On 9 October 2020, the Court of Appeal handed down judgment in Swift v Carpenter, on the issue of how to approach damages for the additional capital cost of accommodation.
A summary of the key points
- Appeal allowed. The court was not bound by Roberts v Johnstone, which, in an era of low positive or negative discount rates, no longer provides fair and reasonable compensation.
- Roberts is therefore no longer applicable to the assessment of accommodation claims. Damages are to be calculated by awarding the additional capital cost of the new property minus the present market value of the 'reversionary interest' in that property. This addresses the 'windfall problem' i.e. that if no deduction is made, the injured person receives more than fair compensation as they would not only benefit from the new house during their lifetime but it would also be inherited by their estate.
- The present market value of the reversionary interest is to be calculated by using an annual rate of return – equivalent to a discount rate - of 5% over the claimant’s life expectancy. The door is left open to revisit the % rate if the evidence justifies it, perhaps if a body of evidence builds up as to the actual rates achieved in the open market.
- There are some cases – primarily those involving short life expectancy – where a different, more creative approach may need to be taken, so it cannot be said that we now have principles of universal application.
- The Court of Appeal has refused the respondent permission to appeal their decision, but an application for permission is likely to be issued direct to the Supreme Court. It is arguable as to whether or not there is a point of general public importance to justify the grant of permission. It was also notable, and unusual, that the Court of Appeal heard expert evidence direct. If permission is granted to appeal, it may be restricted to points of law.
The Swift Formula
Having chosen the reversionary interest model, the Court of Appeal did not actually incorporate a generic formula into the judgment. They were open to the idea but only if the parties could agree the format, which they did not.To make everyone's lives easier, we have produced a calculator to value the reversionary interest based on the formula put forward by the intervener, PIBA, and the evidence of Brian Watson, their actuarial expert. That calculation in Swift is:
- £900,000 (additional capital cost) – Reversionary Interest (RI).
- To calculate the RI, the 5% yield is added to 1 to provide a figure of 1.05.
- You then take the 1.05 to the negative power of the life expectancy (on an iPhone, negative power is the xy button)
- In Swift it is 1.05 to the power of -45.43 = 0.109 (rounded up)
- Additional capital sum of £900,000 x 0.109= £98,100 RI
- Compensation award = £900,000 - £98,100 = £801,900.
- Awards of damages will increase, substantially. Clearly there was no award under a Roberts approach and a negative discount rate; if we went back to a pre 2017 discount rate, 2.5%, using a Roberts approach, the award would have been £900,000 x 2.5% x 26.54 = £567,150. The award in Swift is £234,750 more.
- Short life expectancy cases; the reversionary interest will be at its highest, and therefore the shortfall greatest. If we take Mrs Swift's case but substitute a 15 year life expectancy, the reversionary interest would be £432,915 and the compensation award £467,085. In a short life expectancy case, there is unlikely to be a lot of money in other heads of loss to make up the shortfall.
Whilst it has been suggested that the onus is on insurers / defendants to come up with an alternative approach in such cases, LJ Irwin's judgment in Swift made it clear that overcompensation would be preferable to undercompensation. As such, claimants will undoubtedly argue for full capital costs and defendants may argue very differently.
The reversionary interest model also does not fit neatly with rental costs; for example, a young claimant needs a property now but in the absence of the accident would have rented until age 35. How do you account for those 'but for' rental costs? If the rental spend equates to spend on property, then arguably it must be taken into account.
- Has the role of the accommodation expert become more prominent; will they become involved earlier in the litigation, with a more forensic and detailed analysis, in anticipation of early applications for interim payments to fund accommodation? What about betterment? Perhaps those defending accommodation claims will wish to have more focussed evidence on that issue.
- Insurers are likely to face more applications for interim payments for accommodation.
Swift is not – and was not intended to be – the final answer in all accommodation claims. There is no doubt that the application of the reversionary interest model beyond cases of normal life expectancy are challenging, and the issues will no doubt be ironed out at JSMs in the months to come.