Indemnities for future loss – a solution to uncertainties of future loss or groundwork for future litigation?

There have been an increasing number of settlements in high value claims where indemnities have been agreed for future care costs.  Where a Claimant may be entitled to receive state funding for their care, the Defendant can argue that any amount received should be deducted from the award of damages.  But state funding is not by any means certain.  The amounts funded may change due to budgetary pressures or by a change in the legislation or guidance covering state funding.   Indemnities avoid the assessment of what that future funding will be.

There are two types of indemnity commonly seen, the “straight” or standard indemnity and the “reverse indemnity”.

The straight indemnity is where the Defendant agrees to meet any shortfall of annual state funding each year up to the level they would have to have paid absent the state funding. The calculation is usually done by agreeing an annual baseline of expected funding, and then increasing that baseline annually in accordance with RPI (although as the courts make more decisions on different indexation rates that may change), then assessing on an annual basis whether the local authority provision is more or less than that and making up any difference. 

A reverse indemnity usually works by the Defendant paying the money it is agreed would be paid in damages if there were no state funding and then the Claimant pays back to the Defendant every year what state funding he has received. The benefit for the Claimant is that they can invest the money that has been provided up front and keep whatever interest is earned on it as they would with a normal lump sum.   It is obviously less attractive to a Defendant who has to pay the money up front. 

So why are they not used in every case? First both types of indemnity require the Claimant to account to the Defendant for what funding has been received and to disclose assessments of their care needs and therefore details of their current financial and medical status. Some Claimants may not be happy with that level of invasion of privacy for the rest of their lives.

Secondly, the Claimed normally agrees to take “reasonable steps” to obtain any available local authority funding.  What constitutes “reasonable steps” is the first of many potential problems with the interpretation of these indemnities.  Does a Claimant have to take a case to court? To the Court of Appeal? The Lords? The longer an indemnity is intended to last the greater the potential pitfalls.    

That is not the only drafting difficulty.  In defining what funding the Clamant must seek, or must inform the Defendant of, phrases such as “local authority or other funding” are often suggested.  Does that include funding from charities which would not normally be taken into account in a damages claim?  But if the “other funding” is left out, what if funding becomes centralised or privatised and the local authorities no longer make the payments?  Phrases such as "or its equivalent”, are equally subject to problems of definition.

Standard indemnities have been used for education costs for a number of years, and experience shows that when a claimant calls on them, there are often arguments about what is due to be paid.  By their nature, education indemnities last shorter periods than would be the case for many indemnities for care, realistically a maximum of say 15 years, so the problems are likely to be magnified in care indemnities. 

The indemnity also takes away from a Claimant the ability to use his damages as he wishes. The flexibility that is present even in periodical payments to save money one year against increased expenses the next is lost.

At present there has been no decision directly on whether indemnities can be ordered by the court although it must he doubtful whether a court would have jurisdiction to do so without the claimant’s consent.  It was argued by the Defendant in Iqbal v Whipps Cross University Hospital NHS Trust [2006] EWHC 3111 that they could be ordered by way of the court accepting an undertaking, but the judgment does not decide whether it could accept the undertaking, finding that there was no real benefit in sustaining the relationship between the Claimant and Defendant (see para 73).  Indemnities are therefore a useful tool in the armoury, but care needs to be taken in the drafting and in deciding which risks should be bought off by the indemnity. 

LISA SULLIVAN