Assessment of Lump Sum Compensation Payments

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:

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.