2.1 In this Section we consider two questions:
- Why is an Inquiry into accident compensation timely?
- Why is it appropriate to hold such an Inquiry at State level, given that the Woodhouse Committee’s report on Compensation and Rehabilitation in Australia was presented to the Commonwealth as recently as 1974?
I. WHY IS AN INQUIRY TIMELY?
2.2 The formal answer to this question is clear. Under the Law Reform Commission Act 1967 we are bound to report on any matter referred to us by the Attorney General and he has made a reference on accident compensation in the terms set out earlier (para. 1.1).
2.3 There are, however, at least four additional reasons for suggesting that an Inquiry is timely. These are:
- recent judicial criticisms of the common law negligence action as a means of compensating accident victims;
- financial pressures on compulsory third party and workers’ compensation insurers;
- the emergence of no-fault road accident schemes in some jurisdictions in Australia;
- public concern, reflected in the media and elsewhere, at the apparent deficiencies of existing compensation arrangements.
A. judicial Criticism of the Common Law Negligence Action
2.4 Since at least the 1960’s the common law action in Australia has been subjected to criticism. As is explained in Section 3, critics have attacked the fault principle on which the action is based. They have also argued that a lump sum damages award, which is the only remedy New South Wales courts can provide in a common law action, is not a suitable means of compensating for future economic loss, such as reduced earning capacity or future medical expenses.
2.5 In recent years many judges have joined the ranks of critics. A significant factor in this change has been that courts have been forced to assess damages in common law personal injury actions in an inflationary environment. They (along with insurers and legal practitioners) have had to make predictions on such imponderables as future inflation rates as well as the usual predictions required on such matters as the injured claimant’s life expectancy and future employment prospects. These developments have led a number of eminent judges to acknowledge that the process of assessing damages, at least in serious cases involving future economic loss, is often arbitrary and to suggest that legislative reform is necessary.
1. THE DISCOUNT RATE
2.6 Judicial uneasiness about the common law action is illustrated by Todorovic v. Waller, 1 an important High Court case decided in December 1981. The case is an authority on the “discount rate” to be applied by Australian courts in assessing lump sum damages awards in personal injury litigation. The discount rate is a mathematical device employed to determine the present value of future economic loss, such as reduced earning capacity. 2 The choice of a discount rate is extremely important, for a difference of even 1% may produce substantial differences in lump sum damages awards. 3
2.7 In Todorovic v. Waller individual members of the Court preferred discount rates ranging from 0% to 5%. The majority agreed, however, to compromise on a discount rate of 3%, to apply until further notice. Two of the majority (Chief Justice Gibbs and Mr. Justice Wilson) observed that the calculations required in the assessment of damages are “far removed from all reality”. They went on to say that the
“whole process involves so much speculation that it is impossible to pretend to accuracy .... [A]ll that we have said shows how arbitrary any choice [of a discount rate] must be .....
Our discussion of the questions involved indicates that the law relating to the assessment of damages for personal injury is far from satisfactory. However, any decision as to the way in which the law should be reformed depends on views as to social policy which can be formed only by the legislature.” 4
2.8 In the Barrell Insurances Case, 5 it was suggested to the High Court that damages awards in personal injury cases have become too large. Mr. Justice Stephen observed that the courts have no mandate to depress the level of common law damages. He said that if lump sum awards were thought to produce undesirable consequences, such as unduly high insurance premiums, there are overseas models for legislative remedies in the form of compensation schemes which do not rely on lump sum payments. His Honour pointed out that under the existing law a lump sum award cannot be altered subsequently, however wrong the predictions on which it was based turned out to be. This defect, he said, cannot be overcome except by “radical legislative intervention”. 6
2. PLEAS FOR REFORM
2.9 In a case arising out of the Granville train disaster, in which the jury awarded the plaintiff damages of $2.6 million, Mr. justice Lee of the Supreme Court of New South Wales criticised the current law.
“There is, I believe, grave disquiet in the community in regard to verdicts in favour of severely disabled persons arrived at by the application of common law principles .... Many people think that [the calculation required] goes dangerously close to playing God. But whether it may be viewed in that way or not it can, at the best, only be regarded as an exercise in sheer fantasy.... Many people believe that it is not in the interests of the community to continue with the present system and it may be seriously doubted whether even a large verdict is in the plaintiff s interest either. Only Parliament can alter the present system but the need for a system which, whilst attending to the injured person’s requirements arising from his injuries, avoids placing huge sums of money in his hands, is pressing.” 7
2.10 A strong judicial plea for reform was made recently in England by Lord Scarman, an eminent judicial member of the House of Lords. The principles underlying the common law negligence action in England are similar to those in New South Wales. The plea was made in a case involving a 36 year old psychiatrist whose injuries had made her a “wreck of a human being”. Lord Scarman said that a radical reappraisal of the law was needed and that this called for social, financial, economic and administrative decisions which only a legislature could make. He said that the course of the legislation before him
“illustrate[d] with devastating clarity, the insuperable problems implicit in a system of compensation for personal injuries which (unless the parties agree otherwise) can yield only a lump sum assessed by the court at the time of judgment. Sooner or later - and too often later than sooner if the parties do not settle, a court (once liability is admitted or proved) has to make an award of damages. The award, which covers past, present, and future injury and loss, must, under our law, be of a lump sum assessed at the conclusion of the legal process. The award is final; it is not susceptible to review as the future unfolds, substituting fact for estimate. Knowledge of the future being denied to mankind, so much of the award as is to be attributed to future loss and suffering - in many cases the major part of the award - will almost surely be wrong. There is really only one certainty: the future will prove the award to be either too high or too low.” 8
B. Financial Pressures on Insurers
2.11 A second factor indicating that a review of accident compensation arrangements is timely is that concern has been expressed about the adequacy of reserves set aside to meet the outstanding liability of insurers in New South Wales. Insurers and official bodies responsible for setting or recommending insurance premiums have made the point both in relation to compulsory third party motor vehicle insurance and employers’ liability insurance (which covers the employer’s liability to pay workers’ compensation and common law damages for negligence).
1. COMPULSORY THIRD PARTY MOTOR VEHICLE INSURANCE
2.12 In Australia third party motor vehicle insurance has not gene rally been regarded as profitable by the private insurance industry, which has largely withdrawn from the field. 9 in New South Wales the Government Insurance Office (the “GIO”) is responsible for 98% of this form of business. Since 1977 premiums have been tied by legislation in this State to the Consumer Price Index, even though claims have generally risen at a faster rate. 10 The effect of this policy is that the GIO no longer considers itself able to maintain a separate fund adequate to meet all outstanding claims (that is, claims which have been incurred but not yet finalised). This is very different, of course, from saying that the GIO is in any danger of being unable to meet its obligations. Indeed as will be seen (para.4.11, below) premium income received each year by the GIO continues to exceed claims paid by a substantial margin. Nonetheless, in its Annual Report for 1981 the GIO drew attention to the fact that its Insurance Fund (that is, moneys set aside as provision for outstanding claims) stood at $986 million, yet outstanding claims were estimated at $1216 million. The GIO observed that while
“in the short-term funds available are sufficient to finance payment of claims the longer term outlook suggests the need for consideration to be given to increased premiums beyond the CPI adjustment currently available and/or action to contain the escalation of claims costs.” 11 (Emphasis added)
2.13 The GIO’s concern about the cost of claims has prompted it to suggest a number of legislative modifications to the principles governing the assessment of common law damages. 12 It has drawn attention particularly to the size of the largest verdicts. The 1981 Annual Report pointed out that during the year five verdicts had been handed down where damages awarded exceeded $1 million, the largest being for $1.5 million. The trend has continued since that time and several verdicts have been recorded in New South Wales in excess of $2 million. 13 The comments by the GIO and the suggestions it has made to limit the size of damages awards indicate that cost pressures are likely to encourage changes to the compensation system.
2. WORKERS’ COMPENSATION INSURANCE
2.14 In 1974 the Woodhouse Committee referred to the difficulties then facing workers’ compensation (or employer’s liability) insurers. Statutory provisions had regularly increased the level of weekly payments in respect of claims which had arisen years earlier, and insurers had to operate under economic conditions making it “well-nigh impossible” to calculate the future effect of inflation. 14 There have been some changes in New South Wales since that time, notably the introduction of the Insurers’ Contribution Fund which is designed to cushion insurers against the impact of statutory increases in the level of benefits (para.3.56, below). Despite the changes, concern continues to be expressed about the financial position of workers’ compensation insurers.
2.15 In New South Wales workers’ compensation premiums are not controlled. A statutory body, the Insurance Premiums Committee, recommends annual rates of premiums based on a “loss ratio” which it determines to be appropriate. 15 There is by no means universal agreement on the significance of high loss ratios. The important point for present purposes, however, is not the high loss ratios as such, but the disparity between the ratios fixed by the Insurance Premiums Committee and those actually experienced.
2.16 For the year 1979-1980, the Committee recommended a loss ratio of 75%. The “actual loss ratio” for the year, assuming that premiums were fixed at the rate recommended by the Committee, turned out to be 110.3%. But because of widespread and heavy discounting of premiums below the recommended rates, the loss ratio of licensed insurers on the basis of premiums in fact charged, was 143.3%. 16 As from 31 June 1980, the Committee increased the loss ratio used as the basis for recommended premiums to 85%, partly in an attempt to narrow the gap between recommended and actual premiums. 17 In its report on the loss ratio, the Committee expressed its belief that insurers’ provisions for outstanding claims, as at 30 June 1979, were “lower than adequate by up to 15%”. 18 In its 1980 Annual Report, the Committee said a picture had emerged which gave it
“cause for concern as to the continuing ability of licensed insurers to build their provisions for outstanding claims to adequate levels unless they take note of the Committee’s belief that its premium recommendations, now based on 85 per cent loss ratio assumption, are, on average, the premiums necessary to meet fully all the requirements of the workers’ compensation insurance scheme.” 19
The Insurance Premiums Committee has reported that the actual loss ratio for 1980-1981, on the basis of the recommended premium rates, was 128.3%, compared with the recommended loss ratio of 85 %. 20 The loss ratio on the basis of the (discounted) premiums actually charged was 165.1%. While the GIO advises that the heavy discounting of workers’ compensation premiums has been reduced significantly since mid-1981, the reservations expressed about the financial position of insurers may still apply.
C. The Emergence of No-Fault Road Accident Schemes
2.17 A third important development has been the introduction in some Australian jurisdictions of no-fault schemes for road accident victims. The schemes have been adopted largely as a response to the criticisms that the common law provides no assistance to road accident victims unable to demonstrate that another person was at fault and that even those who can do so may have to wait many years to receive compensation. The estimate cited at para.3.21, below, suggests that roughly one-third of all persons injured or killed in road accidents in New South Wales have no common law remedy, either because they are drivers “at fault” themselves or because they are unable to prove fault on the part of anyone else. A Select Committee of the House of Assembly in the Australian Capital Territory has noted that the
“main advantage of no-fault insurance is that it automatically provides some level of compensation for all persons involved in traffic accidents. It does this by providing immediate regular income support or compensation sufficient to enable the injured and their dependents to avoid the financial trauma which can be associated with even a minor accident. At present, many injured people, if unable to prove fault, receive no assistance whatsoever, often with disastrous repercussions to their life and family.” 21
2.18 Victoria and Tasmania have introduced statutory no-fault schemes providing compensation for lost earnings and medical and related expenses in respect of death or personal injury resulting from motor accidents. While the benefits, especially in relation to lost earnings, are limited and are less generous in serious cases than full common law compensation, they fill some of the gaps left by the common law. The schemes do not replace the common law, but they have the advantage of affording speedy interim relief to injured persons or dependents entitled to pursue a common law action, thus avoiding the hardship often associated with delays in settling such a claim. In the Northern Territory a no-fault scheme came into force in 1979. It goes further than its Victorian and Tasmanian counterparts by replacing the common law action, except in relation to damages for non-pecuniary loss such as pain and suffering. The emergence of these schemes, which are discussed in Section 5 (paras.5.27-5.31, below), emphasises the need to consider whether similar benefits should be provided in New South Wales.
D. Community Concern
1. THE MEDIA
2.19 The media have directed increasing attention to the deficiencies of existing accident is not necessary articles or editorials reflect widespread public dissatisfaction. But even a cursory survey of newspaper reports suggests that there is a significant body of opinion which is seriously concerned about inadequacies in the compulsory third party and workers’ compensation systems and favourably disposed towards a reassessment of current approaches to compensation.
2.20 The huge sums awarded in common law damages have provided a major impetus to newspaper coverage of accident compensation. As acknowledged in one editorial, “record awards to accident victims...always make front-page news”. 22 With verdicts in New South Wales escalating rapidly (although the High Court’s ruling on the discount rate has temporarily halted the upwards spiral) there has been no shortage of opportunities to comment on the size of compensation payments to accident victims. Editorials have deplored the “spiralling costs” of damages awards and what has been seen “as the occasional displacement of reason by sentiment” in the assessment of damages. 23 Articles have drawn attention to the “workers’ compensation disaster”, a reference to the “catastrophic” underwriting losses sustained by workers’ compensation insurers in New South Wales. 24
2.21 There has also been coverage of the problems facing individual accident victims. Articles have often concentrated on reports of hardship, said to be brought about either by the inadequacy of awards or the lack of entitlement to compensation other than social security benefits. The cases reported recently include the following:
- A 45 year old man became a quadriplegic after breaking his neck in a diving accident in his own pool. He was not entitled to any compensation payments and was sent to a specialised home for quadriplegics. His only income was the invalid pension. 25
- A car veered to avoid horses on the road and a passenger sustained injuries including facial scarring. The passenger failed in her damages claim because an appeal court ruled that the driver was not negligent, since the accident had occurred at night when the horses could not be seen. 26
- A 24 year old actor was paralysed in 1972 following an accident which occurred during a theatre fire. He settled his claim for $140,000 in 1975. Seven years later, despite attempts to invest wisely, he was in danger of discontinuing his studies through lack of funds. (This story was accompanied by two others in which very large damages awards had been made and investment with professional advice had provided both victims with reasonable financial security). 27
2.22 Editorials and articles have contended that a substantial proportion of compulsory third party and workers’ compensation premiums do not go to accident victims but “to doctors, lawyers, loss assessors, investigators, insurance companies and others”. 28 Ever increasing damages awards have been attacked as involving “sophisticated guesses” by the court on such matters as life expectancy, the only certainty being “that on average it will be making the wrong decision”. 29
2.23 Editorials have also argued for change, often referring to the proposals of the Woodhouse Committee. In an editorial, the Sydney Morning Herald argued that the
“present compensation schemes are random in their coverage, often provide inadequate compensation, and too often give rise to serious in justices. It should not be beyond the wit of Australians to devise something better, at reasonable cost.” 30
Support has been expressed for limited reforms such as no-fault schemes for road accident victims or annual payment of medical expenses in partial replacement of lump sum awards in common law actions. 31 Some editorials have gone further and argued for renewed Commonwealth initiatives. For example an editorial in the Australian said that
“the gross disparity in the compensation payable to those who have suffered equally constitutes an injustice which ought to be corrected .... This is an area of the law which urgently needs reform. It is time that the Commonwealth acted.” 32
Others have argued for more modest changes, although contending that
“[u]ltimately a national compensation scheme (in which the legal profession will have little or no part to play) will have to replace the primitive, unfair and extremely costly system we now have.” 33
2. COMMUNITY GROUPS AND GOVERNMENT BODIES
2.24 Community groups and government bodies have also indicated their concern at the existing arrangements. The Compensation Reform Action Group (CRAG) has held a number of rallies and public meetings designed to highlight the need for change. Although we have not yet called for submissions from the public, CRAG has made a preliminary submission to us in which the view is expressed that
"the present system is in desperate need of reform because of its irrationality, injustice, complexity and disastrous effects that it has on injured persons.” 34
2.25 We have also received letters from government bodies pointing to particular problems which, in their view, require remedial action. The Women’s Co-ordination Unit of the Premier’s Department, for example, has criticised the failure of the workers’ compensation system to protect housewives and people involved in out-work at home. 35 The Ethnic Affairs Commission has emphasised the special problems faced by migrant workers who are often concentrated in hazardous industries and, in the Commission’s opinion, experience special difficulties in obtaining adequate compensation. 36
II. WHY A STATE INQUIRY?
2.26 A further question that arises is why a State inquiry should be held now, bearing in mind that the Woodhouse Committee presented its report to the Commonwealth on Compensation and Rehabilitation in Australia in 1974. It is, after all, only eight years since the Committee conducted its detailed inquiry and recommended a National Compensation Scheme for people suffering disability by reason of injury or illness (see paras.5.38 ff., below for details). The scheme put forward by the Committee would have supplanted the common law negligence action for damages for personal injury, the workers’ compensation system and other compensation schemes established by State legislation.
2.27 But the proposed National Compensation Scheme was not implemented. The compensation arrangements which were criticised in 1974 by the Woodhouse Committee remain virtually untouched in New South Wales. Except for a sporting injuries scheme, introduced in 1978, no new no-fault compensation scheme has been established in the State and no significant modifications have been made to the common law damages action. A proposal for a no-fault scheme was prepared during 1979 and 1980, under the auspices of the Minister for Transport. The scheme would have provided modest lump sum compensation, to road accident victims, independently of fault. The scheme was also to extend to medical, hospital and related expenses to the extent that they were not covered by health insurance schemes. While the proposal was developed in some detail, it did not lead to legislative action. The result is that even less change has occurred in New South Wales than in some other Australian States, where no-fault road accident schemes have been introduced.
2.28 The Woodhouse Committee was responsible for examining compensation for disability from a national perspective, pursuant to terms of reference which expressly indicated the Government’s acceptance of the principle of a national compensation scheme. Our task is rather different, even though many of the issues canvassed by the Woodhouse Committee are within our terms of reference. An examination of issues from a State perspective presents many issues that the Woodhouse Committee did not have to face (although, equally, they had to deal with many matters with which we are not concerned). For example, we shall have to consider how, if at all, any scheme that might be desirable on grounds of social justice can be financed from State sources. We shall also have to deal with the difficult problem of integrating any State scheme with Commonwealth taxation, health care and income maintenance arrangements. Similarly, we shall need to examine how any proposed compensation scheme can be accommodated within the complicated system for the financing of health care in Australia, which has changed very considerably since the date of the Woodhouse Report.
2.29 There are two further reasons for examining these problems at State level. The first is the doubt that exists as to whether the Commonwealth has constitutional authority to undertake changes of the kind contemplated by the Woodhouse Committee. The Woodhouse recommendations gave rise to serious constitutional questions in relation to key clauses in the proposed legislation, although views on the point were by no means unanimous. 37 These difficulties would not be presented by a scheme at State level.
2.30 The second reason is that there is no indication that significant Commonwealth initiatives will occur in the area of accident compensation. The proposals of the Woodhouse Committee lapsed with the dismissal of the Labor Government in November 1975. In 1976, following a meeting of Commonwealth and State Ministers, a Steering Committee was established to explore the feasibility of a Joint Commonwealth-State National Compensation Program. The Steering Committee met on one occasion, but no concrete proposals emerged and the matter was not actively pursued by the Commonwealth Government. 38 Since that time answers given by Ministers to Parliamentary questions indicate that the prospects of further action by the current Commonwealth Government in relation to accident compensation appear to be remote. 39 It is of course always possible that the political and economic climate will change rapidly. Nonetheless, a realistic assessment is that any significant steps to modify accident compensation arrangements (which may or may not involve the introduction of a comprehensive scheme) will not be taken in the near future at Commonwealth level.
FOOTNOTES
1. (1981) 56 ALJR 59.
2. The justification for using this device is that in times of stable currency “a given sum of money in hand is worth more than the like sum of money payable in the future”. Todorovic v. Waller (1981) 56 ALJR 59, at p.62.
3. A loss of earnings of $250 per week for 30 years produces a present lump sum of $391,350 if a discount rate of 0% is applied; $259,500 if 3% is applied; and $205,500 if 5% is applied: Todorovic v. Waller (1981) 56 ALJR 59, at p.69, per Stephen J.
4. (1981) 56 ALJR 59, at p.66.
5. Barrell Insurances Pty. Ltd. v. Pennant Hills Restaurants Pty. Ltd. (1981) 34 ALR 162.
6. (1981) 34 ALR 162, at p.185.
7. Skow v. Public Transport Commission of New South Wales, 10 July 1981, Supreme Court of New South Wales (Lee J.).
8. Lim Poh Choo v. Camden and Islington Health Area Authority [1980] AC 174, at pp.182-183.
9. A convenient table setting out compulsory third party insurance arrangements in the Australian States and Territories appears in the Report of the Select Committee on Compulsory Third Party Motor Vehicle Insurance for the ACT (ACT House of Assembly, 1980).
10. The policy of indexation is embodied in legislation: Motor Vehicles (Third Party Insurance) Act 1942 (NSW), ss.33-33E (as enacted by the Motor Vehicles (Third Party Insurance) Amendment Act 1977 (NSW).
11. Government Insurance Office of NSW, Annual Report 1980-1981, p.6.
12. One proposal which has produced a legislative initiative is that to reverse the decision in Fitch v. Hyde-Cates [1980] 2 NSWLR 757 (affirmed by the High Court, 6 April 1982), which allowed the estate of a person killed in an accident to claim damages for earnings that person would have enjoyed during the “ lost years”. In introducing the Law Reform (Miscellaneous Provisions) Amendment Bill 1982, the Attorney-General said that one purpose of the legislation was “to protect insurers from having to make greatly increased payments”: NSW Parl. Deb. (Leg. Ass.) 10 February 1982, p.1708. Queensland has legislated for a discount rate in cases involving compensation for future loss of 5% or such other rate as is prescribed: Common Law Practice Act 1867-1981 (Qld) s.5.
13. The largest award thus far was in December 1981, where a total of $2.8 million was awarded. Some awards were affected by the question of the discount rate, which was decided in Todorovic v. Waller (1981) 56 ALJR 59.
14. Woodhouse Report, para.276.
15. For the definition of loss ratio see para.4.12, below.
16. Report of the Insurance Premiums Committee for the Year Ended 30 June 1980, p.9.
17. Insurance Premiums Committee, Report of an Inquiry into the Loss Ratio Percentage and Related Matters (May 1980).
18. Ibid., p.29.
19. Report, n.16 above, p.11.
20. New South Wales Government Gazette, 18 December 1981, p.6652.
21. Report, n.9 above, para.4.9.
22. Sydney Morning Herald, 5 October 1981.
23. Age, 10 July 1981.
24. Australian Financial Review, 23 December 1981.
25. National Times, 6-12 December 1981.
26. Daily Mirror, 17 November 1981.
27. Sydney Morning Herald, 13 February 1982.
28. Sydney Morning Herald, 26 November 1980; Sydney Morning Herald, 10 September 1981; Bulletin, 23 February 1982.
29. Sydney Morning Herald, 10 July 1981. And see the editorial in the Australian Law Journal referring to the “somewhat sorry state of affairs” reflected in the compromise in Todorovic v. Walter, and calling for legislation to introduce a more satisfactory system of assessing damages: (1982) 56 Australian Law Journal 95.
30. Sydney Morning Herald, 8 July 1980.
31. Daily Mirror, 13 November 1981; Sydney Morning Herald, 10 July 1981.
32. Australian, 16-17 January 1982.
33. Sydney Morning Herald, 5 October 1981.
34. Compensation Reform Action Group, Preliminary Submission, 9 February 1982.
35. Letter to Commission, 29 March 1982.
36. Letter to Commission, 30 March 1982.
37. Opinions by constitutional lawyers as to the validity of key clauses of the National Compensation Bill 1974 are set out in the Senate Standing Committee on Constitutional and Legal affairs, Report on the Clauses of the National Compensation Bill 1974 (July 1975), Appendix C. For further background see generally G.W.R. Palmer, Compensation for Incapacity: A Study of Law and Social Change in New Zealand and Australia (Oxford University Press, Wellington 1979), pp.278-279.
38. Cth. Parl. Deb., (H.R.) 22 May 1980, pp.3170-3171.
39. See, for example, Cth. Parl. Deb. (S.) 15 March, 1978, p.587; (S) 19 September 1978, pp.679-680 (Minister for Social Security).
