The BBC's Jane Peel: 'Its effects will be felt by the victims of the most horrific of accidents'

A previous Court of Appeal ruling had cut their personal injury awards by up to a third but that has been reversed by the new decision.

Insurance companise are already warning the increased pay-outs will mean higher premiums.

Kelvin Page: "It's been hell"

The Lords were considering a test case brought by Thelma Wells, who was severely brain damaged in a car crash, and two other people.

Mrs Wells is unable to work or look after herself. A court originally awarded her £1.6m damages but that was cut by the Court of Appeal to just over £1m.

The Lords agreed the reduced amount was too low. Her daughter Thelma said she was delighted with the new ruling.

"We won't have the worry of the money running out. We can continue to love at home and have the quality of life we feel she rightly deserves," she added.

Risky investments

In the past, courts have assumed accident victims would invest their money in the stock market, earning up to 5% more each year.

The Lords said this was too dangerous and victims should be entitled to put their money in risk-free government bonds.

But the rate of return is lower and they said that damages would have to increase substantially to cover the difference.

For Kelvin Page, who was brain damaged when a steel rod pierced his skull, it means almost £1m.

"It's been hell for the last eight years," he said outside the House of Lords. "Finally, it's over."

Solicitor Paul Kitson, who has represented the claimants, said: "This ruling will affect thousands of accident victims.

"Damages in the most severe cases will be increased by 20 to 30%."

Mark Boleat: "Premiums will rise"

In making their decision, the Lords accepted there would be a significant effect on the insurance industry.

"If this principle were applied generally, it would mean a large increase in premiums for employers' liability insurance," warned Mark Boleat, a spokesman for the Association of British Insurers.

"That would affect a number of small employers and most importantly ... a significant increase in motor insurance premiums which is going to affect millions of people."