Ladies and Gentlemen.
Firstly let me say thank you to the Structured Settlements Group for the opportunity to address you today.
Structured settlements as a concept has been around for many years.
However, like many good ideas, structured settlements required some greater momentum to enable this important policy to be implemented. In the words of Ralph Waldo Emerson, structured settlements were a wagon looking for a star!
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.
Out of this adversity - opportunity was born!
The role of structured settlements
There is a clear view in our community that the law of negligence, as applied by the courts, makes it too easy for plaintiffs to establish liability for negligence on the part of defendants and that lump sum damages awards may be inappropriate.
Government has a role in ensuring that the law reflects the reasonable views of society about what is fair and equitable. While at the same time it ensures that those injured through no fault of their own are adequately cared for.
We must work toward a solution which finds the balance between people's needs and people's rights and enables insurance companies to meet the expectations and demands of the community without undermining their financial viability.
In recognition of this role, the Federal Government, in close cooperation with State and Territory Governments, has worked to develop a nationally consistent solution to the current crisis in Public Liability Insurance.
I have chaired three meetings with my State and Territory counterparts to thrash out some practical solutions to the current problems.
Reforms to the common law (or tort law) to reduce the uncertainty surrounding court awards and settlements and reforms to streamline the legal system are essential to stabilise the insurance market.
The States have responsibility for the common law and the courts. So it is essential to this process that State Governments sign on to a process of appropriate law reform.
A key area in which the Commonwealth can contribute is by encouraging the use of structured settlements.
The Taxation Laws Amendment (Structured Settlements) Bill 2002 which is currently before the Parliament, is designed to exempt annuities paid under structured settlements from income tax.
The Bill will remove the existing tax impediments to structured settlements, however, further work will be required at the State and Territory level to remove further impediments to these arrangements.
Other measures to reduce claims costs
While structured settlements may have some impact on reducing claims costs for insurers by better matching compensation with needs, this measure is only one of a range of actions required to address the current situation in the insurance market.
At the last meeting on public liability insurance, held on 2 October in Sydney, an historic in-principle agreement was reached to move to a nationally consistent law of negligence.
The basis for these far-sighted reforms are recommendations contained in the Review of the Law of Negligence chaired by Justice David Ipp of the NSW Supreme Court.
The Review was commissioned to provide a principled evaluation of the existing law as a blue-print to assist governments to achieve comprehensive reforms.
The Panel appointed to undertake the Review 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.
An overarching recommendation of the Panel 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.
A further key recommendation made by the panel was to modify the standard of care to be applied to doctors and other professionals in assessing negligence. 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 both widely held and 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 major component in determining 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 as to how to approach questions of liability.
Other 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 are designed to standardise and harmonise 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.
I will be meeting with my State and Territory counterparts once again on 15 November in Brisbane to move from our in-principle agreement to a formalised position to move all States and Territories toward a national scheme of negligence law.
This position will be put to the meeting of the Council of Australian Governments (CoAG) for endorsement in late November.
Medical Indemnity
One component of the recent difficulties in the insurance market which has required a tailored response from Government has been in the area of medical indemnity.
Specific Government action in this area was required because of the implications of rising premiums for particular specialties and particular rural and regional areas. Nothing is of more value to people than their own health and that of their family, and their ability to go to their doctor of choice.
In addition, medical indemnity is different from other types of insurance because, as it is currently structured, it is not in fact insurance and it is not provided by insurance companies.
Unlike insurance products which impose a contractual obligation upon insurance companies to honour a policy when an insured event takes place, doctors are covered by a discretionary indemnity. That is, medical defence organisations have an absolute discretion to deny cover in any circumstance.
Discretionary cover does not provide much certainty to doctors or patients that claims will be paid!
Another consequence of this discretion is that medical defence organisations avoid prudential and consumer protection regulation.
Prudential regulation is designed to promote the safety of financial institutions by ensuring they hold sufficient capital and provide adequately for their liabilities.
The largest medical defence organisation, United Medical Protection, covering up to 60 per cent of doctors across Australia and 90 per cent of doctors in NSW, went into provisional liquidation earlier this year having not adequately provisioned for its incurred but not reported liabilities to the tune of up to $500 million.
Last week, the Prime Minister announced a Government response to address these fundamental issues in the medical indemnity market. The package is expected to cost approximately $45 million per annum.
The package is designed to address the financial viability of the providers of medical indemnity insurance and second, to ensure that insurance cover remains affordable for doctors.
To address these two issues, the Government has put together a six pronged attack.
Firstly, the Government has agreed to extend the guarantee to UMP for a further 12 months. The extension of the guarantee will enable policies to be renewed and provide certainty to UMP members while the provisional liquidator continues to pursue options to restructure the business.
Second, the Government will be assuming the unfunded liabilities of medical defence organisations and levying doctors to recover the costs of this arrangement over time.
This arrangement is to ensure that medical defence organisations are put on a sound financial footing while still ensuring premium affordability for doctors.
While some might complain about the need to pay a levy it must be remembered that the alternative to this arrangement would be that doctors would have to fund these liabilities immediately through a call or face the prospect of UMP going directly into liquidation leaving doctors and their patients fully exposed to prior years claims. The levy arrangement enables these liabilities to be funded over at least five years to ensure premium affordability and removes these liabilities from UMP's balance sheet radically improving the commercial outlook for this entity.
It is difficult to say exactly what the levy will be for individual doctors. The liabilities that we are talking about here are highly uncertain; for example the provisional liquidator has estimated UMP's unfunded liabilities at between $360 and $500 million. That sort of margin for error makes you realise just how uncertain and difficult to value these types of liabilities can be.
However, to try to provide some level of certainty to doctors, the Government has said that the levy will be based on a percentage of 2000-01 premiums and that the levy will never exceed the levy imposed in the first year. If it turns out that the unfunded liabilities are higher than expected then the term of the levy would be extended to ensure that the levy remains affordable to doctors.
Certain members, for example, retired and student members will not be required to pay the levy.
While the cost of the levy is uncertain, it is roughly estimated that the cost of the levy would work out to something less than 20 cents per consultation for a GP.
The third component of the Government's package will require medical defence organisations to be regulated by APRA and provide insurance contracts to their members.
This will ensure that members of medical defence organisations have greater security and will be protected by the prudential and consumer laws that apply to insurance companies.
Fourth, the Government will be providing subsidies to three groups of doctors facing the most serious premium affordability problems.
These groups are GPs that undertake procedural work, obstetricians and neurosurgeons. These groups face relatively higher premiums to income than other groups of doctors.
In return for the subsidy, doctors will have to participate in quality and safety programs aimed at minimising the incidence of injuries to patients.
In addition to this, the Government will be providing reinsurance cover to medical defence organisations by funding 50 per cent of claims in excess of $2 million.
This measure will directly reduce the costs for medical defence organisations in providing cover, particularly to high risk groups, as it will reduce the costs of reinsurance.
And finally, in addition to this, the Government will continue to pursue tort law reform with the State via the process that I have outlines earlier.
Long term care schemes
With all of these processes in train, many are still asking what the Government's position is on proposals to introduce a national no fault scheme for long term care of the catastrophically injured.
On this topic, I can tell you that the States and Territories through the Heads of Treasuries (or HoTs) grouping are undertaking some work to evaluate the pros and cons of such an arrangement.
States and Territories are looking at this issue because the vast majority of catastrophically injured people sustain those injuries as a result of motor vehicle or workplace incidents, not through medical malpractice. Compulsory third party motor vehicle insurance and workers' compensation are the responsibility of State Governments.
The Commonwealth Government will examine the results of this work once completed.
However, no one should be mistaken into thinking that this type of a scheme would be simple to devise or implement - indeed the HoTs group believe it will take at least a year to come to any sensible conclusion about whether or not such a system would be viable. Nor would it necessarily represent a panacea.
For those advocating such a scheme, I would ask them to consider the following difficult policy questions.
The tort law has been developed to require financial restitution for loss. If catastrophically injured people are taken outside of the system of tort law, what sort of incentives does this arrangement imply? Would doctors be liable for small mistakes but not for large ones?
Only very small proportions 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. Catastrophic injury resulting from medical negligence account for only 5 per cent of those catastrophically injured nationally on an annual basis. If a scheme were developed for medical indemnity alone, this would be very expensive. If it were to be applied more widely, it could be expected to cost billions of dollars annually. The New Zealand no-fault accident scheme currently has $3.9 billion (in New Zealand dollars) of unfunded liabilities. How would a scheme of this nature be funded?
In medical situations, many people have adverse outcomes, not only because of medical mishaps, but sometimes because of the underlying medical condition for which they are being treated. How would you determine who would be covered by the scheme?
These are not simple questions. The fiscal and moral issues at stake make informed debate crucial.
Conclusion
However, we can do better to ensure that those who are injured are properly cared for in a more cost effective manner. For example, offers of particular care, life time funding or equipment may be more important from a needs perspective than a cash award. Structured settlements may provide for a better alignment with the needs of a claimant and ensure that sufficient funds are available over the entire course of a person's life.
A shortfall in compensation for a catastrophically injured person is as unjust as a windfall is to a defendant.
The Structured Settlements Bill is currently before the Parliament. I would like to thank the Structured Settlements Group for its very large contribution to bringing this issue to the point that we are currently at.
However, it is important to recognise that now it will be up to the Government and the Parliament to determine the final form in which the legislation should be enacted.
The current circumstances in the insurance market have allowed structured settlements to become a reality. But this is, in some respects, a double edged sword. In this environment, legislators will look to see whether structured settlements can be applied in a broader range of circumstances.
It is important to understand that notwithstanding the momentum for reform gathering pace, attempts to bring forward a narrowly focussed approach to this issue may result in much needed reform being lost.
I would like to reaffirm my commitment to driving structured settlements forward. All of us have a joint responsibility to find a balance between the need of the community to have access to affordable insurance and the needs of injured people to access appropriate compensation.