Is a statutory scheme a potential solution for public liability insurance?
By Martin Jones, Xceedance Business Leader – Key Accounts Australia
Is it time for Australia to consider a statutory scheme for public liability insurance, along the lines of those that exist for compulsory third party (CTP) motor vehicle insurance and workers’ compensation?
Due to a hardening market, many organisations cannot afford or find appropriate public liability insurance. It is an issue that needs to be debated, given the impact on business, insurers, and the wider economy.
It is a core issue for the Insurance Council of Australia (ICA). ICA’s policy document, A stronger NSW, issued before the March 2023 state election in NSW, says: “Insurers have struggled to maintain profitability of public liability insurance over the past three years, often experiencing combined loss ratios of more than 100%.
“The hard insurance market – characterised by scarce capital, difficulty obtaining reinsurance, high regulatory activity, claims inflation, and rising costs of litigation and settlements – means insurers are increasing premiums or reducing their exposure to some sectors because of the inherent nature of the activity, poor risk management, or both.”
Scheme benefits
ICA says implementing a statutorily defined benefits framework for public liability, like those established for CTP and workers’ compensation in the 1980s, could:
- provide greater underwriting certainty
- reduce claim costs and duration
- improve health outcomes for injured people, and
- increase the affordability and availability of public liability insurance for organisations and businesses.
The Australian Prudential Regulation Authority (APRA) released its annual national claims and policy database (NCPD) review in May 2023 which analyses claim trends and affordability of public liability and professional indemnity insurance in Australia. It examined data collected by APRA up to 31 December 2021.
The detailed review showed average premiums for public and product liability insurance products have grown by 40% since 2015, outpacing inflation in Australia. APRA says: “As premium increases started to occur in 2017, in response to worsening claims experience, the proportion of policies with a larger deductible began to increase. In effect, it appears businesses have been taking on more risk to reduce or maintain premium costs.”
NCPD data shows bodily injury claims are the largest factor contributing to growth in premiums and claims costs, with the average finalised claim size increasing strongly by 5.5% each year since 2013. There is a higher incurred cost for accidents after 2017, driven by work injury and fall claims.
The review said inflation in claims costs has been higher than general inflation, driven by a combination of social inflation (for example, higher claimant demands and media scrutiny), legal and litigation cost inflation, and medical cost inflation.
Is legislation fit for purpose?
Given more than two decades have passed since there was major tort reform in Australia, it is opportune to re-examine current legislation and whether it is fit for purpose.
In 2002, the federal, state and territory governments commissioned the Negligence Review Panel, chaired by the late Justice David Ipp, to recommend changes to personal injury laws.
The review was commissioned in response to a so-called “insurance crisis” of 1999-2002, during which the cost of public liability and professional indemnity insurance rose to unsustainable levels.
Many factors contributed to the crisis. It was precipitated by the collapse of HIH Insurance in March 2001. That was combined with a hardening global insurance market, increased reinsurance costs and previously unrealistically low public liability premiums in a highly competitive domestic insurance market. High numbers of litigated claims and the size of court-awarded compensation payments were also blamed.
Despite the Ipp review’s exhortations, responses around Australia were inconsistent, with state and territory jurisdictions introducing their own legislation.
Prompt action
The NSW Government was one of the first to take action, with the Civil Liability Act 2002 (CLA) being enacted before the Ipp review panel was even announced. The Act limited the recovery of damages for personal injury claims.
Twenty years later, NSW Supreme Court Justice Richard Cavanagh told the Australian Insurance Law Association that the NSW Act had “well and truly achieved its purpose.”
He said the CLA has provided greater certainty to the outcome of claims arising from a failure to take care. “It has resulted in a significant reduction in the number of claims and significant reductions in the damages that would be payable at common law.”
However, he qualified that comment, saying it is “subject to what emerges as to the significance of Tapp.” The Tapp case was a High Court 3:2 majority decision delivered in April 2022 that overturned lower court rulings and granted A$6.75 million in damages to a champion horse rider severely injured in a campdrafting competition.
Emily Tapp had sued the Australian Bushmen’s Campdraft & Rodeo Association Ltd, arguing the event in which she was competing when injured should have been stopped because the ground was unsafe. She lost in the NSW Supreme Court and the NSW Appeal Court before the High Court successfully circumvented the dangerous recreational provisions of the CLA.
Diverse opinions
Justice Cavanagh said that decision brought a pattern of defendants succeeding in cases where the dangerous recreational activity argument was raised to “an abrupt halt.”
He noted the divergence of judicial opinions in the Appeal Court and again in the High Court in Tapp.
The uncertainty of the outcome and the length of time to finalise the case likely weighed on plaintiff and defendant alike. Ms Tapp was injured in January 2011 and her case was not finally resolved until 2022.
Had a public liability statutory scheme been in place, the outcome would likely have been resolved much faster and without major legal expenses.
If a statutory scheme included lifetime care and support provisions, like those that accompany the NSW CTP scheme under the Motor Accidents (Lifetime Care and Support) Act 2006, Ms Tapp could potentially be better off over the long term.
Given no tort reform has occurred for more than 20 years, ICA argues that the development of case law, the emergence of new industries, and the difficulties some businesses face in obtaining public liability insurance all warrant a further examination of civil liability settings – in particular, whether they remain fit for purpose and support insurance availability and affordability.
Genuine reform
CTP and workers’ compensation schemes have provided genuine reform that has helped people to rehabilitate and reduced adversarial litigation. That compares with the possibility of waiting for the judicial system to work out damages four, five or more years after the event.
While not perfect, the CTP models are generally accepted as being much better than the alternative – litigation – and put money into claimants’ pockets faster.
Likewise, workers’ compensation schemes meet more of the community’s needs and in a more equitable way. For example, the NSW scheme offers price stability and caps insurer profits.
In a further barrier to equitable outcomes, the current public liability ecosystem is so complex that only the sophisticated can navigate it and must fund themselves while going through the court processes.
Market volatility
Insurers enter and exit the public liability class, depending on factors such as competition and a softening market, which makes it more difficult to accurately assess the state of the class, despite the benefits of APRA’s NCPD analysis, which started in 2005 at the Federal Government’s request.
The market volatility works against the need for rational pricing. As insurers withdraw when they identify risks they are not keen to write, for example, nightclubs and high-risk adventure activities, gaps are exposed in the market. That leaves organisations and the public potentially at risk.
There is also a societal impact when organisations cannot afford insurance. For example, an emotional response is common when community events are cancelled or live music venues close.
The insurance industry is generally blamed, but insurance actuaries must do the sums to determine what risks can be underwritten and at what premium levels.
The lack of cover has prompted some small but potentially risky industries to create their own discretionary mutual funds as a way to mitigate their risk.
Government investment
ICA says: “Appropriate risk mitigation standards play an important role in helping businesses and organisations implement necessary risk reduction measures that will reduce the risk of injury to people and put downward pressure on premiums.”
ICA has asked governments to invest in training and education programs to improve risk management and national standards across industry sectors experiencing a higher frequency of personal injury liability claims.
Nonetheless, the core issue remains. A statutory scheme would provide greater certainty for underwriters and help injured people return to normality quicker, with an emphasis on rehabilitation not just compensation.
Being more affordable and providing broader coverage, better access and greater governance, a statutory public liability scheme would likely “pass the pub test” and gain approval from the Australian population.
No simple solution
So where next? Implementing a statutory public liability scheme would not be simple or easy.
Given Australia is a federation of six states with two self-governing territories, each of which have their own constitutions, parliaments, governments, and laws, plus an overarching federal government, achieving consensus on a nationwide scheme is unlikely.
Currently all states and territories manage their own CTP schemes, all of which insure the same risk but each scheme has its nuances.
The National Injury Insurance Scheme is a federated model of separate, state-based no-fault schemes that provide lifetime care and support for people who have sustained catastrophic injuries in motor vehicle or workplace accidents and other incidents.
Workers’ compensation is even more disparate than the CTP regimes. Australia has 11 different schemes that connect injured workers to services and support from their employers’ workers’ compensation insurers.
Every state and territory has its own workers’ compensation scheme and there are three federal schemes, each of which is governed by different laws. Most states and territories also enable self-insurance to varying degrees.
Major change
Notwithstanding the wide variety of CTP and workers’ compensation schemes around the nation, it would require just one state to take the lead and establish a statutory public liability scheme. After observing the benefits, other jurisdictions may well follow.
For insurers, any structural reform to public liability insurance would be a major change to operating systems and IT.
But insurers have demonstrated an ability to respond to many structural reforms in the past.
In today’s digital-first environment, IT system modernisation can be accelerated by leveraging low-code/no-code platforms.
With cloud adoption now standard for so many organisations, such solutions, delivered via Software as a Service platforms, can make the transition less painful.
Insurers can work with a trusted partner like Xceedance to achieve business process optimisation and implement the intelligent technology required for transformation.
It is clear that public liability insurance is essential to keep the wheels of commerce turning and protect injured people. However, it needs to be sustainable, affordable, and delivered speedily. A statutory scheme may be the answer to achieving those goals.
