What is a PPO?
Quite simply, a PPO is an order from the court that rather than handing over compensation as a lump sum, the defendant should pay an annual amount, frequently in addition to an initial lump sum, to the claimant for the duration of their natural life.
The very first PPO in British legal history (at the time called a Structured Settlement) was devised by Frenkel Topping in 1989, in the case of Kelly v Dawes.
Why should I consider a PPO?
A PPO can be a great comfort to a claimant. They know that they will have a regular income for the rest of their life, and do not need to worry about running out of the money that has been awarded as a lump sum.
A PPO can also be varied over time and linked to inflation, so if a claimant’s needs change as a result of their injuries, or economic conditions change dramatically, they will not be adversely affected in the same way as they could be with a single, unalterable final payment.
When should I consider a PPO?
A PPO should always be considered in cases where substantial damages are awarded – awards above around £1m are frequently used as a benchmark.
A PPO should also be considered in cases where the parties are having difficulty agreeing over a claimant’s life expectancy – with lump sum awards there is always a tendency for defendants to attempt to underestimate life expectancy, while claimants will naturally seek to overestimate it. PPOs can remove the wrangling.
A PPO can also be a useful tool for claimants who are risk averse, or who are simply not comfortable with the idea of investing and managing large sums of money over a long period of time. A stable income can remove significant worries for individuals who have already been through a traumatic injury and ensuing court proceedings.
What are the advantages of a PPO?
*Regular payments rather than one lump sum make it easier for the injured party to budget and manage funds and care costs. There is no danger of the money running out.
*A lump sum award is based on the estimated life expectancy of the injured person, which can often be a point of contention between parties. Periodical payments will continue for the injured person’s lifetime even if the injured person lives longer than expected. Equally, if a person dies sooner than expected the defendant will not have over-compensated.
*The Discount Rate means that a lump sum award is discounted by a percentage, in order to negate the expected investment return. If the injured person receives periodical payments instead then they do not have to worry about the Discount Rate, investing the money, or the associated risks.
*Compensation received by periodical payments is not taxable. Although a lump sum would not be taxable either, any income received on the lump sum, such as through investment, would be.
*Periodical payments can be index linked which means they can move up and down with inflation. Since the decision in Tameside & Glossop Acute Services NHS Trust v Thompstone , the court can use the Annual Survey of Hours and Earnings Index if the injured person is receiving on-going care.
*If an injured person’s condition deteriorates or they develop an additional condition as a result of the initial injury, then they can apply to the court to vary the PPO and increase the payments.
*Should the defendant fail to make a periodical payment where a court judgment is in place, the injured person is afforded protection under the Financial Services Compensation Scheme.
*Means-tested benefits are not affected by periodical payments. A lump sum payment could affect them now or in the future.
Are there any disadvantages?
*If the injured person lives a shorter life than expected then the periodical payments will stop and their estate will not benefit from a lump sum.
*A lump sum payment gives the injured person more freedom to invest, should they so choose. They can do what they want with the money and choose to invest it on a high-risk or low-risk strategy.
*Just as claimants can apply for increased payments if their condition deteriorates, so if their condition unexpectedly improves the defendant could potentially apply to the court to vary the PPO and decrease the payments.
*As already noted, periodical payments can be index linked. This means they can move up as well as down with inflation.
*Some injured parties prefer to receive a lump sum so they feel they have closure. They can then focus on recovery without being dependant on regular payments, or worried about the prospect of future court cases to vary payments.
What should I do next?
Contact Frenkel Topping for a free assessment of whether a PPO could be the best solution for your client.