Submission

Submission to ministerial meeting on public liability insurance issues

22 March 2002

Executive summary

As the peak body of local authorities across Australia, ALGA is concerned by the spiralling cost of public liability insurance and the impact it is having on the community. In seeking to resolve this issue ALGA recommends consideration of the following:

  • a nationally coordinated response
  • grouped conventional insurance
  • pooled self insurance arrangements
  • public liability insurance risk for community groups to be underwitten by Federal and state governments
  • mandatory pretrial mediation and settlement processes to reduce litigation
  • adoption of structured settlements
  • implementation of audited risk management strategies and standards and for these to be admissable as evidence
  • development of a statutory code on contributory negligence
  • development of a mandatory requirement for damages to be reduced by a substantive amount for each proved instance of contributory negligence
  • restrictions on advertising "No Win No Fee" legal services
  • implementation of a public education campaign to highlight the consequences of the 'someone will pay' attitude

Contents of this page:

Members of ALGA
  • Local Government and Shires Association of NSW
  • Local Government Association of Queensland
  • Local Government Association of South Australia
  • Municipal Association of Victoria
  • Western Australian Local Government Association
  • Local Government Association of Tasmania
  • Local Government Association of Northern Territory
  • Australian Capital Territory

ALGA acknowledges the work done by the LGSA (NSW) and by LGAQ on this and other submissions to state taskforces on this issue.

Introduction

The Australian Local Government Association (ALGA) is the peak body for local authorities across Australia. Representing 698 councils, shires and other local governing bodies, ALGA advocates on behalf of local institutions, the local communities they represent and the process through which they interact. Founded in 1947 by the six States, the Australian Local Government Association now represents all States and Territories and is a full member of the Council of Australian Governments (COAG).

ALGA also encompasses the interests indigenous Land Councils and the Australian Local Government Women's Association. These bodies are represented within the ALGA membership, either through State Associations or by observer status at the ALGA Executive. This engagement ensures participation in ALGA's national policy development processes.

Local Government is the mechanism through which local communities advocate and seek expression for commonly held views and aims. Dating back to 1840, Local Government anchors the Australian system of government at the community level. It is committed to the overarching principles of local democracy, peace, social and economic justice and ecologically sustainable development.

Local Government serves the community as:
  • A local representative government, providing a voice for community aspirations and concerns.
  • A policy maker, setting local agendas and priorities.
  • An advocate, representing local communities to other spheres of government and various community based agencies.
  • A regulator, in areas such as construction controls, public health and the environment.
  • A planner, overseeing the development of local planning frameworks.
  • A co-ordinator, ensuring integrated, effective and efficient service delivery to the local community.
  • A service deliverer, providing social and physical infrastructure.
  • An agent, providing services to the community on behalf of other spheres of government.
  • An information broker, between suppliers and consumers, across all spheres of government, business, community organisations and local residents.

Local government's concern over public liability insurance costs

In summary:
  • Some local authorities and local non-government groups cannot pay the increases in public liability insurance and/or are unable to access public liability insurance for certain types of events/activities
  • Some local authorities and local non-government groups are cancelling a wide variety of events this erodes 'social capital' and weakens or community cohesion.
  • For the local authorities and local non-government groups that are able to access and afford public liability insurance coverage, the face costs that mean sacrificing or comprising some existing functions and/or introducing or raising charges on events and activities.

Local Government strongly supports the objective of ensuring access to affordable and appropriate public liability insurance for community and other not-for-profit organisations. Public liability "covers all legal liability claims by third parties for death, injury and/or property damage." The existence of public liability insurance advantages the community as a whole. In situations where negligence can be proven on behalf of the community, not-for profit or public body, the injured party is able to access appropriate compensation.

Local Government also affirms the right of an individual or organisation to pursue a legal remedy in the event of negligence. Local Government does not intend to implicitly or explicitly suggest an individual's right to compensation as a result of negligence should be revoked or limited.

Due to the range of activities undertaken by local authorities, they are perhaps more exposed to public liability insurance claims than any other sector of the community. The impact of this risk and the subsequent costs negatively effects the day to day activities of Australians.

Increases in local authority public liability insurance premiums must be met through:
  • Increase in rates
  • Decreases in service provision
  • Implementation of user pays charges

These issues bring into question the capacity of Local Government to sustain into the future the range of community services currently provided.

The impact on social cohesion

One of the more significant external factors blamed for the spiralling cost of public liability insurance was the terrorist attacks of September 11, 2001. These appalling events bought into stark relief another feature of the human condition - the importance of community spirit and support. The role of Local Government played immediately after the tragedy and since highlights the importance of belonging to and participating in the local community.

Local authorities are deeply concerned about the loss of cover for many community activities and the decreasing affordability of those activities than can be insured.

For example, in New South Wales this year:
  • 27 events have been reported as cancelled or closed directly as a result of public liability insurance issues.
  • 28 venues, events and activities are now experiencing difficulties due to rising premiums and will now have to assess ongoing viability.

In representing Australian local authorities, ALGA also represents the interests of the individual communities within local government boundaries. Along with the many advantages of the modern age, local communities are counting the cost of increasing social isolation; with increases in the number of suicides, instances of depression, a marked decline in socially responsible activity; and the increasing incidence of domestic violence and abuse within the family and the community.

The potential effects of spiralling public liability insurance including closure of swimming pools, cancellation of cultural and sporting events, and doubt over ANZAC day marches, all have the capacity to contribute to these societal ills.

The human cost of these cancellations and closures cannot be calculated. Young Shire Council (NSW) observed:
"the smaller the town the more noticeable the impact, which is not to say the effect on larger towns will not be equally felt. In many of the smaller towns and villages the only thing holding them together is community spirit and the desire to maintain and expand their communities. The issue of insurance has the potential to have more detrimental effect on rural Australia than the withdrawal of Government (and commercial) services"

Details of these and other events are at Appendix 1. Similar outcomes are being experienced in all other States and Territories. The loss of community activities has a number of potential impacts. These may be summarised as follows:

  • People lose the opportunity to interact and become less connected to their community.
  • People lose volunteering opportunities, diminishing the opportunity to serve their communities and enhance their sense of worth.
  • People lose recreational opportunities (which are already modest in many rural and remote areas).
  • Communities feel a loss of cultural identity.
  • Communities lose fund-raising activities, impacting further on local facilities and services.
  • Communities lose economic benefits that flow from the tourist potential of many of these activities.

Research has sought to explain social capital as the attitude of an individual towards experiences and expectations of links with others inside and outside of their community of interest. Ultimately, social capital it is about the way we connect with others and how we interpret the social rules and habits, which govern our society.

No society is ever fully cohesive. Some individuals are more able to trust and interact than others. However, studies have highlighted disturbing trends towards societal dysfunctionality when those more inclined to interaction withdraw from community participation. Similarly, studies indicate trends towards increased societal cohesion, when those more inclined towards isolation actively participate in their community.

These studies suggest that social capital has, as a major component, levels of generalisable trust which allow people to bridge difference as well as recognise similarities. This type of trust would seem to be produced by cultures, which respect difference, fair play in resource distribution and conflict resolution based on reasonably egalitarian relationships.

There are many social and institutional factors that may feed into making societies more or less civil. However, it is likely that the encouragement of positive social capital practices will assist in building capacities in disadvantaged areas and empowering people to act collectively on local problem solving.

Where people have few social links, low expectations and few experiences of group participation, they are restricted to their own resources, which may be very limited. If some geographic areas have many residents and workers who are disconnected, or only connected to others like themselves, the whole area may be severely deprived due to the limited number of networks and advocates to protect and expand public facilities and spaces. Through increasing social connectivity, benefits accrue from working together on problems or progress. In this regard, the skills of sociability and collaboration are necessary. Isolation, exclusion or other forms of limiting social connections may well become major problems for individuals and the 'communities' they live in, work in and belong to.

The financial impact of public liability insurance premiums on local authorities

The majority of local authorities are facing public liability premium increases of between 30 and 50% , although there are examples of this increase exceeding these figures . Public liability insurance is already a significant expenditure item on local authority balance sheets. The projected increase will have a considerable impact on local government finances; it is anticipated that these increases will represent between 1-5% of a council's total rate base.

It should also be noted that the premium increase in 2001 was between 15-20%. Industry sources suggest that further increases in the range of 30-50% may be expected in 2003.

Local Government does not have the capacity to absorb the impact of these increases, particularly so when it is simultaneously attempting to lessen the impact on local non-government groups.

Local Government finances are under increasing pressure. Threats to ongoing capacity to deliver services and develop and maintain infrastructure are genuine. This is the combined result of restricted revenue raising capacity, increasing responsibilities and rising community expectations.

Rating of property is the only taxation measure available to Local Government and accounts for approximately 50% of total revenue. This narrow taxation base places a severe restriction on a local authority's ability to raise additional revenue. Furthermore, the rating base varies significantly between local government areas; an aspect only partially redressed by the Horizontal Fiscal Equalisation (HFE) principles of the Local Government Grants process. Unlike Commonwealth and State Governments, Local Government does not have the flexibility to spread its taxation effort over a suite of taxation tools, nor is Local Government's share of the national taxation base growing. .

In addition to the increase in insurance premiums, local authorities will also incur major costs in implementing improved risk management procedures, which need to be adopted to reduce the risk of litigation and exposure to compensation claims. Additionally, several councils are now exposed to uninsured claims as a result of the collapse of HIH. This exposure is in excess of $70 million in New South Wales alone.

These increased costs to Local Government will inevitably result in higher rates and charges where this is possible, along with cuts to services and infrastructure. Local authorities will also be obliged to curtail outsourcing in many areas.

Reform options

The reasons for the growing crisis in public liability insurance are complex and the result of years of growing disrepair in the industry sectors involved . Clearly the external events of the collapse of HIH and September 11, 2001 have hastened the current situation. However activities in both the legal and the insurance sectors over the last five years, together with regulatory failures at both the Commonwealth and State government levels have also significantly contributed to the situation.

The complexity of the problem suggests that simplistic solutions are unlikely to result in a lasting or effective remedy.

ALGA believes that a national solution, incorporating both legal and insurance reform, is necessary. As wholesale reform is difficult, if not impossible, to implement quickly, a staggered approach should considered - thereby addressing immediate concerns in the community and ensuring a effective and lasting remedy.

Nevertheless, local authorities, community and other local non-government organisations are clamouring for immediate, affordable and adequate insurance cover. ALGA therefore contends that timely reforms must occur in the insurance sector in order to assist these organisations.

Against this background, ALGA proposes the following options for consideration.

Insurance sector reform

Grouped Conventional Insurance

There are financial advantages in small groups pooling to gain the same benefits as larger organisations. A group insurance arrangement means organisations band together as a single entity to purchase an overarching insurance policy. Under this arrangement, the insurer underwriting the policy carries all the risk.

Member organisations pooling together allows for cost savings for all participants through the bulk buying of insurance. More importantly the insurer must write the business as a group policy and should not be in a position to decline individual risks. The premium is paid on a global basis and an overseeing administrator, using insurance rating factors, derives individual member premiums. It is reasonable to expect savings on current premium levels in the order of 15%, mainly as a result of reduced acquisition costs for the insurer and, subject to good claims data, savings through a more predictable portfolio of business.

Under a group insurance scheme, the underwriting insurer has ultimate responsibility for the management and costs of claims. However, but in practice there would be a close relationship between the underwriter and member organisations. Such an arrangement provides a sound base for coordinated risk management strategies.

The above comments are premised on the full participation of member organisations. While a group insurance policy could be obtained with freedom to enter and exit the scheme, this outcome is likely to result in major issues for underwriters. The effect would be that any financial benefits of pooling would be lost and the scheme would simply be one of packaged insurance on an individual underwritten basis and with no guarantees of cover.

Pooling with self insurance

Under a self insurance arrangement, organisations group together to form a mutual insurance entity. Funds (contributions/premiums) are pooled to meet the costs of claims brought against member organisations. There are many such examples of self-insurance arrangements, including State Government insurance pools and Local Government mutual liability schemes. The latter are reinsured schemes.

There would need to be a body established to administer the mutual insurance entity, provide actuarial and investment advice and manage claims.

In the longer term, it would be feasible for such a scheme to incorporate a bonus system to reward those that adopt good risk management practices with a corresponding good claims history. A fundamental requirement of a self-insurance pool is that it operates on a fully funded basis. Notably, one of the pool's greatest strengths is the ability to smooth out premium increases.

A significant downside of a self insurance pool is the financial exposure of member organisations should there be a shortfall between the premium income and claims costs. Such a circumstance would require members to make an additional contribution. However, this risk can be minimised through appropriate reinsurance placements.

The cost savings of such a pool, over commercially underwritten public liability insurance, are estimated to be between 30-40% due to the pool carrying the risk. There is also potential for further savings, as premiums do not incorporate an allowance for expense and profit. However a declining level of retention by the pool in a reinsurance program, results in reduced cost savings to the pool.

Government Underwriting

The Commonwealth and State Governments could chose to underwrite all public liability insurance risks of not-for-profit community group, thereby taking the place of the private insurance sector in providing insurance cover.

At the Commonwealth level this option would require the establishment of a separate entity to manage the process.

At the State level this option could be achieved if State Governments extended the profile of their insurance pools. While State Governments do not currently have the infrastructure appropriate to manage such an extension, the regulatory requirement for incorporated associations to hold certain levels of insurance does place an onus on State Governments to assist in the ultimate solution.

Currently, in a number of communities where events and activities are facing immediate demise, some local authorities have extended their own group insurance pools to cover certain local non-government organisations . Although this action has effectively saved a number of activities, it is not a sustainable solution. Potentially the consequences of such an extension may worsen the group insurance risk profile and thus raising local authority premiums even further. Furthermore, the method by which local authorities determine eligibility for community groups to enter a risk profiled insurance group would be a particularly difficult matter to resolve. Such an approach would also incur additional administrative costs to local authorities.

Law reform

Local Government believes that changes to mediation and pre trial settlement processes, along with structured settlements, will assist both the community and individuals.

Non Litigation solutions

Currently, a large number of claims fall beneath the local authority's excess level as defined by their policy and thus are the responsibility of the local authority (most of these claims are less than $10,000). Often the cost of defending such actions in court is disproportionate to claim being made. ALGA contends that pretrial settlements and mediation processes would greatly reduce the number of frivolous and vexatious actions in the court system commensurably reducing the costs associated in appropriately compensating a victim of negligence.

ALGA recommends:
  • Claims against a local authority alleging breach of duty of care in relation to a public place must be notified within three months of occurrence - to enable effective investigation by the council.
  • A claim against a local authority cannot be the subject of court proceedings until at least six months after a notice of claim is given (unless the court gives leave in special circumstances) so as to explore non litigated settlements and thereby reducing legal fees for both parties.
Structured Settlements

The disbursement of a verdict or settlement through structured periodic payments is less costly to insurers and defendants, as the payments are funded by an annuity, which factors the time value of the award into the settlement. This method of payment may also be of benefit to the plaintiff in circumstances, which require long term care or treatment.

ALGA would support the implementation of structured settlements.

Caps and Excess

As a large number of the claims against councils are for relatively small amounts, the current arrangement operating in the NSW Motor Accident Compensation Scheme, where claimants are required to bear the first part of any claim, may further reduce frivolous or vexatious claims.

Alternatively, a capping system may be considered for particular injuries. The cap or the upper limit on the amount of the claim could apply to either the claim in total or specific components parts. Notably, however overseas experience suggests that caps are not particularly successful in either reducing the overall number of claims

ALGA supports consideration of an excess system.

System wide reform

ALGA is concerned at the growing tendency of individuals to seek redress against local authorities and the trend of courts to hold local authorities strictly liable. In many of these circumstances, the determination of a local authority's failure in meeting its duty of care does not account for ordinary and expected features of outdoor public areas.

The current application of the legal principle of occupier's liability in relation to local authority owned land bears little resemblance to the true nature of the relationship as more often than not, the authority has no control over the usage of the land.

ALGA supports the proposal by the Local Government Association of Queensland for a legislated standard of care for local authority owned public land, where the local authority does not have any control or management of the land.

This would require codification of a standard of care by legislation, consistent with recent High Court authority. This would clearly articulate local authorities' responsibilities, providing certainty and consistency in this regard.

Local Government would also need to prepare, seek public comment on and subsequently adopt, a formal risk management program setting out the levels and standards to which it is prepared to bind itself in relation to inspection, detection and remedy of defects in roads, parks and other outdoor public areas.

Furthermore, ALGA supports and endorses the need for audited risk management strategies and standards to be developed and implemented by all councils. Such standards and strategies should be admissible in evidence.

ALGA proposes further consideration be given to the development of a statutory code on contributory negligence matters, and the potential implementation of a mandatory requirement that damages be reduced by a substantive amount for each proved instance of contributory negligence.

ALGA supports the proposal to regulate the ability of lawyers to advertise "No Win No Fee" services.

Finally, ALGA supports the implementation of a public education campaign designed to highlight the consequences of the " someone will pay" attitude.

 

Australian Local Government Association
National Secretariat
22 March 2001

Contact regarding this submission

Larissa Karpish
Assistant Director, Ageing, Finance and Economic Policy
Australian Local Government Association
Tel: 02 6122 9427   
larissa.karpish@alga.asn.au

 
Page last updated: 11 October 2005