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Assessment of Lump Sum Compensation Payments

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Compensation part of lump sum settled by agreement or consent order

    

In order to calculate the lump sum preclusion period for lump sum compensation payments made wholly or partly for economic loss, the 'compensation part of a lump sum compensation payment' must be determined. For personal injury settlements made by agreement or by consent order (either with or without admission of liability), the compensation part of a lump sum compensation payment is always taken to be 50%. This is known as the 50% rule. The policy rationale for this is that settlements of lump sum compensation, particularly in the workers compensation jurisdiction, can be manipulated to obscure the economic loss component and to avoid or minimise the reduction to the compensation recipient's CAP.

Medical costs

Medical costs should be included in the calculation of the compensation part of a lump sum compensation payment. That is, the 50% rule is applied to the total lump sum, including medical costs. Where a court order has specified an economic loss component, medical costs should be added to the economic loss component to determine the compensation part of the payment.

Legal costs

A successful plaintiff is entitled to receive costs for the work undertaken in pursuing the action (or, in the case of a successful respondent, in defending the claim). These costs are normally based on statutory scales, and are referred to in the settlement as the party/party costs. These costs should be excluded from calculation of the compensation part of a lump sum compensation payment. Solicitor/client costs are those additional legal costs incurred by a solicitor on behalf of the person and cannot be claimed as party/party costs (that is, those that are not allowed by the courts). Solicitor/client costs should be included in the calculation of the compensation part of a lump sum compensation payment.

Application of 50% rule

The following table demonstrates the application of the 50% rule in various circumstances:

If...

Then...

a lump sum includes past periodic payments which have to be repaid

the compensation part of a lump sum compensation payment is 50% of the lump sum after the amounts repaid for periodic payments are deducted.

a court order or judgment identifies an economic loss component of the lump sum compensation awarded

the 50% rule does not apply and the compensation part of a lump sum compensation payment will be the economic loss component as characterised by the court.

the terms of the settlement specify the lump sum is inclusive of any medical costs

the compensation part of a lump sum compensation payment is 50% of the total payment.

the terms specify an amount for medical costs, in addition to a lump sum, eg '$xxx exclusive medical costs'

the compensation part of a lump sum compensation payment is 50% of the total payment including medical costs.

legal costs are specified as a separate amount in a settlement or court judgement, eg $xxx plus costs (either a set amount or a reference to costs including, for example, party/party costs)

those legal costs (either specified of the amount subsequently agreed or ordered to be paid by the unsuccessful party) are excluded from the calculation of the compensation part of the lump sum.

the settlement amount or judgement states '$xxx including costs'

it is necessary to ascertain the amount of costs which are paid by the unsuccessful party prior to determining the preclusion period. The amount of costs is excluded from the calculation of the compensation part of the lump sum.

additional legal costs, such as solicitor/person costs are not specified or referred to in the settlement judgment

those legal costs remain part of the calculation of the compensation part of a lump sum compensation payment.

any interest is included in the settlement

the compensation part of a lump sum compensation payment is 50% of the total payment including interest.

Compensation part of lump sum settled in tribunal or court order

    

Where a court has made an order after a contested hearing specifying the economic loss component of a lump sum payment the 50% rule is generally not applied. In such cases the compensation part of a lump sum compensation payment will be the economic loss component as characterised by the court. Where this is not specifically stated, it may be necessary to interpret the terms of the court order to ascertain the amount awarded in respect of lost earnings or lost capacity to earn. If a court order does not set out fully the basis of the award, more information should be sought about the nature of the award and a decision made on the basis of all the available information. If no information is available then the 50% rule should be applied.

What is the economic loss amount

When a case is finalised after a contested hearing, the compensation part of the lump sum is made up of the amounts awarded specifically for economic loss. In particular the delegate should have regard to amounts awarded for:

  • lost wages (past economic loss),
  • interest on past economic loss,
  • lost capacity to earn (future economic loss), and
  • lost superannuation contributions.


According to subsection 5NB(1) of the VEA a compensation affected pension means:

  •       an invalidity service pension payable to a person who has not reached pension age; or
  •       a partner service pension payable to a person who has not reached pension age; or
  •       an income support supplement payable to a person who has not reached qualifying age.