No-fault is the only answer

There is a virtually unanimous view that the current employers' liability (EL) regime is outdated and too expensive. As the ABI put it in its submission to the Department of Works and Pensions (DWP) inquiry, maintaining the status quo is just not an option.

That, unfortunately, is about as far as the agreement goes. Before we can make things better, we have to answer the obvious question - what should we put in its place? When we consider this point, the consensus breaks down. Broadly speaking, responses fall into three categories: those who would modify the current system; those who prefer a no-fault compensation system US-style; those who do not know what to do.

In theory, this should not matter. The DWP can resolve this question by coming down one way or the other as part of its investigation. In practice, however, no one I have spoken to expects this to happen. My guess is that the DWP's recommendations will include further consultation and another report - in other words, more delay.

In that case the insurance community will be in no position to blame ministers or their civil servants for the outcome. After all, we in the industry cannot come to a view on one of the most important problems we face, so why expect anyone else to find a solution?

Mixed views
Our hesitancy is understandable in view of the complexity and importance of the issue. Airmic, like everyone else, is sitting on the fence while it takes stock of all the conflicting views. Although among the first organisations to come out for change in the way EL is handled, we have yet to agree among ourselves what that change should entail. I expect it to be a big topic of debate, both formal and informal, at our conference in Manchester next month.

For that reason these views are mine, and not those of Airmic or all of its members. Some eminent risk managers will disagree - and their views should be heard.

But there is an overriding need to move the debate on. If we do not, we may end up retaining the current system by default. Even worse, we could find that the government opts for some kind of compromise or token reform that satisfies no one. So, I shall have my say and invite anyone who strongly disagrees to come forward.

Reduce need for lawyers
My experience of handling personal injury compensation claims has put me firmly in favour of adopting a no-fault system of EL similar to the best workers' compensation schemes practised in the US. The benefits are overwhelming and self-evident, while the well-publicised drawbacks have been overstated and taken out of context.

A no-fault scheme would provide more certainty, encourage the greater use of rehabilitation and ensure that the compensation goes where it is most needed. Above all, I want to reduce the need for lawyers. My own research suggests that, in the vast majority of EL claims, lawyers' fees account for over half the claims costs eventually incurred. It is by no means unusual for lawyers to take up to 80% or more of the total. This is not what the original legislation was supposed to achieve.

My analysis is consistent with the results of the Third UK Bodily Injury Awards study, published by the IUA and ABI in March. After sifting through more than a million claims they concluded, among other things, that legal fees had risen at nearly three times the rate of national average earnings for at least a decade. The study looked mainly at motor injury cases, but there is every reason to believe you would get a similar result for EL.

Lawyers would argue in their defence that they are not entirely to blame for this state of affairs; legislation and legal developments have made personal injury litigation far more complex and time-consuming than it used to be. I do not entirely disagree, but this line of argument only emphasises the need to find another way of doing things.

The alternative EL reforms I have seen do little or nothing to address this overriding weakness of the current system. It is sometimes suggested that disease should be removed from the EL equation, and an employers' pool set up to handle any resulting claims. That would be insurance by another name, it would be complex and would do little to reduce the litigiousness that is driving up costs.

Opponents of no-fault compensation in the US and elsewhere say that it does not work in practice; that it can be bureaucratic, overblown and just as litigious as anything over here.

Learn from US mistakes
That is only true if you are highly selective in the states you examine. We need to learn from the bad experience of, say, Florida, where there is increasing claims frequency, health care costs are far higher than the national average and, dare I say it, increased litigation. The system works well, however, in the vast majority of the US, delivering speedier settlements, better medical outcome and (by US standards) reduced legal costs.

We are fortunate in the UK. We can learn from other people's experience, avoid the mistakes they have made or are making and choose the best of the no-fault systems that are successful. The alternative is to watch the current discredited system grow ever more burdensome on industry as it becomes less and less attractive to underwriters.

The time has come to be bold and radical. Nothing else will do.

What do you think? Email
andy.cook@instimes.co.uk