Ladies and Gentlemen.
It is a great pleasure to be invited to address the Australian Insurance Law Association conference today.
The inter-relationship between the law and insurance is something which has occupied a great deal of my attention in the past year, so I am very pleased to be talking with a group of people who, from varying perspectives, can appreciate, better than most, the many and varied challenges that have come my way both politically and legally as the so-called crisis in insurance has gathered momentum.
The impact of the past year's dramatic increases in insurance premiums and the reduced availability of cover across a range of classes has caused widespread concern for all areas of the Australian community.
From small business, to community groups, local governments and the professions, no one has been immune.
These challenges require a strong and comprehensive approach by Government.
The implications of the current problems in insurance spread across several ministerial portfolios.
Through my portfolio responsibilities for the prudential regulation of insurers, I have been charged with developing the Federal Government's cross-portfolio response to the issues affecting the public liability, medical indemnity and professional indemnity markets.
It became obvious very early on that what was required was a national approach to what is a national problem.
Given the responsibilities of States and Territories in relation to the common law and the administration of the legal system we needed to get all levels of Government involved in order to achieve results.
I am pleased to say that we have had much success. Reforms in prospect and already achieved will have profound implications for the law of liability and flow through implications for professional and medical indemnity and public liability insurance.
Today, I will endeavour to draw together the common themes that underpin each of these liability classes and describe the policy responses that have been implemented or are in the course of being considered by State, Territory and Federal Governments.
Action required
The need for an urgent solution to the crisis in the insurance market does not depend on accepting the arguments of the insurance industry, nor does it depend on comprehensively rejecting the pleas of plaintiff lawyers and those they represent.
Rather, the task of the Federal Government has been to co-ordinate a range of policy responses by Federal, State and Territory governments designed to restore stability to a market in free-fall and in danger of collapsing on itself.
It is not necessary to rely on industry claims to be certain that long-tail, high risk insurance has become largely unaffordable or unavailable for business, community groups, medical practitioners, private hospitals, mid-wives, auditors and accountants just to mention a few.
The latest casualty under threat is the Australian Light Horse Association's Anzac day March.
APRA statistics also bear-out the experiences in the insurance market. For 2001, the return on equity for the general insurance industry was 5.5 per cent - but this figure excluded the impact of the liquidation of HIH and only partly reflects the impact of the events on 11 September 2001.
Had HIH been included in the APRA statistics, reported losses would have been substantial, reducing the industry's return on equity to -30 per cent.
The insurance industry has sustained underwriting losses of $7 billion over 7 years - and this is before taking into account the losses of HIH in 2001!
While in the past, underwriting losses could be offset by investment returns, the outlook for investment markets means that now, more than ever, insurers must either set adequate prices or face serious financial consequences.
Against this background, the rising cost of claims has assumed enormous significance.
Advice to the Ministerial Meeting on public liability insurance in May indicated that awards for bodily injury claims have been increasing on average by 10 per cent per annum over the past decade.
This advice reinforces the very real feeling in our community that there is an increasing culture of blame and that individuals are less prepared to take responsibility for their own actions.
It is very clear that people are dissatisfied with the seemingly random nature of court awards.
It is not difficult to see how these perceptions have arisen given the number of high profile claims that have attracted the attention of the media in recent times and which the community simply cannot understand.
Since 1994, local councils in NSW have paid out $183 million in general insurance cases including more than 6000 claims valued at $54 million for accidents on footpaths.
Insurance Statistics Australia report that over the past decade, more than 200 payouts in excess of $500,000 have been made in the area of medical negligence. Of these, 32 claims in excess of $2 million have settled since 1994.
Infrequent, large claims are extremely difficult for insurance companies to price. This has been a factor in the recent difficulties of the major medical indemnity organisation, UMP/AMIL -which contributed to the imminent collapse of the organisation and the need for the Government to provide a guarantee to ensure that doctors can continue to access indemnity cover and have the confidence to practice.
With insurers unable to adequately price risk and the industry experiencing the highest underwriting losses ever recorded in Australia and worldwide, it is no coincidence that insurers are directing their relatively reduced capital bases towards less risky and more profitable classes of business.
No business can continue to sell product lines at a loss.
We have seen a number of insurers exit the market all together and others are threatening to follow suit. For example, Holly Bellingham the CEO of Marketform was recently quoted as saying that Marketform, a medical indemnity reinsurance company, would consider withdrawing from the Australian market.
She said "We are not here as the ultimate deep pocket. Unless insurers can underwrite business believing that they will be treated justly by the courts, and that it isn't automatically given that the plaintiff will get the money, we will not underwrite business here and we will withdraw. My company hasn't withdrawn from any territory in 30 years and I expect Australia might be the exception."
We need to act now
The need for an urgent solution to the crisis in public liability and medical and professional indemnity cannot wait. To do otherwise would leave government's open to the same fate as Emperor Nero. Fiddling while Rome burns is not a position widely endorsed by the public.
It is true to say that there are indications the courts are moving to remedy the situation with a growing body of High Court decisions in favour of defendants. There are enlightened judges such as New South Wales' Chief Justice Spigelman who have provided lucid arguments for comprehensive reform. However, the community cannot wait for the Courts to turn the trend around quickly and decisively enough.
We cannot wait for the insurance cycle to soften. We cannot wait for plaintiffs to be more responsible for their actions.
We cannot wait for the culture of blame to evaporate. We cannot wait when local councils are now dismantling childrens' playgrounds.
We cannot wait while essential services such as doctors and nurses simply close their practices. We cannot wait while community activities and sporting events are cancelled.
We cannot wait while highly trained medical specialists such as neurosurgeons, procedural GPs and obstetricians withdraw their services because they cannot get affordable insurance.
We cannot wait for reinsurers to simply stop doing business in Australia.
There is no doubt that the problem is real and it must be addressed now.
Ministerial meetings
To address these problems, I have convened a series of ministerial meetings with my State and Territory counterparts to examine a range of issues and possible solutions.
The rationale for the meetings has been the recognition that we have a national problem that required coordinated action where each of the Federal, State and Territory governments would own and be responsible for reform in each jurisdiction. Central to the reforms is law reform.
I have to say that from a standing start, the ministerial meetings have now progressed to the point where the almost unimaginable is about to happen.
At the last meeting on 2 October, there was a unanimous agreement in-principle to the adoption of a model law of negligence or, at least, to achieve conformity in all the jurisdictions.
The Ipp Report
The basis for these far-sighted reforms is recommendations contained in the Review of the Law of Negligence chaired by Justice David Ipp of the NSW Supreme Court.
The panel was commissioned to provide a principled review of the existing law as a blue-print to assist governments to achieve comprehensive reforms.
The panel sought to strike a balance between the interests of injured people and those of the community at large and to impose a reasonable burden of responsibility on individuals to take care of others and to take care of themselves.
The panel made 61 recommendations on specific changes that could be made to the law of negligence.
The panel's overarching recommendation was that the reforms should apply to any claims for personal injury resulting from negligence, regardless of whether the claim is brought in tort, contract, under statute or any other cause of action.
Another key recommendation made by the panel is to modify the standard of care test for doctors and other professionals. The new test would reinstate a modified version of the Bolam test and would re-balance the interests of plaintiffs and defendants. It would mean that doctors would be protected against a claim for negligence if they have acted in accordance with an opinion widely held by a significant number of respected practitioners in the field, unless the court considers that the opinion was irrational.
The panel considered that this recommendation could be applied to any profession or trade and it would provide significant protection for professionals acting in accordance with accepted practice.
Another key recommendation relates to the statute of limitations. The panel has recommended the limitation period be reduced to three years from the date of discoverability, subject to a 12 year long-stop which, in turn, is subject to special provisions to protect plaintiffs in circumstances of latent disease.
Clearly, if adopted, this recommendation will have significant implications for long-tail insurance classes such as personal injuries and will assist insurers to more accurately price their risks.
A key component in negligence is forseeability. That is, a person can only be responsible for harm that they knew about or ought to have known about. Presently, risks that, as a matter of common sense, appear to be anything but far-fetched and fanciful can result in large awards for damages. However, the panel has recommended that the forseeability test should be "not insignificant" and that there should be principles to evaluate whether a reasonable person in the defendant's position would have taken precautions against a risk of harm to others. For the average person, this is a subtle change to the test. For tort lawyers, it is a substantial change to the test and if legislated in all jurisdictions, it will provide a clear signal to judges.
Important recommendations relate to liability of public authorities and are particularly significant for local councils so bedevilled by concerns about failing to give specific warnings of risk. The panel has recommended that a claim for damages arising out of the negligent performance or non-performance of a public function should not generally succeed where a public authority had taken a decision to perform or not perform that function on policy grounds - unless the decision was so unreasonable that no reasonable public functionary could have made it.
This recommendation clearly acknowledges the need of public authorities to make decisions taking into account not only potential risk of harm but also financial, economic, political and social factors.
There are also recommendations concerning liability in relation to recreational services - something that is vital to our communities and the Australian way of life. The panel has recommended that voluntary participants in recreational activities should not be able to sue for injury in circumstances where the risk of that injury occurring from taking part in the activity is obvious.
Other recommendations relate to contributory negligence and proportionate liability. Processes for expert evidence, causation and damages.
The Ipp report generally highlights the inconsistent approach across different State and Territory jurisdictions, and between different schemes within States and Territories.
In respect of damages, recommendations are directed to discouraging people from bringing actions for minor injuries. For example it is recommended that the awarding of damages for legal costs should be limited. The panel recommends that no order for legal costs should be made where the award of damages is less than $30,000 and, in any case, where the award of damages is between $30,000 and $50,000, the plaintiff may recover no more than $2,500 in legal costs.
Further, the panel concludes that a threshold for awards of general damages would be an effective and appropriate way of significantly reducing the number and cost of smaller claims. The panel recommends that a threshold for general damages be set at 15 per cent of the most extreme case and a cap for general damages at $250,000.
The recommendations as to damages will standardise and harmonise the approach to damages and remove some of the inconsistencies between various State and Territory schemes and decisions in various State and Territory courts.
The reforms proposed by the panel can be expected to have major flow on effects for public liability, medical and professional indemnity as well as for providers of recreational services, public authorities such as local councils, and for reducing the incentives for people to make claims for relatively minor injuries.
At the next Ministerial meeting, there will be further consideration of proportionate liability and, in particular, whether proportionate liability for economic loss should replace joint and several liability.
Will reform Work?
However, one important question that must be asked is whether these sorts of reforms will work.
If governments, public authorities and professions work together to implement these reforms, there are good prospects that premiums should be stabilised and that there will be downward pressure on premiums in the mid to longer term.
The Government is as concerned as the community to see that this occurs.
With this aim in mind, the Commonwealth Government has provided the ACCC with an ongoing monitoring role over the insurance industry to ensure that premiums are being adjusted to take account of cost savings generated through law reform.
The Government's brief requires the ACCC to monitor the situation for premiums in both the public liability and professional indemnity markets over two years.
We have already seen some very positive signs with the willingness of Suncorp Metway to re-enter the public liability market in jurisdictions that have the political will to push forward on reforms. The co-insurance panel for not-for-profit organisations announced by QBE, IAG and Allianz recently is another very positive step. IAG have also announced that they will commence writing public liability business once law reforms are in place. Several commercial insurers have expressed interest in entering the medical indemnity market once again subject to tort law reform.
It is essential that the insurance industry delivers the results that governments and the community expect. The reputation of the insurance industry depends on it and I am confident that national tort law reform will provide the basis for a stable and predictable market for liability lines of insurance.
Are Plaintiffs' rights Impacted?
Understandably, concerns have been raised about whether proposals such as those contained in the Ipp report will impact unfairly on plaintiffs' rights.
In considering this question, it is important to note that relatively speaking, personal injury law provides very generous compensation to a very small proportion of the population at considerable expense to the rest of the community.
There is an overwhelming consumer interest in restoring the balance in a system where, at present, the benefits disproportionately favour the few. Only a very small proportion of deaths or injury result in the payment of compensation. The vast majority of those who are injured have to rely on their own resources and on other sources of assistance, notably social security.
This observation has important implications for proponents of no-fault schemes for compensation. A scheme of this nature would be expected to cost billions of dollars. The much touted New Zealand Accident Compensation Scheme, for example, currently has unfunded liabilities of $3.9 billion in New Zealand dollars. It is not hard to understand why bungee jumping was invented in New Zealand!
A scheme to provide care to those people who are catastrophically injured would cost many billions of dollars per year. Those injured must be adequately cared for - but in the most appropriate, cost effective way.
This is one reason why the Commonwealth Government moved recently to provide concessional tax treatment to structured settlements which provide periodic payments for injured plaintiffs as opposed to lump sums. In fact, long-term care cases are an important driver of costs in the system.
There are occasions when the problem may require a more tailored government response. For example, the Government will shortly be announcing a package for medical indemnity that will include a range of measures to deal with more serious, higher cost claims and a subsidy arrangement for doctors in high-risk specialties.
Solutions to these crises must be balanced between the need for appropriate Government action to secure the outcomes we expect as a society, and the need to manage the costs of doing so. No government has an appetite for socialising the high-cost claims whilst allowing the profit to go to insurers. A better outcome is getting the settings right to ensure the market works more effectively.
Ultimately, rights are a relative concept, they are not absolute. There is little use in having rights if there are no services, no playgrounds, no recreational activities and no doctors. Rights must be balanced with responsibilities and rights must not be asserted to the disadvantage of the community as a whole.
Conclusion
There are now major incentives for the States and Territories to adopt a national law of negligence. Any jurisdiction that fails to do so will be faced with serious consequences.
Insurers are saying that their ability to continue to provide insurance at a reasonable cost is dependent on States reforming the law.
Doctors and other professionals are saying that they will not continue to practice in States that do not reform the law.
It is not the luxury of Governments to sit idly by as normal human activity grinds to a halt. In the words of Martin Luther King Jr "the ultimate measure of a man is not where he stands in moments of comfort, but where he stands at times of challenge and controversy".
The momentum for reform is, I believe, unstoppable. It has required determination, commitment and difficult decisions.
Insurance is a vital thread running through the fabric of our society. We must all identify what we can do and act swiftly to restore the balance and some common sense into a system that we simply can't live without.
Thank you