Sustainability of Common Law

Sustainability has become a key word in all injury scheme objectives. With all the changes and variations, what can we say about sustainability in relation to common law?

SUSTAINABILITY

While many reports and inquiries into compensation schemes are full of ideological debate about common law and the no fault alternatives, I propose that economics trumps ideology. Through our history, the push for scheme reform is most often driven by increasing scheme costs (and premiums), and common law is most often the first target. The main criterion, therefore, for judging sustainability is scheme costs.

THE HISTORY

In 19th century British law, the only way an injured person could receive compensation was through common law, which involved suing the negligent party (if any) who caused the injury.

For workers, this changed during the 25 years leading up to 1915. In Australia, states created specific workers compensation laws to provide compensation for work-related injuries regardless of negligence. The right to no fault entitlements and the opportunity to sue for negligence at common law co-existed for many decades, but not without problems.

Sustainability issues tend to arise when common law is seen as a ‘risk free option’ to increase compensation, or when it’s blurred with other lump sum entitlements.

15 years ago I predicted the eventual removal of common law from our injury schemes. As the quote at the start hints, I was wrong. Common law remains, but has often not been sustainable. Many schemes have reviewed, reformed, and re-reviewed common law access and design over the last 30 years. In the last five years I count four significant changes to common law entitlements in our workers compensation and motor accident schemes. Between 1985 and 1990, I count 10.

CHANGING COMMON LAW

From around 1985, the growing cost of workers compensation and CTP schemes in several states led to radical and controversial reforms1. Common law entitlements were an important aspect of these.

Figure 1 summarises changes to common law entitlements for workers compensation and motor accidents schemes in the last 30 years. This shows:

• there have been many changes over the last 30 years;
• the pace of change has slowed since the turn of the century;
• NSW and Victoria were the most active from 1985, but have been very stable since 2000;
• only the ACT has left common law untouched, although change has been attempted several times;
• the most sustainable changes appear to have been in the Northern Territory, Comcare (which covers federal workers) and Victorian CTP;
• there have been more changes for workers than CTP;
• all but one of the expansions or increase in entitlements have occurred post-2004.

HOW HAS COMMON LAW CHANGED?

The six main methods of reforming common law are:

1. ABOLITION

Many schemes have attempted to abolish common law, with varying degrees of success. While there seems to be a degree of permanence in four schemes (NT motor and workers since 1987; Comcare since 1988; SA workers since 1992), the history shows abolition of common law is not always sustainable.

2. REINTRODUCTION

Over the last 30 years, six schemes abolished common law access, and three had reintroduced it within three years following a change in government. In each case, the new government was still keen to keep premiums low and as a result there was a focus on other cost control measures. These measures have had varying degrees of success, as discussed below.

3. SERIOUS INJURY LIMITATION

The most common method for controlling common law costs has been the use of ‘thresholds’ to restrict access to the seriously injured.

It is notable that no major changes have been made to the Victorian serious injury definition in more than 25 years. This sustainability, when other thresholds have failed, warrants serious consideration. Is it strategic and effective management by the schemes? Did the specific wording in the legislation help? Is it something in the state culture and in particular its legal system?

The Western Australian workers scheme has had an equally interesting journey in finding a suitable definition for serious injury, but for the opposite reasons.

The experience in WA illustrates the importance of getting the serious injury definition right. Erosion of thresholds and access via unforeseen secondary gateways has been a major cause of unsustainability, and has led to multiple reforms.

4. HEADS OF DAMAGE AND QUANTUM RESTRICTIONS

A number of states have also attempted to cap common law costs by abolishing access to certain heads of damages and/or restricting quantum on others.

Despite these caps, there remain pressures on the sustainability of this system in NSW – as indicated by the proposed reforms of 2013 that were subsequently withdrawn due to lack of support in the Upper House.

While these changes curtailed the level of general damages, the gains were soon eroded by significant offsetting increases in awards for economic loss.

While restrictions on heads of damage may help with sustainability, they are not sufficient on their own and can be ineffective because of the common law’s adaptability (e.g. the use of medical or care buffers to substitute for general damages). It is a bit like the balloon that you squeeze in one part – it then bulges out elsewhere.

5. ELECTIONS

In the author’s view the use of elections is not particularly helpful for sustainability. It entrenches serious legal involvement early in the life of claims and exacerbates the adversarial nature of claim resolution.

6. LEGAL COSTS AND PROCESS

The effectiveness of legal fee thresholds is debatable – it can be argued they set a ‘target’ for plaintiff lawyers, contributing to superimposed inflation. Further, while legal cost restrictions act to control amounts that can be reimbursed as part of the claim settlement, there is nothing to stop plaintiff lawyers charging their clients a different amount as solicitor-client costs – including no- win-no-fee uplifts.

While many Australian states have used ADR and non-judicial (administrative) tribunals for several decades, there is not the same degree of cultural development and understanding of behaviours as in our court systems.

Controlling legal processes and costs is important in making common law sustainable, but these processes can be complex in their own right and perhaps outside the core competence of many scheme designers (including actuaries).

THE RELEVANCE OF SCHEME CULTURE

Culture, simply described as ‘the way we do things around here’, can be a powerful force in a complex system such as an accident compensation scheme. Changing legislation alone will not change ingrained behaviours. For example, when common law was abolished in NSW and SA, for example, legal activity switched almost seamlessly to redemptions and impairment lump sums. These payments types then functioned in a fashion almost indistinguishable from common law, except that a workers compensation tribunal heard the matters rather than a court.

Culture can be a force of inertia. One example is the buffers referred to earlier, which act to replace restricted or reduced heads of damage. To put it simply, lawyers and judges have an expectation about what an injury is ‘worth’ and follow that expectation. The Queensland CTP experience is a case in point.

THE HONEYMOON

Scheme reforms usually follow a period of crisis or high stress. There are numerous examples of a ‘honeymoon period’ after a change, when claim numbers and costs fall materially, often below the level anticipated. All seems to be going well, until a few years later when the costs start to increase towards or even past pre-reform levels. It is important therefore to take a medium term (five to seven year) perspective in assessing sustainability following a modification to common law.

CONCLUSIONS

Restricting common law access to those with serious injuries is by far the most common approach to controlling common law and scheme costs more generally. The definition of serious injury therefore becomes the most important decision, and threshold erosion has often led to further need for reform. With one exception, all the thresholds currently in use are based on Whole Person Impairment using AMA Guides – evidence that this is the most sustainable approach. In Victoria, a narrative threshold has been used since 1989 (motor) and 1999 (workers) without change. Other forms of limitation, such as excluding heads of damage and limiting quantum, are not the most important factors in sustainability.

Despite my prediction, many jurisdictions seem committed to keeping common law as part of their scheme design, albeit for more serious injuries only. In this case, I present my recipe for sustainable common law.

The fact that I provide this recipe should not be taken to mean that I support common law over no fault. Having once predicted the gradual demise of common law compensation, and been proven wrong, I aim to make a constructive contribution to the quest for sustainability. Sustainability is, after all, a goal of all injury compensation schemes.

¹ Three states introduced no fault compensation for motor accidents as far back as 1973 when the previous cost crisis took place – Victoria, Tasmania and NT, with NT abolishing common law.

² Defined as:

1. a permanent impairment of 30% or greater; or
2. serious long-term impairment or loss of a body function; or
3. permanent serious disfigurement, such as scarring; or
4. severe long-term mental or severe long-term behavioural disturbance or disorder; or
5. loss of a foetus.

CPD: Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.