Victims of serious road, work and medical accidents will have their compensation awards boosted by tens of thousands of pounds from today.
The change could mean an increase of more than £100,000 in the most severe birth damage cases worth £3m, lawyers said.
The rise results from a regulation laid before parliament yesterday reducing the "discount rate" - the rate accident victims are deemed to earn by investing their compensation awards - from 3% to 2.5%.
It means that accident victims will be entitled to bigger lump sums to cover their future care and loss of earnings because their investments will be deemed to earn a lower rate of return.
The move will cost the NHS and the insurance industry millions of pounds more.
The lord chancellor was given power in 1996 under the Damages Act to set a rate but, much to claimants' lawyers' frustration, it took him five years to exercise it.
Lawyers took a series of test cases to the House of Lords in 1999 arguing that accident victims should not be expected to invest in equities, which are risky, but should be entitled to put their lump sums in gilts - government securities which are risk-free but offer lower returns.
The law lords agreed and reduced the then rate of 4.5% to 3%, substantially increasing awards.
Claimants' lawyers argued for a further decrease to as little as 2%, pointing out that rates had dropped again since 1999. However, insurers argued that a well-advised claimant would invest in a mixed portfolio of equities and gilts.
Explaining why he chose 2.5%, Lord Irvine said: "I must set a rate calculated to avoid over- or under-compensation of claimants. In doing so, I have had regard to the legitimate concern of claimants who are seriously injured to ensure that they have a stream of income in the future adequate to meet their needs."
Mark Harvey, secretary of the Association of Personal Injury Lawyers, said: "We welcome the fact that we've finally got some certainty. It's long overdue. What I am disappointed about is that the lord chancellor has not agreed to review the rate regularly."
John Parker of the Association of the British Insurance Industry, said: "This decision will increase insurers' costs, and certainly will not help keep premiums down in the classes of business most likely to be affected - motor and employers' liability.
"But the impact will be significantly less than if the rate had been set at 2%, which had, until today, been a possibility."
