpenter case was one of those instances.
The Swift v Carpenter Decision
The claimant had her left leg amputated below the knee after a road traffic accident. In order to fund more appropriate accommodation, the claimant required £900,000. The High Court applied the Roberts methodology in line with the negative discount rate. This resulted in insurance contribution towards the £900,000 sum accounting for £0. Dissatisfied with this result, the claimant appealed to the Court of Appeal and submitted that the Roberts formula was no longer fit for purpose.
On the 9th of October 2020, the Court of Appeal found that the Roberts formula “no longer achieves fair and reasonable compensation for an injured claimant” (per Irwin LJ). In his leading judgment, Irwin LJ found that the formula was suited to specific market conditions at the time the decision was made. Hence, he found the court was within its rights to depart from the Roberts formula if it was demonstrated to be ineffective. After hearing submissions and evidence from experts including economists and actuaries, the court found the Roberts formula did not compensate the appellant fairly. Therefore, the appellant was entitled to recover over £800,000 of the sum she required to fund the property more suited to her needs. Although this is not the full amount, it is a far cry from the £0 contribution to accommodation she was originally entitled to.
Irwin LJ did note that his position should “not be regarded as a straitjacket to be applied universally and rigidly”. This likely means that insurance contributions will not always be as significant as they were to the appellant in Swift v Carpenter.
The Impact on Insurance Firms
Swift v Carpenter has opened the door to insurance firms contributing more significantly to catastrophically injured victims’ accommodation costs. With property prices for catastrophically injured victims being, on average, higher than the ordinary market rates, the additional expense will place more stress on insurance firms to pay higher amounts of compensation than they are accustomed to. The additional accommodation expense will have to be factored into the compensation insurance firms already pay to catastrophically injured victims. For many insurance firms, the sums paid out to catastrophically injured victims to comply with Swift v Carpenter are likely to correlate with an increase in cash-outflow. In an increasingly complex insurance market that faces a deluge of new risks, the Swift v Carpenter decision is but another factor to be considered.