THERE was great news for car owners this week after Lord Chancellor David Lidington announced draft legislation that, if passed, will reverse recent changes to the personal injury discount rate.

The discount is applied to compensation payments made in the aftermath of life-changing injuries and is supposed to take account of the fact that those in receipt of that money will be able to benefit from investment growth over their lifetime.

So, if someone earning £25,000 a year was left unable to work after being severely injured in a car crash their annual earnings would be multiplied by the length of time they had left to work - 15 years, say - to come up with the amount an insurer should pay them to make up for the lost earnings.

As the money is paid as a lump sum to be invested for the future, though, insurers have been able to reduce the amount they pay by applying the discount rate, which until earlier this year was set at 2.5 per cent. That meant the £375,000 the person above would have received would have been reduced to £365,625.

That is until Lidington’s predecessor Liz Truss stepped in and slashed the rate to minus 0.75 per cent to take account of the fact that investment returns have been very hard to come by for an extended period of time.

As that meant insurers paying a premium rather than a discount - the £375,000 would have risen to £377,812.50 under the new rate - they were clearly up in arms and started passing the cost on to motorists in the form of increased insurance premiums.

After serious lobbying from the industry Lidington is proposing a new rate of between zero and one per cent, which, unsurprisingly, has been well received.

Huw Evans, director general of industry body the ABI, said the move would “deliver a personal injury discount rate that is fairer for claimants, customers and taxpayers alike” while RSA Group chief executive Stephen Hester said the changes would “much better reflect the realities of how claimants invest their compensation payments today” in addition to “helping to stop the rot of steep rises in premiums”.

Which sounds great, right? We all want to pay less for our car insurance, after all.

The thing is, Lidington’s announcement only relates to claims made in England and Wales and while the Scottish Government followed Truss’s lead by slashing its own discount rate earlier this year it is not clear whether it will raise it this time round.

While the Government announced a Damages Bill that will amend the law on the discount rate as part of its programme for government, a spokesman confirmed that “the Scottish Government is still considering the responses to the joint consultation on how the discount rate should be set and no decisions have yet been reached”.

The ABI Scotland has already met with the Government to push its case and, according to industry insiders, some insurers are using the threat of higher costs for motorists or even the withdrawal of their services from Scotland to try to force its hand.

“Just because there have been changes in England and Wales doesn’t mean there will be changes in Scotland,” one source said. “If that was to happen there would be different costs in the underwriting and that would be reflected in different premium rates.

“If England went to one per cent and Scotland went to minus one per cent, for example, you would see a significant shift in prices.

“You might even see some insurers say that for the size of their book in Scotland they might not want to be here. That would reduce competition and could drive prices up.”

The flipside of the argument is that as the discount rate applies to claims made by people who have suffered severe, life-changing injuries the Scottish Government should be looking to maximise, not minimise, the amount of compensation they receive.

Patrick McGuire, a partner at Thompsons Solicitors, said: “This is about making sure that victims of the most serious injuries are fairly compensated.

“That’s what the discount rate is there to achieve: fairness and justice at the most serious end of the personal injury industry.

“It’s about catastrophic, life-changing injuries and people that require compensation to see them through the rest of their lives.”

It is now up to the Scottish Government to decide how to balance the needs of these people with the threat to the finances of everybody else, although when it comes to the suggestion that motor insurance premiums will rise if the discount is reduced or eliminated McGuire has a scathing response.

“The prospect of insurance premiums being different in Scotland to England and Wales are slim because the insurance industry works on an industry-wide basis and premiums are set in that way,” he said.

“Over the last 20 years the levels of compensation and legal fees in England and Wales have been substantially higher than in Scotland but during that time the premiums were not lower in Scotland.

“Any suggestion that this will result in a Scottish premium has not been borne out in the last 20 years. This is a brilliant opportunity for the Government to do the right thing.”

Government, it’s over to you.