Insurance premiums rocketing; politicians denouncing the arrival of a US-style ‘compensation culture’; journalists decrying ambulance-chasing lawyers: it all sounds frighteningly familiar, doesn’t it? While Australian headlines uncannily echo our own, their news reports have a typically earthy Antipodean flavour.
Take the tragic story of Guy Swain, who unwittingly became a symbol of a compensation system that was perceived to be out of control.
One fateful day in 1997, Guy downed a 750ml bottle of beer having taken an ecstasy pill the night before, then dived into the surf on Bondi beach, ignoring the safety flags. The 28-year-old surfer hit his head on a sandbank, broke his neck and was left quadriplegic. Last year he was stripped of the A$3.7m (£1.4m) damages he won after successfully suing the local council in a case that, it has been claimed, inspired the New South Wales’ government’s crackdown on public liability payouts. The judges held that their decision was not intended to detract from the fact that Swain had suffered “a tragic and terrible accident” that cut him off in the prime of his youth.
However, they added: “But the real and genuine sympathy that all must have for his plight cannot obscure the need for there to be evidence of negligence.”
A couple of years ago, Australia was widely perceived to be in the grips of an insurance industry crisis.
Gerard Mullins, the Queensland president of the Australian Association of Personal Injury Lawyers, says that the outcry in Australia had reached “epidemic proportions” by mid-2002. Just as in the UK, the compensation culture debate in Australia can be seen as a hopelessly one-sided propaganda war between insurers, enthusiastically aided and abetted by a willing media, and claimant lawyers fighting to be heard, but largely ignored.
The Australian federal and state governments decided to act. They ordered a review of the law of negligence conducted by the Honourable David Ipp, who has since been made a judge of the Court of Appeal of New South Wales. He was also on the bench for the Swain appeal.
The Ipp Review’s terms of reference asserted that the damages awards for personal injury had become “unaffordable and unsustainable as the principal source of compensation for those injured through the fault of another”. It stated: “It is desirable to examine a method for the reform of the common law with the objective of limiting liability and quantum of damages arising from personal injury and death.” A sceptical Mullins notes that the allegations that increases in the size of damages and the number of claims were a significant factor in rising insurance premiums were “never substantiated”. He adds that the whole law reform exercise was predicated by “broad assertions on shaky factual foundations and anecdotes about outrageous awards of damages in cases that often did not exist”.
So what was driving increasing insurance premiums? The insurance industry concedes that it got its sums wrong in the late 1990s. Dallas Booth, deputy chief executive of the Insurance Council of Australia, says: “In March 2001 [insurance company] HIH failed and a huge amount of business which was previously being written by it, particularly in the public liability and federal indemnity area, flooded into the rest of the remaining market. For the June renewals that year, in many cases insurers realised they didn’t know what premiums to charge, particularly for areas of business that had previously been covered by HIH, and there was a very striking withdrawal of supply of cover. The insurance industry simply did what it had to do, which is try and price its business correctly.”
Simon Grant, a former defence lawyer and principal legal consultant in strategic policy at the Queensland Department of Justice & Attorney-General, says: “If anything, this has shown that the insurance companies, despite the fact that the industry has been in existence for so long, were very poor at assessing their risk and lumped a lot of risks into the same basket and then, of course, centred on worst-case scenarios.”
However, the ambulance-chasing antics of some personal injury lawyers made the law reforms easier to sell to the general public. “A lot of firms were charging exorbitant amounts to people for small legal actions and all the awards were being eaten up under no-win, no-fee deals,” says Grant. By way of an illustration, he believes that it was not unheard of for a lawyer to bill A$15,000 (£6,000) in fees for a damages claim of A$8,000 (£3,000).
This fundamental reform of the law of negligence has everything to do with a viable insurance industry to flourish and little to do with the legal rights of accident victims. In fact, there is an explanatory note to the legislation explaining that the primary purpose of the legislation is, as Grant says, “to make it attractive to provide insurance in Queensland”. Mullins argues that insurers, by raising premiums, effectively created the crisis and then demanded that law reform. Surely this is the tail wagging the dog, he says.
Much of the Ipp Review was aimed at stripping the small claims out of the system. Claims where the injury was less then a certain per cent impairment were not to be awarded damages for pain and suffering at all, or were to be awarded a very limited sum. In Queensland, if an award falls under A$30,000 (£12,000), a claimant is generally not entitled to legal costs. The plaintiff pays their costs out of the award of damages. Mullins says that the reforms largely abolished small claims by making them uneconomical to pursue. “The problem with abolishing small claims is that it is legislating in disguise against people with small incomes or those people on pensions,” he says. He cites the example of a teacher whose child is seriously ill after being prescribed the wrong medicine by a doctor and has to take three months off work to look after the child, losing A$10,000 (£4,000) in wages. He says that such claims have been effectively “legislated out of existence”.
But did the reforms work, and did premiums drop? The insurers believe that the first signs are looking good. Booth believes that fewer cases are being brought to the courts and that last year premiums rose by a lower margin than previous years. “The market has restored itself,” he says. “The outstanding question is the overall impact. Only time will tell.” Grant largely agrees, and says there has been anecdotal evidence of capital flooding back into the market. He expects a premium drop in the near future.
Mullins remains unconvinced. No promise was extracted from the insurance industry to reduce prices, he says, and – surprise, surprise – it hasn’t. Booth, on the other hand, says the industry never made such a promise because it cannot be seen to be saying anything about the state of the market. “It would give the appearance of collusive activity – and you go to jail for that,” he says.