Stone, Andrew --- "Pricing ourselves out of business" [2014] PrecedentAULA 55; (2014) 125 Precedent 3

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PRICING OURSELVES OUT OF BUSINESS

By Andrew Stone

The primary political battle over compensation schemes for the balance of this decade will be the fault versus no-fault divide. There are genuine arguments in favour of no-fault schemes:

(i) The at times arbitrary distinction between those at fault and those not at fault.

(ii) The lump sum nature of fault-based schemes and the dangers of the injured squandering the lump sum.

(iii) Delays in providing benefits while liability is disputed.

(iv) The high frictional cost of providing the lump sum.

These are all valid criticisms that we need to understand. We need to continue to make out the case in favour of lump sum compensation:

(a) That with limited resources, it is better to compensate the ‘innocent’ than the ‘guilty’.

(b) That a lump sum represents financial freedom.

(c) That no-fault schemes almost invariably become ‘low benefit’ schemes.

The issue that I particularly wanted members to reflect upon over the summer break is the role of the legal profession and the frictional cost of lump sum compensation. Put bluntly – if we become too expensive, government will close us down.

In a perfect world, both justice and social justice would not be commoditised or priced, but rather valued as an inherent good. Justice would be fair and quick without needing to be cheap. We do not live in such a world. The economists now run the joint. They measure the cost of delivery of services and justice has become commoditised as a service, like so many others.

Let me explain with a simple example. Take a protracted case that ultimately settles for $250,000 all inclusive. $50,000 goes to pay back medical expenses and Centrelink. Because the difficult liability case typically runs all the way up to the doors of the court, the combination of professional costs, disbursements and counsel’s fees ends up coming to $100,000, with a cash-in-hand return for the injured claimant of $100,000.

The claimant may well be appreciative of what they have recovered: with an insurance company fighting liability, they have $100,000 more than they might have recovered on their own.

However, an economist looks at this scenario and is appalled. The efficiency rate of the delivery of compensation to the claimant is only 50 per cent. A no-fault compensation scheme that delivered $100,000 in benefits, with no legal fees would be twice as efficient.

A no-fault scheme that delivered $70,000 in benefits with a capped $10,000 in legal fees would compensate twice as many, still be far more efficient and have economists in raptures.

I am not suggesting that this hypothetical example is typical. I am saying that if it becomes typical, then we have a huge problem.

The amount that we as the legal profession take out of cases that settle, matters. It matters to economists. It matters to government. Inefficient schemes are not going to survive to the end of this decade.

The economists believe that one of the most effective ways to make schemes more efficient is to have a no fault scheme (eliminating liability disputes), pay everybody a small defined benefit (eliminating quantum disputes) and let Centrelink and Medicare pick up the rest.

Such changes are disastrous for those who can prove fault and have substantial entitlements to loss of earnings and a substantial need for future medical treatment or care.

Economists seem prepared to sacrifice compensation rights in the interests of efficiency and premium stability. We have an ongoing fight on our hands across a variety of jurisdictions to preserve the right to lump sum compensation or even fair statutory benefits.

Lurking in the background is the desire of the Productivity Commission to move to a national no-fault scheme once the NDIS and NIIS are bedded down.

Too high a frictional cost of legal services to the injured will hasten the downfall of lump sum compensation.

Let me conclude on a more positive note by wishing you happy holidays. As you read the issue, reflect on the year past and consider the year ahead, take pride in the work you do representing the injured and take pride in the work the ALA does advocating for the interests of injured people. So many ALA members put in so much of their time to support the organisation and I thank you all.

Andrew Stone is a barrister at Sir James Martin Chambers in Sydney. EMAIL [e-mail].