Over the past 12–18 months, our team at Paladin Experts has noticed a shift in the way defendants approach catastrophic injury settlements involving Periodical Payment Orders (PPOs). Where undertakings previously managed the interaction between damages and statutory funding, defendants such as NHS Resolution and large insurers are increasingly insisting on Reverse Indemnities (RIs).
For claimant teams, deputies and financial experts, this development raises numerous practical and strategic issues which need careful consideration before settlement can be reached. In this article, we will address the rise in reverse indemnities, how these mechanisms work and some of the key issues we are seeing in practice.
What is a Reverse Indemnity?
A reverse indemnity is an agreement included in personal injury settlements that requires claimants to repay the defendant a proportion of any statutory funding received for their care. This is to prevent ‘double recovery’, which occurs when the claimant receives statutory funding to cover the care costs that are already being compensated by the defendant.
These mechanisms were once uncommon, as settlements would typically incorporate Peters’ undertakings. Originating from Peters v East Midlands Strategic Health Authority & Ors [2009] EWCA Civ 145, Peters undertakings served a similar purpose to RIs, requiring claimants to make a legally binding promise not to seek funding for care costs already covered by damages. However, following the Supreme Court decision in Tinsley v Manchester City Council & Ors [2017] EWCA Civ 1704 that claimants should not be prevented from exercising their statutory rights to free after-care under Section 117 of the Mental Health Act 1983, Peters undertakings were rendered effectively unenforceable.
This ruling has prompted defendants to champion reverse indemnities as an alternative mechanism to protect themselves against double recovery. In many of the NHS and catastrophic injury cases on which Paladin Experts has provided advice in recent months, defendants have insisted that any periodical payment order settlement must include a form of RI. However, as there is no widely accepted ‘standard wording’ for these agreements, negotiations often involve considerable drafting and re-drafting.
How Do Reverse Indemnities Work?
When a personal injury settlement incorporates an RI, the claimant in receipt of the PPO must repay the defendant a percentage of any statutory funding they later obtain to cover the cost of the same care and case management. While this percentage will vary from case to case, one structure we have seen recently is:
- 75% repayment to the defendant
- 25% retained by the claimant
The retained proportion acts as an incentive for the claimant to seek statutory funding where appropriate. However, the way these mechanisms are drafted can have significant consequences for claimants.
Considerations When Negotiating Catastrophic Injury Claims
From ensuring that the repayment of statutory funding does not exceed the periodical payment order awarded to the claimant to preventing the mechanism from interfering with existing care funding, several factors must be considered when drafting a reverse indemnity during settlement negotiations.
1. Capping Repayments
Imposing a cap on the repayment amount is crucial to prevent the claimant from paying the defendant more than the damages being received. This is theoretically possible in the case of some catastrophic brain injury cases, as their statutory funding entitlement can become very high.
For example:
- A claimant receives an annual PPO of £205,000
- When this claimant is assessed for statutory funding, their package entitles them to £400,000
- At 75% repayment, the claimant receives £300,000 from the defendant
For this reason, it is essential to establish caps during negotiation to ensure that repayment cannot exceed the annual PPO amount.
2. Definition of Statutory Funding
Disagreements about how statutory funding is defined can similarly cause issues when calculating the repayment amount. Defendants frequently seek wording that includes:
- Payments made
- Payments due
- Value of services provided
Where services are provided directly by a local authority or NHS body, determining their financial value can be extremely difficult. As these services could include shared staffing models, on-call support arrangement or even supported accommodation for the claimant, it is unclear how their attributable value should be calculated, which can create a risk of future satellite disputes.
3. NHS Continuing Healthcare (CHC)
Reverse indemnities frequently capture funding provided by Integrated Care Boards under NHS Continuing Healthcare. These packages can be substantial, typically valued between £200,000 and £400,000 per year or more in catastrophic brain injury cases.
When CHC packages are obtained after settlements have been reached, the RI mechanism may significantly reduce the effective value of the PPO. While this is not necessarily problematic, it is an important financial modelling issue when advising on settlement structure.
4. Timing of the Repayment
Applying RIs immediately upon settlement can cause serious problems for claimants who are still in temporary placements funded by their local authority. In practice, it can take several years for claimants to purchase and adapt property to their needs, while recruiting carers and transitioning to a private care regime can similarly extend their reliance on government-funded services.
For this reason, delaying the start date of an RI or discounting the statutory funding covering their current placement can be necessary to avoid immediate disputes about the value of existing services.
5. Administrative Complexity
Some RI structures attempt to calculate repayment based on a “surplus” model, subtracting actual care expenditure from the total statutory funding to determine the repayment amount. While theoretically fair, this approach can create substantial administrative complexity, including:
- Annual accounting exercises
- Disputes over what counts as care expenditure
- Evidential requirements for deputies
Many defendants, therefore, prefer a simpler structure based solely on a percentage of statutory funding received.
6. Break Clauses
The inclusion of break clauses in reverse indemnity agreements is necessary to safeguard the claimant against any subsequent changes in their circumstances. Without the provision to apply to the court to vary or discharge the mechanism, the claimant would be vulnerable in the event of:
- Their care needs are increasing significantly
- Their PPO is becoming insufficient
- The RI is operating unfairly
Periodical Payment Orders vs Lump Sum Settlements
An interesting consequence of the increasing adoption of RIs is that they may change the commercial attractiveness of PPOs. While the security provided by PPOs has made them popular with claimants, should the trend of statutory funding recovery continue, some of their financial advantages may be reduced.
By contrast, lump sum settlements are not subject to reverse indemnity clauses, allowing claimants to access statutory funding without repayment obligations to defendants. That being said, the lump sum value may be insufficient for some claimants, depending on their life expectancy, investment assumptions and expected care needs.
In order to weigh the advantages of periodical payment orders against lump sum settlements for your client, we have produced the following comparison.
| Advantages of PPOs | Advantages of Lump Sum Settlements |
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Financial Advice for Catastrophic Injury Claims
Reverse indemnities are likely to remain a feature of catastrophic injury settlements for the foreseeable future, and until we reach a universally accepted model, these mechanisms will continue to be defined through negotiation rather than established precedent. For claimant teams, it will be essential to consider the practical administration of these mechanisms, how they will interact with statutory funding and how finances should be modelled in different scenarios.
At Paladin Experts, we have consulted on many catastrophic injury settlements, supporting solicitors to ensure provision is made for every possible scenario, protecting claimant needs and their financial future. For support and guidance on the considerations and structures of settlements including lump sum only, Periodical payments and reverse indemnity agreements for your client, or for more information about our services, please contact us today to discuss the specifics of your case.
