Public Liability

Public liability insurance protects you and your business against the financial risk of being found liable to a third party for death or injury, loss or damage of property or 'pure economic' loss resulting from your negligence.

Professional Indemnity

Professional indemnity insurance protects you from legal action taken for losses incurred as a result of your advice. It provides indemnity cover if your client suffers a loss - either material, financial or physical - directly may need cover against claims of goods causing injury or damage. For more info about professional indemnity click here.

Product Liability

If you sell, supply or deliver goods, even in the form of repair or service, you may need cover against claims of goods causing injury or damage. Product liability insurance covers damage or injury caused to another business or person by the failure of your product or the product you are selling. For more info about product liability click here.

In Summary:

      DESCRIPTION OF PUBLIC LIABILITY PRODUCT AND MARKET
      VOLUNTARY COVERAGE
      COVERED PERILS & RISKS
      PRIMARY TYPES OF CLAIM
      COVERAGE TRIGGERS
      SECONDARY COSTS OF INSURANCE
      COVERAGE LAYERS
      PACKAGING
      DISTRIBUTION THROUGH INTERMEDIARIES
      MANY INSURERS
      CURRENT ISSUES IN THE PUBLIC ARENA
      COVERAGE AVAILABILITY
      SYSTEM DIFFERENCES
      JURISDICTIONAL DIFFERENCES
      ADVERSARIAL BASIS
      FAULT BASIS
      SYSTEM DELAYS
      CHANGING PUBLIC EXPECTATIONS

Description of Public Liability

Public Liability encompasses a number of systems for providing benefits to those who suffer injury. In this context, injury has a rather broad meaning, encompassing personal injury (both physical and psychological), damage to property and economic loss.

Other Australian systems that provide some benefits for those who suffer injury include:

• Social Security
• Workers' Compensation
• Compulsory Third Party (CTP)
• Medical Indemnity
• Professional Indemnity
• Property Insurance
• Builders Warranty
• Product Liability
• Product Guarantee
• Personal Accident
• Health Insurance
• Medicare

Public Liability Insurance provides protection for those who would otherwise have to pay Common Law awards. Public Liability policies are typically open-ended in that they cover all liability in respect of a particular location or activity, unless excluded by the policy wording. Despite this technical point, Public Liability Insurance does in effect provide financial protection for injured persons, to the extent that any parties found liable for damages would not otherwise be able to pay the compensation awarded.

Public Liability Insurance does NOT provide direct compensation for injured persons. Rather, compensation is provided by the Common Law application of the principle of Tort, although the application of Tort law is substantially influenced by the existence of insurance.

Voluntary Coverage

In contrast to the two main statutory liability classes, workers compensation and CTP, Public Liability Insurance is largely a voluntary insurance. The main exceptions to this are certain public events and facilities, where a licensing authority requires Public Liability Insurance. In addition, many organisations that operate on a voluntary basis, typically with the support of local council, are also generally required to hold Public Liability Insurance.

This protects the supporting body (the council) from any call on its Public Liability Insurance. In any event, most organisations and many individuals are increasingly aware of the potential to be sued and regard Public Liability Insurance as a necessity. It is automatically included in most property insurances (home, shop, boat, etc., but not motor vehicle, where CTP is compulsory) and in most business package insurances, but is also sold as a separate policy, particularly to larger businesses and to organisations without premises.

Covered Perils & Risks

Public Liability Insurance provides protection for those who would otherwise have to pay Common Law awards in respect of personal injury or physical damage. This protection may relate to a particular location, to the use of moveable property, or to the activities of a group or individual. Because the policy is intended to cover the unexpected, most policies are limited by exclusion, rather than attempting to enumerate the perils, which are covered.

The main exclusions are typically the perils for which the insured would normally be expected to have more specific insurance. Known hazardous activities may also be excluded, as are criminal actions by the insured. (Perhaps incongruously, compensation is sometimes payable to persons injured in the course of their own criminal activity.)

Primary Types of Claims

Claims typically fall into two main classes - property damage and personal injury (both physical and psychological) - although some claims encompass both. Other forms of injury are typically covered by more specialised liability insurances, such as professional indemnity, directors and officers, etc. Property damage losses may also include loss of profit and other consequential losses.

Personal injury claims can be rather more complex. The main elements of compensation considered in the settlement of a claim are referred to as heads of damage some of which are:

• economic loss
• past loss of income (prior to settlement of the claim)
• future loss of income
• treatment and care
• medical, etc., treatment
• hospital
• prosthetic and other aids
• rehabilitation
• home modification
• domestic and living help
• fund management
• non-economic loss
• pain and suffering
• loss of use
• bereavement
• exemplary damages (rare in Australia)
• plaintiff legal costs awarded against the defendant

Coverage Triggers

Public Liability policies are typically written on a claims occurring basis. The policy covers claims in respect of incidents which occur during the policy period, regardless of when the claim is reported or payment made.

The main alternative basis is called "claims made". On this basis, the policy covers incidents notified in the policy period. This is now the standard basis in several other liability classes (for example, Medical Indemnity and Professional Indemnity), but has not yet emerged as an important basis for Public Liability coverage in Australia.

Secondary Costs of Insurance

Given that insurers are liable to meet the cost of damages awarded, they have a strong financial incentive to defend each case. In doing this, additional costs that they may incur may include:

• assessment
• investigation/surveillance
• defendant legal
• claim administration

As well as meeting the cost of claims, insurers must also include in their premiums the cost of:

• general administration
• policy issue
• policy distribution (including commission and other fees)
• policy taxes and duties

These secondary costs may add a loading of 30-50% to the risk premium for liability policies.

Coverage Layers

Outside the statutory classes, all liability insurances are subject to limits on the amount payable and most are also subject to excesses. (An excess, also called a deductible, is deducted from the amount paid to the insured.)

There is always a limit (the sum insured) on the total amount payable on the policy. Many policies also have a per claim limit. Larger policies often also have adjustable premiums or other arrangements, so that the insured bears a proportion of the claim cost and benefits if there are none.

Deductibles (franchises are less common) are generally a few hundred dollars for small policies, but can be very large for large corporate clients. In effect, some corporations act as self-insurers, with the insurer only picking up the highest layers of the very largest claims.

Packaging

Public Liability Insurance is commonly packaged with other covers. Most consumer insurances, other than motor, include it, as do most business insurance packages. This helps with policy loadings, by spreading fixed costs over a larger base premium, but leads to other problems.

In some cases the cost of the liability cover is glossed over, as it is typically a small part of the whole. The pressure to achieve an acceptable overall premium for the package also exerts downward pressure on the Public Liability component of the rates.

Distribution Through Intermediaries

Stand-alone Public Liability Insurance is almost exclusively distributed through brokers and agents. Where it is packaged, particularly with consumer insurances, direct and, increasingly, internet selling are also important.

Where brokers are involved, the insurer does not have direct access to the client and usually has to rely on the information provided by the broker. In some cases this adds to the difficulty of getting the price right, particularly if the information is "dressed up" to make the client look attractive. Making sure that your Broker has not misrepresented your risk is a very important factor in making sure you get the appropriate cover. For more info' on this see "Duty of Disclosure" under Consumer Advice on our home page or click here

Current Issues in the Public Arena

There is a perceived crisis in Public Liability Insurance.

The main issues are seen to be:

• the availability of coverage
• premium levels and premium increases
• the recent failure of a major insurer
• the impact on broader services

Other major issues which have attracted less public attention include:

• benefit differences between systems
• differences between jurisdictions
• the adversarial nature of Common Law
• the negligence basis of Common Law
• system delays
• changing public expectations
• persistent losses by insurers
• inadequate incentives for prevention
• inappropriate claim management
• the lack of reliable data.

Coverage Availability

There is a fair amount of concern that Public Liability Insurance coverage is becoming unavailable to many entities. To a large extent, we believe that this is a matter of perception rather than reality, though cover for some activities can now only be placed overseas.

Several insurers have withdrawn from the market and most others have become far more restrictive. Most cover sought remains available, but at a significantly higher price. The real problem is that premiums are now seen as too high. This is a genuine problem. Premiums have increased dramatically in 2001 and 2002 and are likely to continue increasing for some time to come.

System Differences

The various injury compensation systems can be loosely classified as statutory or Common Law. Most statutory systems restrict access to the Common Law. In some cases, the statutory benefits are more generous or more easily accessible than the benefits likely under the Common Law system.

In other cases, the Common Law system can be more generous. Some of these differences are extreme. Because Public Liability policies generally cover everything that is not explicitly excluded, some claimants will go to some lengths to establish a claim under Public Liability for an incident that falls naturally under a statutory scheme, or vice versa.

Jurisdictional Differences

For a variety of procedural and social reasons, the level of Common Law awards and settlements varies between states. There are also observable differences between individual courts and judges. Naturally, plaintiff lawyers attempt to get their cases heard in the most favorable jurisdiction and under the most favorable legislation. This is an equity, as well as a cost issue.

These differences also affect the stability of costs. Higher awards in one jurisdiction, or even by a particular judge, can be used as an argument for ratcheting up awards generally.

Adversarial Basis

As well as being labor-intensive and, therefore, costly, the adversarial basis of the Common Law system is often criticised as being less likely to arrive at the truth than an inquisitorial system, where the court can ask its own questions and call its own witnesses.

Another major problem, particularly in personal injury cases, is that the adversarial system discourages sharing of information between plaintiff and defendant until the last possible moment. This can severely hamper any attempt by the defendant at mitigation.

The case is seen as a battle to be fought, rather than a situation to be mutually resolved in the best interest of an injured person. The pressure on the plaintiff to demonstrate the severity of the injury can work against rehabilitation. This is particularly important in cases of psychological injury.

Insurance policies usually explicitly prohibit any apology or admission of fault by the insured, because this would compromise any defence, even though this prohibition may magnify the damage.

Fault Basis

Because, under the Tort system, an award for compensation is only payable if someone is found liable, there is substantial pressure on those who are seriously injured to find someone to blame.

Over time, this may have the effect of pressuring the courts to impute liability even where fault and/or negligence are highly tenuous. Any such expansion of liability principles away from real negligence towards the concept of "strict" liability increases the Tort system's dependence on a well-functioning system of liability insurance.

The fault basis also creates a two class system for people disabled through injury - those who are compensable and those who are not. While no-fault systems partially resolve this issue, injuries may still be sustained where either fault cannot be attributed or no-fault legislation is not available.

System Delays

While many small claims are settled quickly, the dollar-averaged delay to settlement is probably around five years, with some large claims running much longer than this. In conjunction with all the other uncertainties, this makes it very difficult to assess the cost level of current occurrences and, hence, the level of premiums required.

Some of these delays are inevitable. Some injuries take a long time to manifest and others take a long time to stabilise, particularly injuries to children. Because settlement is by lump sum, it is undesirable to settle until the injury stabilises.

On the other hand, if ongoing losses were compensated by periodic payments, the payment tail would be even longer. Structured settlements, which avoid this problem by providing ongoing payments in the form of an annuity, managed by a life insurer, are now expected to be more viable following changes to tax arrangements announced by the Federal Government in September 2001.

Other delays are a consequence of crowded courts, legal workloads and the adversarial system. In some cases, one side or the other deliberately delays proceedings to gain a forensic advantage.

Changing Public Expectations

An important consequence of, and contributor to, delays in the system is that public standards change over time. Because it can be many years before a claim comes to court, it is not unusual for behaviour which occurred many years ago to be judged in the light of current standards.

There are three issues here.

• Such claims are not usually lodged until public standards have changed enough that there is a reasonable prospect of success.
  
  
• In theory, such claims should be tried on the basis of the standards applicable at the time of the behaviour which gave rise to the injury. In practice, the basis seems to be the current perception of what those standards were or should have been.
  
  
• Insurance underwriters may fail to recognise that standards have changed.