Why not adopt NZ’s no-fault national insurance

I do love New Zealand.  It’s a beautiful country with great people and a relaxed attitude.  One factor that supports a relaxed attitude is New Zealand’s national enduring no-fault accident insurance scheme, which eliminates some the perceived legal risks that can stifle innovation, new business, increase medical costs, and reduce private land utilisation.

I want to take the time to examine this important issue, by looking at the history and performance of the New Zealand scheme, in its various iterations, and compare this to the scope of State and national accident and health insurance provided in Australia.  I will preface the discussion by noting that I am not a legal scholar, but an economist looking at the behavioural incentives provided by the legal framework.

So what is this no-fault insurance scheme I speak of?

As one of my Kiwi friends put it, imagine workers compensation for all accidents for all residents and guests in New Zealand.  Yes, that includes Rugby World Cup players.  In its latest incarnation, the scheme is governed by the Accident Compensation Act 2001, which created the Crown organisation the Accident Compensation Corporation (ACC) (although the legal structure is a little more complex than that).

Funding is provided through various payments, with accounts kept for different types of accidents, such as work injuries, non-work injuries, treatment injury (medical malpractice), and motor vehicle injuries – in all, a comprehensive national accident insurance scheme.

One key feature of the New Zealand scheme is that the legislation, by providing national insurance, removes the ability of accident victims to sue for damages even is such cases as fault could be determined (apart from strictly defined exemplary damages).   The origins of this important provision include concerns over wasted legal effort, and sometimes impossibility, of proving fault in accident claims, and the lack of support of victims of no-fault accidents.

This is quite different from Australian tort law, where damages for negligence can be sought from those at fault, provided they meet a few criteria –

  1. A duty of care must be found to exist.
  2. The duty of care must be breached.
  3. Damage or injury, not too remote, must result from the breach.

The legal profession uses the term the ‘public liability and professional indemnity insurance crisis’ to describe they way insurance markets responded to ever increasing claims for damages with higher prices and less availability in Australia around the turn of the millenium.  This has serious implications for social clubs and sporting organisations, medical professionals, and private landholders who allow third parties to conduct activities on their land (an angle I will revisit later).

The Americans have been eyeing off New Zealand’s national no-fault insurance scheme because it appears so remarkably affordable.  Regarding medical ‘misadventure’ not only are damages paid lower in New Zealand than under America’s tort system for claiming damages, but the administrative costs make up only around 10% of expenditure, compared to 50-60% under the US tort system.  While some criticize a no-fault system as a no accountability system, the reforms to New Zealand’s scheme have included accountability for doctors and disciplinary hearings.

There is even regard for New Zealand’s scheme because it automatically provides accident insurance in the case of terrorist events.

Of course, some have criticised the scheme as inadequate.   One argument often presented, that doesn’t seem to hold water, is that the losses from the elimination of the tort system go further than just removal of incentives to minimise loss. They also remove the information base from which monitoring activities can be designed and upon which education to prevent future loss relies. Both of these are vitally important factors in a system that is heavily dependent on overt monitoring to achieve a socially optimal outcome. (here)

However, having a central agency, if structured well, would greatly enhance the information base about risks and risk education.  A haphazard arrangement of private insurers, and unpredictable court decisions would be a maze to navigate if one wanted to get an appropriate estimation of risk levels.

The critiques of such a scheme are those you might expect to benefit from its abolition – the business community who would take over insurance provision, and the legal profession.

While certainly a minority, there is a vocal constituency, comprised largely of individuals from the business community, who seek outright abolition of the no-fault system and a return to the common law tort system. Chief among these critics is the New Zealand Business Roundtable, which considers the accident compensation scheme to be an “unjustifiable intrusion by the state upon individual freedom and decision making” and would like to see it disappear altogether. In 1998, the Roundtable proved successful, if only temporarily, in its goal of dismantling the accident compensation system with the enactment of the Accident Insurance Act. Bolstered by substantial support from the Roundtable, the Act signaled a significant policy shift toward contraction of accident compensation coverage. By suspending the ACC’s statutory monopoly on the administration of benefits and beginning the process of privatizing the ACC, the Act ended most mandatory insurance coverage until the statutory re- institution of the ACC’s monopoly in 2000.

This temporary setback was the product of a clash of political ideals and a shift in political power.

Don’t get me wrong.  New Zealand’s scheme is not perfect, and neither are any other national of State regulations for the provision of accident insurance, whether at work, in motor vehicles, or during domestic and recreation activities.  New Zealand’s scheme has a checkered history of changing scope of coverage, cost blow-outs, and changes of government and direction.

Cost blow-outs were quite dramatic in the early decades of the scheme, with expenditure growing 8 fold in real per capita terms between 1974 and 2000.  What this means in income adjusted terms I am not sure, since even with a set of identical claims and outcomes, the cost of the scheme is always going to at a rate closer to wage growth, than consumer price growth (since income compensation occurs are a proportion of previous incomes, and medical costs are closely linked to labour costs – see here for more explanation on this principle)

Other criticisms come in the form of questioning the moral hazard problem.  Won’t everyone in New Zealand simply stop caring?  Won’t business allow their patron to take extravagant risks?  Will compensating behavior lead the outcomes from the scheme to be far from optimal?

The answers to the questions are all simply no.  Studies have shown that risk of medical misadventure in New Zealand sits very close to the average of its peers (half way between the UK and Australia by the way).  In terms of serious injuries to workers, New Zealand outperforms all Australian States bar Victoria in terms of population adjusted workers compensation cases.

In fact, the ACC has a role to prevent injury, and has adopted an approach of being a provider and safety information and regulatory advice.

New Zealand’s system, while it appears quite radical, is inherently similar to Australia’s public health care and welfare system from the point of view of an injured person, in terms of health care, rehabilitation, and lifetime income support (although income support in Australia is at subsistence welfare levels rather than a portion of previous income as in the New Zealand scheme).

In the realm of motor vehicle and workplace accidents, Australia has similar national or State insurance/compensations schemes in place (or compulsory private insurance), and it wouldn’t be such a great leap to expand our insurance systems to include all injuries.  In fact, only about 25% of the serious injuries are not covered by statutory insurance requirements.

Data has shown that 61% of catastrophic injuries in Australia come under the motor vehicle scheme, 13% are part of workers’ compensation, 11% are due to medical negligence, and 15% fall under public liability. (here)

Some States in Australia have also reformed tort law to cap damages claims, and make scope for damages more narrow.  This has gone some way to reducing civil matters that can clog our court systems to the advantage of the legal profession.

After all this rambling Rumple, will you now tell us why you are so interested in this scheme?

Yes, thanks for interrupting me.

In everyday life I see liability insurance as a great hindrance to social and economic activities.  Local sporting competitions are often burdened by the costs of insurance, which are often directly attributable to legal costs under the tort system, and expectations of damages claims.  Adventure sport and tourism, New Zealand’s great exports, would have a much more difficult time if they could not pool their liability insurance across all the diverse activities occurring in New Zealand.

Even if our current system does restrict liability, the uncertainty and difficulty in interpreting legal accountability, is itself a hindrance to emerging social and economic activities.

The NSW parliament has shown some interest in no-fault State accident insurance after the decision of the High Court to reinstate the award of $3.75million in damages to Guy Swain, a man rendered quadriplegic after diving into a wave and hitting a sandbank at Bondi Beach in 1997 (here).  Waves of ‘insurance crises’ have led to continual tort reform, but in 2005, Bob Carr announced that the government was working on a no-fault scheme of insurance.  It is these types of legal and damages costs that Councils, community groups and landowners fear.

Doctors face hefty costs to start up their own practice, and often the risks involved from medical malpractice suits leads to over mediation, and excessive treatment.  Since medical costs in the public system are already paid for by the public at large, wouldn’t any measure to reduce costs be beneficial?  In the US, these so-called ‘defensive’ medical treatments are estimated to cost around $45billion per year.

Lastly, the liability of property owners for injuries from activities on their land does stifle economic activity.  For example, would you allow an adventure sport race on your farm if you knew that there was a slight chance of being held liable for injuries to participants?  Or would you allow campers on your land? What about paragliders launching and landing?  I know from speaking with the paragliding community that liability concerns have made many landholders reluctant to continue to allow launching from sites on their property, and these same concerns extend to local Councils.

Removing the fear of legal action in the case of injury (whether real or perceived), by making all accident insurance compulsory and national, will help lubricate the economy by enabling those very small businesses and community groups to conduct activities they would otherwise fear to undertake.

Australia, and many other countries, are incrementally heading towards the basic principles of New Zealand’s national scheme, as the economic benefits from the elimination of the right to damages apart from in exemplary cases, provides society wide benefits.

I don’t see a sudden change in this direction, but with ongoing parliamentary interest, and recurring insurance crises, we may yet reach a point where the net effect of our complementary insurance scheme is much the same as New Zealand’s scheme, simply by default.

Any input from people who have been injured in New Zealand, or worked in this area of law would be greatly appreciated.

Tips, suggestions, comments and requests to [email protected] + follow me on Twitter@rumplestatskin

Comments

  1. Around 9 months ago a car turning left across a cycle crossing failed to give way and cleaned me up, the result for me was a badly shattered kneecap. The TAC ( Victoria ) has been excellent and paid for everything, removing the extra worry that would have been a part of the processes without them.

    However there are a couple of things about it. Firstly the loss of income amounts are capped at well below my normal income.

    Secondly I do feel as though the driver “got away with it”, he got a ticket on the spot but that is all, he doesn’t even know what suffering has been caused. This was definitly not a “No Fault” accident however for the driver it does seem like a no fault outcome.

  2. Good policy
    Anything to reduce Australia’s increasingly litigious people from wasting time and money and encouraging ambulance-chasing lawyers. The 250kg guy who fell through his lounge floor recently being a classic case. Perhaps he should be suing Isaac Newton for setting the gravitational constant too high…

  3. Bring it on. Like RS, I am aware of numerous cases where community activities have been stiffled by excessive insurance costs.

    At the very least, adults should able to explicitly take full responsibility for their actions. In the paragliding case above, for example, the paragliders should be able to explicitly absolve the landowner from all responsibility. I may have been misinformed, but I am under the impression that this is not currently an option.

  4. Good post Rumple,
    but then “Cui bono” from this? Yes most of the country and its citizens would, but you would render a complete sub-industry of legal practitioners superfluous. What are they do? Do you know how much it costs to get a legal degree in US? I don’t, but it’s a lot. But no seriously, all the points you raise are valid, and NZ has shown the way to do it.
    Unfortunately the lobbying by those who stand to loose out would be massive and would hinder the progress. Slowly but surely we’ll probably get there one day.

    • Jumping jack flash

      Good to see that New Zealand’s leaders are standing up and saying “no” to the lobbyists of lawyers and insurance companies, unlike a particular recent leader of Australia who shall remain nameless.

      These “leaders” of ours just bend over and take whatever the lobbyists thrust at them. It sure is easier that way than, say, to come up with any ideas and decisions of their own. Perish forbid! It may anger the lobbyists, and they’ll come back with pineapples…

      • Mark HeydonMEMBER

        Opening the ACC up to private competition in the workers account is part of the National government’s manifesto and all indications are that this will proceed apace, with scheduled commencement later this year. So I don’t think the government in NZ is entirely deaf to lobbyists.

  5. Lawyers would oppose no-fault insurance unless it came with a quid pro quo for lawyers. The obvious quid pro quo is to pay indemnity costs, at public expense, to all persons acquitted of criminal charges. That would improve lawyers’ chances of getting paid when they act for defendants.

    But, if memory serves, it’s more than 20 years since I first went public with that idea.

  6. Well the TAC system actually includes a place for lawyers.
    It is accepted that you might have a lawyer to guide and advise you through the process. That is pretty much what the ambulance chasers do in victoria now …

  7. Perhaps and example of a common accident on a comparison basis with NZ -Australia -UK and USA would further illustrate the pros and cons of NZ’s system
    keith m

  8. Tedblack44MEMBER

    I recently had my appendix out. Keyhole surgery for 1.5 hours. The excess of over $300 which the Anaesthetist charged above what my insurer would pay was justified to cover his +$100,000 pa Liability Insurance premium. Whose bad experience have I just partly paid for? More likely some QC or Barister’s good experience.

  9. Rumplestatskin,

    This issue has been considered in some depth by the Productivity Commission as part of the proposed National Disability Insurance Scheme (NDIS) reforms.

    See link here…

    http://uat.pc.gov.au/__data/assets/pdf_file/0008/106379/19-chapter16.pdf

    Note the proposed measures to achieve consistency in no fault arrangements across various state and territory jurisdictions etc. Currently, it is a dogs breakfast across the various jurisdictions and frankly, a JOKE.

  10. Booboo Bingbang

    “Funding is provided through various payments, …….”

    As an employer – I paid for ACC and its tangled web in 4 different ways:
    1. Earner’s levy is deducted from gross pay along with PAYE tax
    2&3. Levy included in the price of petrol and motor vehicle licensing fee
    4. Employee personal cover levy

    It still loses sh*teloads of money each year as generational “injuries” weigh down a basically flawed model.

    • What system are you comparing to Booboo? I’d be interested to know, simply because the international comparisons put the cost of the NZ system as relatively low. They also put the safety of NZ medical treatment, as I mentioned, in the middle of a tight range between the UK and Australia.

      Remember, all insurance systems suffer from moral hazard by their nature, whether supplied through private or pubic insurers.

  11. Booboo Bingbang

    On top of an inefficient funding model, it also has engendered a form of “protectionism” for the Medical fraternity where the most unbelievable acts of medical misadventure are either swept under the carpet or processed in bureaucratic back offices over many years.

    Take my word for it (2 years in projects and re-organisations of the mess in the 90s has taught me” universal cover is not equitable, fair, manageable or in any way a shining model for Australia.

  12. I’m with Booboo. The moral hazard risk is too great. I’d like to see the data behind the claim of risk-of-injury equality between public, capped-liability schemes and tort-based schemes.

    Perhaps there is a case for a public and capped scheme for non-profits, but the risk of significant financial and other liability is justifiably one of the risks of providing potentially hazardous services on a for-profit basis. It focuses the mind on providing a safe service.

    It may, or may not, be the case that risk is being mis-priced, but show me the evidence when deaths from iatrogenic causes are numerous. One Australian report (now old – 2001) says as follows:

    “Healthcare is a risky business. Simply being a patient in an acute care hospital in Australia carries, on average, a 40-fold greater risk of dying from the care process than from being in traffic, and a 400-fold greater risk than working in the chemical industry.”

    http://www.apsf.net.au/dbfiles/Iatrogenic%2520Injury.pdf

    A better solution, perhaps, might be to streamline the legal system, and reduce its costs, by creating mandatory conciliation and/or arbitration tribunals in this area.