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The Proclaimer

November 2008

Welcome to the Proclaimer October newsletter. This is a special edition on tort reform, 5 years on. Has it been effective, what has it achieved? Is 5 years long enough to reach some conclusions on the impact of tort reform? It seems the industry is still trying to understand what the impact has and will be. While the claims are long tail in nature, it is quite amazing that there is very little available evidence on what tort reform has done, and what its legacy might be. While we agree that it is difficult to read the tea leaves precisely at this stage, developments over the last 18 months have left us convinced that tort reform had a short term positive impact, but a confluence of factors have meant that there is no lasting savings being generated from reform, and that costs are escalating just as insurer returns are diminishing.

Articles

 Current Trends In Public Liability: Tort Reform, What Reform?
Some More Specific Issues Arising from Tort Reform - An article by Jonathan Lee
Workers Recoveries – Dealing with Workers Compensation Recovery Injuries Jon Broome, with assistance from Marianne Lim and Bryce Check

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Current Trends In Public Liability: Tort Reform, What Reform?

To arrive at our opinion on the impact of tort reform we have been studying a group of clients with attritional claims experience from 2002 to 2008. It includes a range of risks such as retail, cleaning, leisure, pubs and clubs and construction. As many of our clients are trained to advise us of incidents as early as possible, we often are ahead of the general insurer experience. Whilst a large percentage of our claims are relatively small, we are of the view that the sample we have taken (of around 10000 incidents and 1500 claims annually) is representative.

The Trends

Five years on and what can we say about the impact of tort reform on public liability?

There were clearly some short term effects. These can be broken down into 2 areas:

  1. Statistical, in terms of claim numbers and costs; and
  2. The overall environment in which we operate.

Statistically the short term impact was:

  1. A fall in claim numbers - our sample showed a 25% to 30% reduction in claim numbers;
  2. An even greater short term reduction in the number of litigated claims; and
  3. 2003 and 2004 accident years have returned good results with modest development, demonstrating there was a positive reduction in claims costs initially following the reforms.

There was no reduction in overall incident numbers in our population. In fact, incident numbers increased slightly. So there is no evidence that tort reform has in any way impacted on the number of incidents occurring which could give rise to claims. In fact, in our sample the numbers of incidents have increased, most likely because the soft insurance market has led to less attention to risk and claim management.

What about the environment in which we manage claims? Immediately following tort reform the playing field was reasonably even for plaintiff and defendant. There was some sanity at the bench and you would have some confidence running a case with strong evidence in your favour. Thresholds and damage parameters were being observed and some plaintiff lawyers were anxious about cost penalties and limitations. So immediately following the reforms, there seemed to be a reduction in vexatious or frivolous claims and it did seem to restore some sanity to the liability landscape. Hence the 25% to 30% reduction in claims from 2004 to 2006.

Fast forward to 2007/2008. The good news is that statistically claim numbers remain steady as well down on 2003/ 04 (although we think the numbers have bottomed), however the claims that have been knocked out are largely the smaller ones which don’t have a great impact on insurers bottom line. Current trends are:

  1. Increase in average claim costs ($1 and above) of over 30% annually over last 2 years;
  2. Creeping increase in numbers of litigated claims;
  3. 2005 year is developing out later and more adversely than 2003 and 2004; and
  4. 2006 shows significant increases in costs and development.

The environment has also deteriorated; we are not so confident about running marginal or even reasonably solid cases as the results are becoming increasingly unpredictable, with the natural leaning to the claimant reemerging. In addition, plaintiff lawyers who survived the reforms have adapted and learned how to work with the reforms, in some cases to their advantage.

The graph below shows the experience of a disparate group of our clients. The orange bar is the numbers of claims, the blue bars are incident numbers. The three lines are the average incurred figures (claims $1 and above so removing zeros). The graphs shows great results in 2003 and reasonable results in 2004 but deterioration in results thereafter. We base our estimate of costs increases on the movement in average costs from year to year – so 04 accident year in 06 to 05 accident year in 07, which is as close as we can get to comparing apples.

Proclaim Liability Trend Index

What if we tried to estimate what $1 of claims costs across the public liability spectrum in 2003 equals in 2008? If claims at 2003 prior to tort reform were indexed at 100 where would be now?

Taking into account both the number of claims (eliminating zero value claims)and the average cost of those claims:


In 2004 claims spiked a little with those brought forward, but the ultimate impact was more in the decline in costs of around 10 to 15%. Index 90.

In 2005 claim numbers were down 10% and costs off about 10% so the apparent immediate impact of tort reform over the first 2 years was an overall decline in costs of an estimated one third, or around 30 to 35%. So the index absent inflation would have been at around 70.

2006 – Costs up around 20% off a further declining base of claim numbers of 10%. Index closer to 80.

2007 - Costs up around 25 % off similar claim numbers. Index around 100, so claim costs equal to or above pre tort reform.

2008 – Costs up around 20% to 25% off similar or slightly higher claim numbers. Index around 125.

In the 5 years post tort reform premiums have declined by 50% or more while costs are up more than 25%.

Many underwriters are expecting reduction in claim costs by 25% or more as a result of tort reform. When claims finally filter through the system they may well have increased in overall costs by 50% or more. In 2008 we may well be operating from half the premium base with close to double what is expected on the claims side, with a 50% increase against an anticipated 25% reduction in costs. This spells trouble for underwriters and means that accounts that have halved in premium, particularly larger attritional accounts, are unlikely to be profitable. Claims need to be contained and premiums need to rise to avoid a crash landing.

By State development in costs 2007 – 08

NSW - has always been the most difficult State for public liability insurers. Higher costs of living, higher wages, aggressive plaintiff lawyers with a society with a litigious outlook means higher costs than in other states. Tort reform was always going to be tested longer term in this environment, but any chance of making a long term impact was limited by the rubbery and subjective nature of the threshold test. What is 15% of the worst possible case? While we initially thought a fracture with longer term complications would be required, strains and sprains are getting over the thresholds, and wrist fractures are assessing at 25 to 30%. Against that environment there is little wonder that costs in NSW are now galloping ahead. You will see from the table below on NSW data for the last two years that 2005 and beyond will be building significantly over results in 2002 to 2004, once loss development kicks in. NSW is showing significant adverse development from 2004 on with further deterioration expected as the economic difficulties take hold.

Queensland – The most significant procedural reforms occurred in QLD. Under the PIPA process a claim must be started by a voluminous notice of claim. For a procedure that intended to avoid the cost and inefficiency of litigation, they have done a pretty good job of creating a process very much like litigation and in some aspects worse. The imposition of time lines and strict procedures has led many claimants and respondents direct to lawyers, increasing the cost and complications of the process. In addition, as there are no cost penalties to join other parties, there tends to be too much indiscriminate joining of parties on the fringe, which again increases complication and takes the parties further from resolution. All in all what we have is a pre-litigation process that is unique to Queensland and has as many pros and cons as litigation itself.

2005 and 2006 accident years in QLD have developed out significantly in the last year showing an adverse trend after 2005. Results after 2005 have broken our usual trend line which indicates that losses will escalate from 2006.

Victoria - has adopted a more objective test which seems to have a little more traction than the NSW test, at 5% on the AMA tables. However to argue the toss on whether an injury meets the criteria you need to submit to a medical panel, at a cost that tends to be over $2000, and success before the medical panels has been infrequent. However even though Victorian losses have been lower on average than in the northern states, we have seen significant development as well in years 2004 and 2005 and an unusually high starting point for 2007. This demonstrates that even in Victoria we are seeing costs escalating, and the continued emergence of workers compensation recovery actions is partly responsible. Those claims average $50,000 or more and are difficult to resist if they have not been notified and investigated early.

While our experience with other states is more limited, we believe that the trends are not confined to the eastern states and that the shift in the environment where these claims are brought, together with the deteriorating economic conditions, means that we are likely to see similar increases in costs in other states.

What Conclusions Can We Draw?

  1. In the last year it has become clear that the liability claim environment has deteriorated significantly. Our trend lines had been reasonably consistent until the third quarter of last year where for the first time we noticed new adverse patterns in the results.
  2. That years 2005 on will become problematic for underwriters with long tail business.
  3. That NSW is leading the charge, with increasing litigation and a greater tendency for claimants to rush to lawyers.
  4. That Queensland with its PIPA regime is creating a very high claim cost environment that will be second to NSW, and is likely to create problems for insurers who do not have the capacity to manage those claims in house. Heavy reliance on lawyers for the run of the mill PIPA claim will lead to legal costs blowing out.
  5. That the years in which tort reform had a positive impact will likely be confined to 2 main years - 2003 and 2004. 2005 and 2006 will be more difficult and as costs increase there will be red type in this class of business as losses develop.
  6. From 2003 costs are up between 25 and 50%; premiums are down by around 50%. While investments were productive from 2003 to 2007, it is hard to see that gap remaining without some adjustment in the market, or loss ratios will blow out.
  7. All of this on top of a deteriorating economic and investment environment, which tends to produce more claims at the same time as less investment income for underwriters.

There will no doubt be people scratching their heads; wasn’t tort reform sent to save us? Why are liability claims costing more?

Why?

  1. Tort reforms, particularly in NSW, were rubbery at best, and have been eroded over time.
  2. Tort reform only eliminated the smaller claims at the lower end. So if there were 20% fewer claims, many of them were the very minor ones that in reality should not have been brought in the first place. For that we can be grateful.
  3. The environment has reverted back to being more plaintiff friendly which to some extent encourages more speculative litigation.
  4. Plaintiff lawyers have adapted and found their way around many of the reforms - and while there has been some rationalisation among plaintiff firms, many of the larger firms have emerged stronger as a result of the initial fall-off in work from the tort reform – they have had to be creative in tougher times.
  5. Tort reform moved many of the small to medium claims up to a higher damages level due to the various thresholds and set assessments that now apply. I can still remember being amazed when a broken wrist came in with an estimate at double the pre-tort reform going rate.
  6. The soft insurance market has acted as a disincentive to risk and claim management. Those who slackened off in the post tort reform cycle will feel the whip of loss development shortly. If you have not been capturing your risk, and settling claims early, the claims will settle later at greater cost given the high rate of claims inflation we are seeing.
  7. We have also seen an increase in workers compensation recovery actions. These tend to come in at 5 to 10 times the costs of your average claim and as they have increased in number they are having a significant impact on the average cost of claims. The impact of this and the need for training and new strategies to combat this should not be underestimated.

Impact on Business

Currently there is still strong capacity in the insurance market. However with investment returns dwindling and the claims cycle changing, the prospects for strong return on equity in the insurance sector is weak at best. The spoils will be shared by a few stronger companies. With the restrictions worldwide on liquidity we expect the insurance cycle to turn as whatever capital is left out there finds its way into more profitable opportunities outside insurance.

As a result, capacity will decline, and there is likely to be further rationalisation in the insurance sector. This will lead to diminished capacity for risk and will force up insurance premiums. We are already seeing the start of the harder market cycle with property rates starting to come under pressure. The worldwide financial collapse will be visited upon insurers in the form of more claims, which will also tighten capacity and increase rationalisation in the insurance sector.

There are consequences for buyers of insurance as well, with those companies who have taken their foot off the risk and claim management pedal expected to suffer:

  1. Claims will develop out more adversely from the last 3 years at greater cost.
  2. The deteriorating risk cycle will lead to competition for the scarce capital and as a result the better managed risks will be favoured; those with poor loss history will suffer price and deductible increases.

What we are saying is basically in line with what happened in the last hard market – if you have control of your risk exposure, you will be able to obtain competitive insurance quotes for liability. If there is evidence that you do not have your risk and claims under control you will pay a heavy price in terms of very high deductibles, higher premiums or a combination of the two.

The pending changes to the market mean that strong management is required to recognise the issue before it becomes problematic.

For companies, it is very important they ask themselves if they have control of their claims; if they have been rejecting claims outright based on the tort reform regime, and they have not been assessing the risks for each claim, we suggest your losses will start to develop out adversely very soon.

What can be done to help?

We understand that until there is a recognised problem, there is unlikely to be any consistent action taken in response to creeping increases in costs. While capacity remains for public liability risk, policyholders won’t be feeling any pressure to change.

However, what you do now pays off in 18 months to 3 years time. With long tail claims, things that blow up tend to do that three years down the track. Forward thinking companies will recognise that now is the time to take hold of your risk and claim regime, as the rewards are likely to come when the market is at its toughest in 2 to 3 years. How do you take hold of your risk? You control your exposures.

  1. A proactive regime of notifications and early investigations to ensure you understand and control your claims exposure.
  2. Risk management and education to limit the risks that can be controlled or eliminated.

From a claims perspective:

  1. Improve claims and risk response; minimise your tail by promoting an active and proactive incident management regime – capturing incident information early and having a system to manage the claims potential that arises from these incidents
  2. Bring forward losses – do not wait as claims do not get cheaper with age. Actively manage your portfolio so any claims that can be resolved are resolved now before claim costs escalate any further.

From a risk control perspective:

1. Training and education. In several areas:
a. Incident management – how to deal with them, what information to gather, benefits of early intervention;
b. Contractor injuries - how to deal with them, what information to gather, follow ups. How to prevent or resist workers compensation recovery actions; and
c. Latest developments - with different regimes in each state, getting to grips with the process in your state and the information requirements is important.

What Our Clients are Getting

1. Quicker claims settlements through an early intervention approach. You can see from the table below that claims reported early are settled more modestly. Your best chance of a cost effective result comes if you notify incidents early and there is proactive management of the exposure from there (note that the history that is more than 3 years old - 2004 and earlier - is more reliable in terms of the effectiveness of early intervention as the older claims have developed);

2. Faster reading on claims exposures. We will be at odds with many people out there in suggesting tort reform has been ineffective, and that costs are going up. We believe that time will bear out our opinions. We think the best thing we can do for our client’s is bring their losses forward. When claim conditions are deteriorating, you need to settle claims quickly as when they get dragged out the costs escalate as well. No claim gets better with age!;

3. Less costs and less claim development if claims are settled proactively. In addition, claims settled quickly save not only legal costs but management time and also limit brand damage;

4. Benchmarking against other clients and the loss experience of competitors;

5. A specialist. Are your claims being handled by a dedicated claim specialist? Many companies have their under excess claims managed by their insurance broker. This can be a dangerous solution. Your need to consider; and

a: Is claims a core competency of theirs?

b: Do they dedicate adequate resources to the management of claims? The cost of managing claims is usually a function of case load and expertise – the higher the case load the lesser is the quality of the service but the cheaper the claims administration cost. Cost of claims management needs to be seen in context with the value of claims that are being managed, as that is where the real dollars usually are.

c: Can they advise you objectively on the quality of their claim solutions? Are they benchmarking against any external markers?

d: Are you confident that when the market hardens that underwriters will give you credit for your claim and risk regime?

Conclusion – What Reform

“The bottom line is that tort reform legislation seems only to erect more barriers that prevent victims of malpractice from obtaining justice in the courts, and does nothing to correct the underlying problems. Unfortunately, more and more states are adopting such measures, and they are also being considered once again in Congress. Perhaps what is needed, in addition to an overhaul of America's health care system, is tort reform reform”.

Seems a fairly accurate take on local tort reform but it is actually from a US web article on tort reform efforts in the USA (see footnote 1 -yes, they have tried it there too!).

So 5 years down the track, where are we? It is fair to say that our trend lines have been broken in the last 12 months, indicating change is afoot.

  1. Claims are down, litigated claims are still well down, but we have hit the bottom in terms of claim numbers and both claims and litigated claims are rising again. In reality all we have eliminated are the nuisance claims which, when handled well, can normally be settled modestly in any event.
  2. Claim costs are up significantly on pre tort reform averages and deteriorating
  3. The environment for claims is deteriorating along with the economy - more people are watching their pennies and claims are now coming in more quickly than for some time, while the bench is back favoring the claimants once more. More claimants are being represented as the lawyers come back in the frame for personal injury claims.
  4. We have different regimes in each State and states like Queensland have a process that is arguably more elaborate than that which existed (at least for the large majority of claims) prior to tort reform.
  5. A shrinking premium pool to cope with an escalating loss experience.

Tort reform, what reform? You’d have to say we aren’t really in a better position now than we were back in 2003.

As a final assessment, the NSW Government position on reform in 2002 was as follows:

“The challenge, therefore, is to prepare a

  1. Careful, coordinated set of reforms.
  2. Which influences the behaviour of those involved in the compensation process.
  3. Reduces costs.
  4. Increases efficiency.
  5. Promotes involvement by a competitive insurance market.

What do we have?

  1. A raft of separate and distinct reforms for each State.
  2. A stronger plaintiff bar that specialises in the law post reform; in some states like QLD the reforms have not promoted the kind of behaviour that was desired.
  3. Costs are increasing.
  4. The string of different laws and different interpretations means the system is not efficient.
  5. The insurance market has been involved and responded positively initially but we are reasonably confident that this is the market cycle and not a longer term phenomenon.

So in terms of tort reform being successful, capacity did increase and prices did come down for insurance, so there was that positive impact. We also had some net positive impact on claims costs in the first year or two of reform, although even that is still to be played out. The next market cycle will tell us whether the increased capacity following tort reform is sustainable. At the end of the day, tort reform enacted separately across each State was always going to be a tough process, but you can’t help but feel that the whole process was largely a great opportunity lost, and we really needed one strong set of reforms nationwide for it to have a chance of success. A very wise and seasoned claim manager said to me at the start of this process that in 5 years time it will travel full circle and we will be back where we were. In many respects he was right, although it appears we are back where we were with interest, at a precarious time for insurers and commerce generally.

http://www.southernstudies.org/facingsouth/2007/03/its-tort-reform-time-in-tennessee.asp

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Some More Specific Issues Arising from Tort Reform
An article by Jonathan Lee

Queensland & PIPA

As part of its novel approach to tort reform, Queensland adopted a pre-litigation process (“PIPA”) that has in many peoples’ view added both undesirable complexity and an additional administrative burden to personal injury claims in that State.

PIPA includes procedural requirements and timeframes that can create work (and costs) that is wildly out of proportion with the value of smaller claims. To settle these claims now typically requires a compulsory conference between the parties, which more often than not also involves their solicitors and, particularly as far as claimants are concerned, their barristers. While PIPA was meant to demystify and simplify the process so that there was less spent on legal costs in small claims, our experience is that in many cases it is having the entirely opposite effect.

As a result of PIPA, companies with liability exposures in Queensland have specific additional needs, including:

  • When they are a respondent to a PIPA claim, their interests need to be protected (and in fact promoted) during the document intensive process and at the compulsory conference.
  • At the same time they need continuity between their claim manager, who has investigated and had conduct of the claim, and the person that represents them at the conference.
  • If a claim is capable of settlement it ought to be settled before the conference where possible and appropriate or at least at the conference stage. Ideally the person attending the conference ought to have a strategy to resolve the claim and the skills to negotiate an appropriate settlement.

Currently there are four main ways of dealing with personal injury claims in QLD:

  1. Settle prior to conference.
  2. Settle at conference (via telephone conference).
  3. Settle at conference where you have representation at that conference.
  4. Fail to resolve at conference and go to trial.
    In our experience, the vast majority of claims fall into categories 2 and

Trends

PIPA was intended to provide a framework which was an alternative to costly and time consuming litigation and ultimately to reduce the cost to policy holders and to the public of liability insurance through reducing claim numbers, the amount claimed and legal costs. The results have been mixed at best and the coming period of economic instability (a time when traditionally liability claims have increased) will tend to magnify and confirm this view.


Currently, in the majority of PIPA claims we see, respondents are represented by lawyers. The lawyers are more often than not instructed on first notice of the claim and then manage the claim through to a compulsory conference. The costs, of course vary, however, we have found that typically for preparation, attendance at conference and reporting back to the client will cost $5,000 plus. Where lawyers are briefed from the outset we generally see that costs to settlement at the conference are in excess of $20,000. In the extreme cases, we have seen fees over $100,000 incurred up to the compulsory conference stage.

For the vast majority of claims (more particularly the smaller ones) this is not a cost effective arrangement - it is like smashing a walnut with a very expensive sledgehammer!

Representation by lawyers at informal conferences is not mandatory, and if the exposure is low or the case is clear cut (which tends to be the majority of PIPA cases) then we believe it is an unnecessary expense, when a competent Claim Manager can provide the same expertise at a fraction of the cost.

This is not to say lawyers should never be retained, however, their involvement is best restricted to those claims on which they can add value such as larger or more complex claims. For example, we represented the interests of a cleaner co-respondent to a PIPA claim, our client did not incur any legal fees for the claim, while a property owner who retained a law firm from the outset incurred fees of over $25,000.

This may go some way to explaining why QLD claims costs are escalating. The trend graph below shows that since 2005 costs are blowing out and the average cost of claim is increasing. You may now ask “Why?”. We put it to the following reasons:

  • The PIPA process is convoluted, document heavy and cumbersome, particularly where smaller claims are concerned. As a result, it tends to encourage claimants and respondents to seek legal advice even where the issues and exposures cannot really justify that.
  • PIPA creates a long winded process which claimant lawyers often slavishly adhere to despite that fact that it is not always apparently in their client’s interests to do so. Classic examples are the avalanche of meaningless disclosure of documents provided by some firms and their love affair with the compulsory conference. Some will tell you that they simply do not wish to discuss settlement prior to then. Of course, these are the areas where large fees can be generated by claimant’s lawyers.
  • The process encourages indiscriminate joinder of third parties that complicates the process and adds time and costs.
  • PIPA actually encourages ‘potential’ claimants to make claims and follow through on them as it imposes new obligations upon them which did not exist at common law (i.e. to serve the Notice of Claim within 9 months of the accident and within one month of instructing lawyers).

Impact on Business

  • The PIPA process itself is not suited to smaller claims, which really should have a faster and less complicated track to resolution.
  • Legal costs are escalating both on the claimant and respondent side.
  • Claimants’ lawyers have no incentive to assist in resolving claims quickly and cost effectively as the legislation rewards them for prolonging a claim at least through to a compulsory conference.
  • Workers compensation claims and recoveries are increasing in QLD.
  • For those clients without operations in QLD, the whole PIPA regime seems too hard to learn, and most throw their hands in the air and look for legal representation when they ought to be looking at more cost effective solutions.

What Our Clients Get

The major advantages in utilizing a claim manager for these claims include:

  • Significant cost reductions which go straight to your bottom line.
  • Our Brisbane based claim managers have significant expertise in managing PIPA claims and obtaining exceptional results at compulsory conference. In fact, our claim managers are significantly more experienced than the junior solicitors (and barristers) from law firms that usually attend compulsory conferences.
  • A “one stop shop” for coordination of incident investigation, claim management and conference activities - saves you time as well as money in that you deal with the one company rather than a number of different people.
  • Access to legally qualified claims expertise and risk related advice at your claim manager without the need for instructing lawyers.
  • Reduces the duplication of effort required when a law firm has to get up to speed on the file, prior to conference.


How We Can Help

Currently it is common for law firms to represent companies at compulsory conferences, at an average cost for preparation and attendance of around $5,000. If the lawyer has been retained since the beginning of the PIPA process then the costs can often exceed $20,000. This is out of proportion with the value of many PIPA claims. It is not compulsory to retain lawyers for conferences; in fact Proclaim offers a fixed price solution that can save clients significant dollars, as illustrated in examples below.

In April 2008, Kate Farrell conducted a compulsory conference on behalf of a large corporate retail property client. The claim settled for $25,000 with nil contribution from our client. We saved our client approximately $5,000 in legal fees by having our Brisbane office attend.

Our Brisbane office also acted for a large cleaning services company in June 2008 where there were three other parties. The claim settled for $23,000 and our client contributed 25% and thus $5,750. Again we saved the client significant legal fees as they did not have to hire a law firm and our fee was capped.

We have now resolved numerous claims at compulsory conference on behalf of residential property managers. One such claim was resolved for $130,000 plus costs. Our client’s contribution was $10,000 because it was able to rely on an indemnity it had from the owner. No legal fees were incurred by our client. In another, the property owner spent in excess of $30,000 on legal costs. We were able to settle the matter for $5,000 ‘all up’ with the owner paying that entire amount and our insured paying nothing to the claimant and no legal costs. Needless to say, our client was over the moon with that result. These are just a few examples which illustrate how our model can work and how clear the savings can be.

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Workers Recoveries – Dealing with Workers Compensation Recovery Injuries Jon Broome, with assistance from Marianne Lim and Bryce Check

The new bane of Public Liability

It is almost ironic that the escalation in public liability losses arises in part due to workers compensation claims. The penny has dropped for workers compensation insurers that they can pursue recovery from negligent occupiers or principals, and as a result a significant portion of the WorkCover payments are now being shifted to the public liability sector as recoveries.

Over the last 5 years, it has become increasingly more common for recovery to be sought by an employee’s workers compensation insurer from their contracted employer or host (as site occupier or “host employer”), months or even years after the incident has happened.

In some cases, where fault is alleged, the worker may take separate action against the employer at common law in addition to the workers compensation insurer recovery, which can make the claim substantially larger. In these cases the employer is not able to control how much the workers insurer spends on rehabilitating the worker so these claims can become quite expensive the longer that the employee is off work.

It is also very difficult to investigate the incident circumstances long after the incident has occurred. Often first notice of what can be a substantial claim comes when the workers condition has stabilised or they are back at work....which is often 2 years or more after the incident arose. Recollections are also hazy at best and piecing together the history can be an epic exercise in itself. Likewise, it becomes difficult and costly to involve other parties who may share responsibility well after the incident because legal and investigation costs are higher if the incident is notified late. In addition, if you start getting a number of these claims, it can have an impact on a companies ability to obtain the most beneficial insurance terms in the future.


Trends

Whenever we attend client reviews, we are seeing an increasing number of the larger claims being workers compensation recoveries. We are also hearing from insurers that these claims are the ones that are causing them grief both technically (as they are generally difficult claims) and financially (as they are larger than your average claim).

We see two main reasons for this trend:

  1. Increase in specialisation and outsourcing of labour. This means a higher percentage of the workforce are contractors. This is particularly true in industries like construction and services;
  2. Increase in the focus by workers compensation insurers on their workcover claims. Ironically some legal practices which were decimated by tort reform 5 years ago have remerged as workers compensation recovery specialists - so a whole new class of claims has really emerged in the last 5 years.

These claims tend to be at the severity end, and also come in very late, so investigations are often difficult and sometimes impossible, placing you on the backfoot immediately.

Below is a sample of claims from our clients with the average incurred costs in the $60,000 to $100,000 range – which places these claims at 5 times the size of your normal claim.

Results

  • These claims can come late and large do have a real tendency to change results that once looked good.
  • Late investigation is difficult and expensive and that is why information is gold, and the earlier you get it the better and more reliable it will be.
  • When claims come as a combination of insurer recovery and common law action they are more complex and the stakes are raised.
  • We generally have less control over quantum as workers insurer pays losses, but you can investigate early to determine your liability exposure.
  • There are needs for training and change in the way these incidents are managed so the claims managers get the opportunity to investigate the claims that ought to be investigated.


Impact on Business

We are seeing that these losses have had an impact on insurers in terms of severity and the late development of these losses, which will ultimately flow through to the corporate market in terms of:

  1. Higher deductibles for workers recovery claims (or worker to worker exposures as it is often the case);
  2. Increased focus on the contract labour component of the labour force. If you are in high risk areas for workers compensation recovery actions (such as construction, mining, services, etc) expect your labour hire salaries to be carved out and rated higher, akin to workers compensation scales.

There is a prospect that the combination of higher deductibles and increased rating of labour hire may render the contracting of labour for some as uneconomic, and companies may instead revert to employing staff in the more traditional sense. This has to be weighed against the whole issue of specialisation and core competencies. For example, does a Shopping Centre want to have cleaners on staff when it is not their core activity, versus the cost of claims where cleaners injure themselves on site and their workers compensation insurer seeks recovery from the Centre as a negligent occupier.


What Can You Do?

For insurers, we are already seeing the demands for more information on contract labour components in proposals for insurance. Other relevant issues that ought to be considered by insurers include:

  • Differentiating between dependent and independent labour hire (dependent being contract employees who provide services for one company or principal; where independent is contract employees who provide services to a number of different principals such as consulting and as such do not present as great a risk).
  • Having a threshold percentage of labour hire costs v total employment costs where extra requirements and details are essential.
  • Overlaying extra due diligence and training in the industries at risk: three quarters of self employed are in construction, property services, transport/storage, communications and manufacturing.
  • Ensuring that the levels of excesses are adequate.
  • Where there is a strong exposure to workers recoveries claims, insist on training and education to ensure there is some control over the claims exposure.

Ultimately, to have some impact on these claims insurers need to rate it correctly and through premium and deducible levels lead their policyholders to exercise care in this area by looking both at how they manage the risk commercially but also how they can manage the claims more effectively if they arise.

There are some important things that companies can do to manage the claims exposure and these include:

  • Early notification of incidents involving contract employees or third party employees.
  • Staying in contact with injured party’s employer to monitor progress and likelihood of recovery claim.
  • Keeping comments on fault and liability to the phone not email and note that this may impact on the incident reporting format.
  • Keeping OHS and liability strategy coordinated.
  • Early notification to other parties as it is easier to involve them if they are told earlier.
  • Ensuring all contractors are aware of and understand house rules and there is evidence that they have successfully undertaken an induction program.

We have also found that two simple things can go a long way to assisting us to manage the risk better and these include:

  • Early notice of any incidents.
  • Monitoring of workers injuries.

For serious injuries involving significant lost time, we recommend extensive investigations so if a recovery action eventuates you are in a better position to resist, or resolve the case. As it stands, most clients do not have the information they need to resist claims as they have not identified the potential for a claim so the opportunity for effective investigation has been lost.

Proclaim provides training programs on how to minimize the risks of claims escalating.
Please contact us if you are interested in a training session for staff.

Other Issues Impacting Reform

1. Re-Emergence Of The Plaintiff Lawyer

They were never going away, but there was a sense immediately following the implementation of reform that finally the plaintiff personal injury lawyers had hit the wall. Certainly in 2003 to 2005 there was a drop in claims which must have had an impact on the profitability of plaintiff law firms.

They say in a recession that hard work and quality will win out but post reform, some of the smaller and more marginal players could not cope with the increasing complexity of the law as reformed. However, some of the larger firms saw this as an opportunity.

One, Slater and Gordon, listed on the stock exchange and began accumulating other personal injury firms, expanding their footprint on the east coast, and increasing their systemization and specialization of the area. In a report by their Managing Director, it was noted that personal injuries was a “growth opportunity”, with tougher regulations around personal injuries leading to the work becoming more complex and being more often referred to specialists.

This supports the theory that the reforms have made firms such as Slater and Gordon that go through the tough times more resilient and creative, and in effect has created a more formidable adversary for insurers and their clients. Slater and Gordon continue to grow and much of their growth is fuelled by personal injuries, which is 75% of their work.

So it seems that 5 years after tort reform the plaintiff firms that have survived understand the rules of the game and have been able to build sustainable and growing practices, and are strongly positioned as a result.


2. Soft Insurance Market

Corporate memory is often selective and more often than not short term. Only 7 years ago, following the demise of HIH, many companies were in crisis and some could not buy insurance on reasonable terms. Many had to resort to high deductibles; others had to place their insurance with higher risk off shore insurers (DOFIs).

As a result of the hard market many companies had to improve their processes, gain greater control over their risk and employ professional risk and claim managers to assist them.

In the last 3 years, the insurance market has softened considerably and capacity has been readily available for companies. Tort reform has also reassured clients (and in many cases falsely), that things are under control. As a result, we have seen a general drift away from many of the initiatives that came by necessity in the hard market. Underwriters have been competing on prices that have been heading south. Whilst in the hard market underwriters dictated terms, and would often require companies to take positive steps to manage their risk or impose conditions such as high deductibles that gave them the incentive to manage that risk, much of that was thrown to one side as market prices headed down. As a result, proactive measures to manage risk are on the wane.

In the hard market, underwriters often imposed conditions such as training and reviews or changed the terms of the policies to drive better risk management. Much of that has now disappeared with the softer market conditions, which has an impact on risk management and claims in the longer term. And maybe, just maybe, the good results in 2004 had as much to do with better managed risk from 2001 as it had to do with tort reform!

The impact of the softer market will be seen in escalating claims in a few years time. The result of poor risk control now is poor results in 2 to 3 years. As claims escalate, this will be magnified. And so the cycle will start once more.

3. Strange Decisions From The Bench
Richard Thomas

The Bad News – adverse case-law developments in Australia

There have been a number of recent decisions at the lower court level which make it extremely difficult for liability insurers to have confidence that even the unlikeliest claims can be defended with confidence. While some of the worst decision have successfully been defended this is obviously at significant cost and still provides encouragement to plaintiff solicitors to keep pushing the boundaries.

In Karimi v Rooty Hill RSL Club Limited and Ors [2007] NSWSC 938, the Plaintiff was assaulted and severely injured by another patron in the Club’s car park.

After a confrontation between two groups of young males in the Club, both parties were required to leave by different exits. This was consistent with Club policy and would seem to the lay-man to be a sensible practice. After he was seen to exit the Club’s car park in a car driven by his girlfriend, the assailant (also a defendant) re-entered a different entrance to the Club and assaulted the Plaintiff.

The assailant was jailed and did not mount a defence ultimately being found liable (although unlikely to meet any judgment). The contracted security officers who effected the eviction were found liable mainly as they did not escort the Plaintiff safely to his vehicle (again, this was club policy of which they were aware). The main reason the Club was held liable appears to have been failing to attempt to ascertain who had started the fight. It was found that this would have alerted it to the need to take addition precautions to prevent the assailant re-entering the club or by staggering the evictions. This was despite the Judge’s concession that the statements from the two feuding parties would be self-serving so unlikely to easily reveal who was, in fact, the aggressor.

Another assault occurred in the course of a robbery by three armed men and resulted in a finding of liability against a Club in Brown v Drummoyne Sports Club Ltd (District Court of NSW, 2 March 2007 (unreported)). The plaintiff, a semi-retired pharmacist in his late 50s was injured when he struck the face of one of three masked armed robbers during an armed robbery. In the result of striking out he lost balance and fell on his stool with his assailant falling against him. He suffered a broken hip. There was a finding from the trial judge that the club should have had its front door locked with an employee posted at the entrance to the club who could have warned patrons not to resist the robbery. He found that such a warning would have prevented the plaintiff’s injuries. The armed robbery occurred during peak trading hours in the evening.

The plaintiff in Russell v Rail Infrastructure Corporation (30 April 2007) NSWSC accompanied a group of young men through a missing panel in a chain link fence and onto a rail freight line. She then followed their example in climbing onto a slow moving train but let go and was dragged over the rock ballast alongside the tracks. She sustained severe injuries to her right leg which was later amputated below the knee.

The hole in the fence was often used by members of the public as a short cut to various local amenities. Whenever it was repaired it was cut down again within a day or two by local people.

The Rail Infrastructure Corporation (RIC) owned the railway track and was responsible for the fence. It was found liable for her injury on the basis that it was foreseeable that persons accessing the rail corridor via the hole in the fence would sustain injury including by foolhardy activities such as jumping onto moving trains. Notwithstanding evidence of other nearby alternative access points it was found that had point in question been barred by a secure fence the injury would have been prevented. Of relevance was the Plaintiff’s mild intellectual impairment which no doubt engendered the Court’s sympathy.

Bizarrely, at first instance, the Court in Yu- Mi Chu v State Rail Authority of New South Wales [2007] NSWDC41 appeared to find that a slippery step caused the Plaintiff to be raped several weeks later. The Plaintiff was a 24 year old Taiwanese television reporter living in Sydney to learn English who suffered a broken ankle on wet steps at a railway station when rushing to catch a train. There was a fairly uncontroversial finding that the defendant was negligent as the steps were not sufficiently slip-proof. Several weeks later while still in a cast and on crutches she was raped and beaten by a man she was visiting and suffered significant psychological injuries. The Court found that but for her broken ankle she would have been able to escape the rape and subsequent beating and, hence, the Rail Authority was found liable for the injuries sustained during the rape.

The award of damages for the injuries suffered in the rape was subsequently overturned on appeal on the ground that these injuries were not foreseeable to the Rail Authority.

In most of these decisions the injuries were quite severe which may well have influenced (even sub-consciously) certain findings of fact and interpretations of law. However, in Skulander v Willoughby City Council [2007] NSWCA 116 the injuries were relatively modest. The Plaintiff was walking along a bus exchange platform towards a pedestrian crossing while looking at her mobile phone. She struck her head on a metal cage which housed a toxic gas monitoring unit which was situated at about head height on a column on the platform. The Plaintiff lost her case in the District Court but succeeded on appeal. A majority in the Court of Appeal found the Council liable on the basis that simple measures could be taken to prevent pedestrians hitting the cage (by placing a rubbish bin underneath or a handrail around the column). A finding of contributory negligence of 50% was found which seems to indicate that you are only half expected to watch were you are walking....


Conclusion

When tort reform was first enacted the environment for litigation was probably as even as we can recall. We were encouraged to resist claims that ought to be resisted, knowing that there needed always to be a weighing of the risk against legal fees and time involve d in any defence of a claim. For some clients, like Councils, you could resist claims with some confidence. However, we seem to have returned to more unpredictable times, where you need to carefully pick your battles and be prepared for the unexpected. The concept of accountability seems to have received only a brief reprise from tort reform, and we seem to be heading back from whence we came – sympathy for claimants sometimes out of proportion with the facts scenario - which spells bad news for insurers and, ultimately, the purchasers of insurance.

 

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