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<br><P>Senate Economics References Committee</P>
<P> </P>
<P>Inquiry into public liability insurance and professional indemnity insurance</P>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P> </P><FONT face=Arial size=7>
<P>Submission from the </P>
<P>Australian Council of Professions Ltd</FONT><SPAN></P><FONT face=Arial>
<P>(ABN 20 059 999 914 ACN 059 999 914)</P></FONT>
<P> </P>
<P> </P><FONT face=Arial size=5>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P>13 May 2002</P></FONT>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P> </P>
<P>Mr Peter Hallahan</P>
<P>Secretary</P>
<P>Senate Economics References Committee</P>
<P>Parliament House</P>
<P>CANBERRA ACT 2600</P>
<P> </P>
<P> </P>
<P>Dear Mr Hallahan</P>
<P>I enclose a submission from the Australian Council of Professions Ltd to the Committee’s inquiry into public liability insurance and professional indemnity insurance.</P>
<P>The Council is able to provide representation at public hearings, should the Committee wish to invite it to attend.</P>
<P>The contact person in relation to the submission is Dr David Stephens, Policy Consultant, who may be reached on 02 6257 6100, 0413 867 972 or davids@intellcap.com.au.</P>
<P>Yours sincerely</P>
<P> </P>
<P> </P>
<P> </P>
<P>John Castles AM</P>
<P>President</P>
<P>13 May 2002</P><B><FONT face=Arial size=4>
<P align=center> </P>
<P align=center><A name=_Toc8807705>Table of contents</A></P></B></FONT><FONT size=2>
<P align=center></FONT><FONT size=4>Table of contents </FONT><A href="#_Toc8807705">*</A> <FONT size=4>
<P>Summary </FONT><A href="#_Toc8807706">*</A></P><FONT size=4>
<P>The Council </FONT><A href="#_Toc8807707">*</A></P><FONT size=4>
<P>Professionalism and professional indemnity insurance </FONT><A href="#_Toc8807708">*</A></P><FONT size=4>
<P>Definition of a Profession </FONT><A href="#_Toc8807709">*</A></P><FONT size=4>
<P>Policy on Risk Management </FONT><A href="#_Toc8807710">*</A></P><FONT size=4>
<P>The impact of professional indemnity insurance, including directors </P>
<P>and officers insurance, for small business: Term of reference (b) </FONT><A href="#_Toc8807711">*</A></P><FONT size=4>
<P>Professions and small business </FONT><A href="#_Toc8807712">*</A></P><FONT size=4>
<P>Professionals and professional indemnity insurance </FONT><A href="#_Toc8807713">*</A></P><FONT size=4>
<P>Directors and officers insurance </FONT><A href="#_Toc8807714">*</A></P><FONT size=4>
<P>The cost of professional indemnity insurance: Term of reference (c) </FONT><A href="#_Toc8807715">*</A></P><I><FONT size=4>
<P>Table 1: Professional indemnity insurance premium increases, selected professions: Minimum premiums for sole practitioners, earning fees $30-100 000 a year, for coverage of $1 million ($ increases 2000-01)</I> </FONT><A href="#_Toc8807716">*</A></P><I><FONT size=4>
<P>Table 2: Professional indemnity insurance premium average increases, selected professions: For coverage of $1 million (% increases 2000-01)</I> </FONT><A href="#_Toc8807717">*</A></P><FONT size=4>
<P>Reasons for the increase in premiums for professional indemnity insurance: Term of reference (d) </FONT><A href="#_Toc8807718">*</A></P><FONT size=4>
<P>Schemes, arrangements or reforms that can reduce the cost of </P>
<P>insurance and/or better calculate and pool risk: </P>
<P>Term of reference (e) </FONT><A href="#_Toc8807719">*</A></P><FONT size=4>
<P>Professional standards legislation and limits on liability </FONT><A href="#_Toc8807720">*</A></P><FONT size=4>
<P>Tort law reform and proportionate liability </FONT><A href="#_Toc8807721">*</A></P><FONT size=4>
<P>Structured settlements for the catastrophically injured </FONT><A href="#_Toc8807722">*</A></P><FONT size=4>
<P>Cultural change </FONT><A href="#_Toc8807723">*</A></P><FONT size=4>
<P>Other </FONT><A href="#_Toc8807724">*</A></P><FONT size=4>
<P>Conclusion </FONT><A href="#_Toc8807725">*</A></P><FONT size=4>
<P>Attachment A: Letter, Australian Financial Review, </P>
<P>3 May 2002, p.79 </FONT><A href="#_Toc8807726">*</A></P><FONT size=4>
<P>Attachment B: RAIA News Release, 1 May 2002: </P>
<P>Professional indemnity iceberg looms </FONT><A href="#_Toc8807727">*</A></P><B><FONT face=Arial size=4>
<P align=center></P>
<P></P>
<P align=center><A name=_Toc8807706>Summary</A></P></B></FONT>
<P>The Australian Council of Professions (ACP) has an integrated concept of professionalism, within which robust and viable professional indemnity insurance arrangements are seen as essential. The ACP also has a policy on risk management.</P>
<P>Increasing professional indemnity insurance premiums are a critical issue facing small businesses, which means most professionals. The sudden steep increases have made business planning difficult and put strains on cashflow. </P>
<P>By far the great majority of professionals have professional indemnity insurance – around 95 per cent in some professions. Professionals accept that indemnity insurance is both an integral part of professionalism and sound commercial sense. </P>
<P>The ACP’s investigations suggest professional indemnity premiums have risen by between 20 and more than 200 per cent recently. This has been mostly for reasons internal to insurance providers and the insurance market rather than because of claims history. The ACP objects to the idea that professionals should carry in such amounts, and over such a short period, the burden of poor business decisions by insurers.</P>
<P>The Australian Prudential Regulation Authority (APRA) should investigate whether professions with low numbers of claims are cross-subsidising claims by others. APRA should also look at whether the ‘targeting’ of insurance claims is being driven more by a profession’s capacity to pay (from insurance coverage) rather than by responsibility for the damage or loss.</P>
<P>The ACP believes that no single cause has led to the increases in premiums and no single solution will fully address the problem. Further, solutions should not be confined to a particular profession or to a narrow aspect of the problem. </P>
<P>Part of the solution is professional standards legislation, where professional associations commit to compulsory indemnity insurance, risk management programs and complaints and discipline procedures, in return for limitations on liability. Such legislation needs to be enacted in every State and Territory and Commonwealth trade practices and corporations law should be amended to ensure complementarity. These issues have been around since at least 1989 and have passed from the realm of tardiness to that of failure of will.</P>
<P>Professional liability needs to be limited in amount and time and joint and several liability needs to be modified to allocate liability among multiple defendants. Model legislation to introduce proportionate liability has been prepared since 1996 and should be implemented by governments as a matter of high priority. </P>
<P>Culturally, there is a gap between the expectations people have of professional services and the capacity of those systems to deliver. People may need to modify their expectations.</P>
<P>Finally, the Council endorses other legal reforms, supports the provision of better information on insurance options, and notes the opportunity for professional associations to establish their own insurance companies.</P>
<P> </P>
<P> </P>
<P>1. The Australian Council of Professions Ltd (ACP) welcomes the opportunity to make a submission to this inquiry and is prepared to provide further information at committee hearings. The Council has a particular interest in indemnity insurance as it affects professionals so our submission mainly addresses term of reference (b), noting that very many professionals are located in small businesses, and terms of reference (c), (d) and (e). The submission draws upon many years of work by the ACP in this area, especially by our professional liability committee.</P><B><I><FONT face=Arial>
<P><A name=_Toc8807707>The Council</A></P></B></I></FONT>
<P>2. The Council has existed in essentially its present form since 1971. It currently has 14 constituent organisations which, between them, represent some 250 000 professionals throughout Australia. The Council’s constituent organisations (as at 1 May) are:</P>
<TABLE cellSpacing=0 cellPadding=7 width=568 border=0>
<TR>
<TD vAlign=top width="50%">
<P> </P>
<P>The Institution of Engineers, Australia</P></TD>
<TD vAlign=top width="50%">
<P align=right> </P>
<P align=right>The Institute of Actuaries of Australia </P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>The Royal Australian Institute of Architects</P></TD>
<TD vAlign=top width="50%">
<P align=right>The Australian Institute of Quantity Surveyors</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Australian Dental Association, Inc.</P></TD>
<TD vAlign=top width="50%">
<P align=right>Australian Physiotherapy Association</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>CPA Australia</P></TD>
<TD vAlign=top width="50%">
<P align=right>The Australasian Institute of Mining and Metallurgy</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>The Institute of Chartered Accountants in Australia</P></TD>
<TD vAlign=top width="50%">
<P align=right>Audiological Society of Australia, Inc.</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>The Institution of Surveyors, Australia Inc.</P></TD>
<TD vAlign=top width="50%">
<P align=right>Australian Computer Society</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Pharmaceutical Society of Australia</P></TD>
<TD vAlign=top width="50%">
<P align=right>The New South Wales Council of Professions.</P></TD></TR></TABLE>
<P> </P>
<P>3. There is a branch of the ACP in each State and Territory, except New South Wales and the Northern Territory. In New South Wales, the New South Wales Council of Professions (NSWCOP), an independent body, performs the function of a branch. NSWCOP’s members include the local branches of most of the above organisations, as well as the state branches of the Australian Medical Association, the Bar Association and the Law Society. </P><B><I><FONT face=Arial>
<P><A name=_Toc8807708>Professionalism and professional indemnity insurance</A></P></B></I>
<P><A name=_Toc8807709>Definition of a Profession</A></P></FONT>
<P>4. The Council adheres to an integrated concept of professionalism, within which robust and viable professional indemnity insurance arrangements play an essential part. The Council’s agreed Definition of a Profession, adopted in 1997, is as follows:</P><FONT size=3>
<BLOCKQUOTE>A profession is a disciplined group of individuals who adhere to ethical standards and uphold themselves to, and are accepted by the public as possessing special knowledge and skills in a widely recognised body of learning derived from research, education and training at a high level, and who are prepared to exercise this knowledge and these skills in the interest of others. </BLOCKQUOTE>
<BLOCKQUOTE>It is inherent in the definition of a profession that a code of ethics govern the activities of each profession. Such codes require behaviour and practice beyond the personal moral obligations of an individual. </BLOCKQUOTE>
<BLOCKQUOTE>They define and demand high standards of behaviour in respect to the services provided to the public and in dealing with professional colleagues. </BLOCKQUOTE>
<BLOCKQUOTE>Further, these codes are enforced by the profession and are acknowledged and accepted by the community.</BLOCKQUOTE></FONT><FONT face=Arial>
<P><A name=_Toc8807710>Policy on Risk Management</A></P></FONT>
<P>5. The Council’s Policy on Risk Management, also adopted in 1997, places indemnity insurance within the context of the relationship between professionals and the community they serve. The italicised sections stress the importance of insurance and risk management: </P><FONT size=3>
<P>The Australian Council of Professions recognises that the professions have a responsibility to provide services to the community which encompass the highest standards of quality and competence. This responsibility includes the need for professional associations and statutory licensing authorities to maintain standards of entry to ensure that only fully-qualified professionals are able to practise in areas where professional skills are required. </P>
<P>The community has a right to expect competence and attention to the management of risks where they might occur in the provision of professional services. </P>
<P>However, it is necessary for the community: </P>
<OL type=a>
<OL type=a><I>
<LI>to improve its understanding of the nature of risk; </LI></OL></OL>
<OL type=a start=2>
<OL type=a>
<LI>to manage expectations; and </LI>
<LI>to have available a system for reasonable compensation for any loss due to action or omission by professionals. </LI></OL></OL></I>
<P>To achieve this, the Australian Council of Professions recommends that professionals should: </P>
<OL>
<OL>
<LI>at all times exercise their knowledge and skills in the interest of others, be they client, patient, the community or its institutions; </LI>
<LI>practice only in their areas of competence, save in exceptional circumstances for an emergency; </LI>
<LI>continue their professional development throughout their careers and actively encourage and promote the extension of knowledge to all members of the profession especially those under their direction; </LI>
<LI>exercise judgment based on experience, technology and understanding of the needs of their clients; </LI><I>
<LI>identify likely risks inherent in their practice, take action to minimise them and, where possible, make provision for unsatisfactory outcomes; </LI>
<LI>apprise the client of any risks likely to prove significant, either to the client or the community and of their consequences; and </LI>
<LI>contribute, where appropriate, to the processes whereby: </LI>
<OL type=a>
<LI>risk can be managed; </LI>
<LI>the understanding within the community of the nature of risk (including the managing of expectations) can be improved; and </LI>
<LI>a system for reasonable compensation for loss due to action or omission by professionals can be established. </LI></OL></OL></OL></I></FONT>
<P>6. Given the importance of indemnity insurance to the role of professionals, if adequate insurance is not available at reasonable rates there is a threat to the capacity of professionals to provide the services that the community expects of them. There are strong signs among the professions that Australia is moving towards this unwelcome situation.</P><B><I><FONT face=Arial>
<P><A name=_Toc8807711>The impact of professional indemnity insurance, including directors and officers insurance, for small business: Term of reference (b)</A></P></B></I></FONT>
<P>7. As noted above, the Council and its constituent organisations recognise that professional indemnity insurance is an essential element of professionals’ relationship with the community. Nevertheless, insurance can be a considerable burden where professionals are located in small businesses. </P>
<P>8. The Council supports the view of Mr Don Armstrong, Chair of the Small Business Coalition (SBC), in a letter to the Assistant Treasurer on 19 March 2002, that ‘spiralling liability premiums is one of the most critical issues facing small businesses today’. The sudden steep increases in premiums – which have been both unexpected and to unpredictable levels – make business planning difficult and put strains on cashflow. </P><FONT face=Arial>
<P><A name=_Toc8807712>Professions and small business</A></P></FONT>
<P>9. Working in a small business is common across all of the professions represented by the Council. For example, the Institution of Engineers, Australia (IEAust) recently surveyed 512 of its members throughout Australia. Seventy-seven per cent of those surveyed worked in practices with less than 20 staff and 58 per cent where there were less than five staff. Seventy-seven per cent of those surveyed worked in practices with turnover of less than $2 million annually.</P>
<P>10. These figures are reasonably typical of the professions. While some members of most professional associations work in large businesses or in institutions like the defence forces, government departments, research organisations and hospitals, a large proportion of the members of the ACP’s constituent organisations are in small business. For example:</P>
<UL>
<LI>the Royal Australian Institute of Architects (RAIA) estimates that 75-80 per cent of its members work in practices of six or less people;</LI>
<LI>roughly 60 per cent of the 10 000 members of the Pharmaceutical Society of Australia (PSA) work in community pharmacies and roughly 95 per cent of community pharmacies have less than 20 staff; </LI>
<LI>of 22 members sampled from the Australasian Institute of Mining and Metallurgy (AIMM), 20 were either sole practitioners or owner-managers and 20 came from firms with an annual turnover of less than $0.5 million; and</LI>
<LI>perhaps 60 per cent of the members of the Institution of Surveyors, Australia (ISAust) are in businesses with less than five members.</LI></UL>
<P>11. There are some exceptions to the above. Small business is much less the rule among computer professionals: only around one-third of the 12 000 professional members of the Australian Computer Society run small businesses, although others work in small businesses. Audiologists (members of the Audiological Society of Australia, ASA) also tend to be employees rather than in private practice. Accountants are found in large businesses and public sector organisations as well as small business, although the Institute of Chartered Accountants in Australia (ICAA) has a large percentage of its members in small business.</P><FONT face=Arial>
<P><A name=_Toc8807713>Professionals and professional indemnity insurance</A></P></FONT>
<P>12. Although precise statistics are difficult to obtain, by far the great majority of professionals have professional indemnity insurance. They accept that professional indemnity insurance is both an integral part of professionalism and sound commercial sense and take out appropriate cover accordingly.</P>
<UL>
<LI>Professional indemnity insurance is mandatory for chartered accountants in public practice, for architects and for engineers. Some States have legislative requirements.</LI></UL>
<UL>
<LI>The Australian Dental Association (ADA) and ISAust both estimate that virtually 100 per cent of their members have professional indemnity insurance.</LI>
<LI>The PSA believes well over 90 per cent of pharmacists hold their own professional indemnity insurance.</LI>
<LI>Eighty-five per cent of engineers in the IEAust survey had carried professional indemnity insurance at some time in the last five financial years.</LI>
<LI>Seventeen out of 22 members of the AIMM sample had professional indemnity insurance at some time in the last five financial years.</LI></UL><FONT face=Arial>
<P><A name=_Toc8807714>Directors and officers insurance</A></P></FONT>
<P>13. There could be an additional burden where small businesses in the professions take out directors and officers (D&O) insurance. Although it is hard to be certain on this issue – statistics are difficult to obtain – the ACP’s impression, after consulting our constituent organisations, is that D&O insurance is not widely held among professionals or, if held, is not seen as a big problem. </P>
<P> </P>
<P>14. This situation arises partly because of the unincorporated structures that many professionals prefer and partly because of lack of awareness of this form of insurance. For example, most pharmacists who run community pharmacies do so as sole traders or partnerships, so D&O insurance (applicable to companies) is not an issue for them. A similar position applies with dentists and surveyors. Among architects, although company structures are common, very few companies are publicly listed and the issue of whether to take D&O insurance against actions by shareholders does not arise.</P>
<P>15. Where D&O insurance is held by some professionals working in company structures D&O costs are seen as far less of an issue than those applying to professional indemnity. Some professionals in small business and in professions where company structures are common (for example, engineers) do not hold D&O insurance at all and others (mainly larger firms) are taking out employment practices liability insurance, which includes D&O liability. </P>
<P>16. Finally, there may be some lack of awareness about D&O insurance, with some professionals who perhaps should consider this form of cover wrongly believing that their professional indemnity insurance also covers D&O liability.</P><B><I><FONT face=Arial>
<P><A name=_Toc8807715>The cost of professional indemnity insurance: Term of reference (c)</A></P></B></I></FONT>
<P>17. The Council has sought information from its constituent organisations on costs and the following examples are presented of current costs and recent increases. The Council notes that excess costs have increased, along with premiums<B>: </P>
<UL></B>
<LI>Dentists, according to the ADA, have been used to paying around $1 200 a year for professional indemnity insurance but costs are now in a rapid uphill spiral. New South Wales dentists, for example, face premium increases this year of around 80 per cent.</LI>
<LI>Audiologists (members of the ASA) are awaiting advice of increased costs from their insurer but expect premium rises as follows for policies covering group malpractice, public and products liability (approximate figures): standard cover to rise from $390 a year to $550 a year; extended cover as required by the Office of Hearing Services to rise from $560 a year to $800 a year. Prices are expected to rise over three years as the insurer seeks a breakeven point. (Because the audiologists are a small market the insurer may, in fact, refuse coverage.)</LI>
<LI>The IEAust survey referred to above showed that engineers have borne premium increases of an average of around 9 per cent a year since 1996-97 or 39 per cent over the period 1996-97 to 2000-01. The cost of excess has risen commensurately. The average premium cost in 1996-97 was $5 600 compared with $7 800 four years later. Although, as noted above, the great majority of those surveyed were in small businesses (77 per cent with less than 20 employees) only 33 per cent paid less than $2 000 for professional indemnity insurance in 2000-01. </LI>
<LI>The AIMM (metallurgists) sample showed a 53 per cent increase in premiums over the period 1996-97 to 2000-01 (from an average of $3 800 to an average of $5 800).</LI>
<LI>Members of the ICAA report increases of 100-200 per cent and more.</LI>
<LI>Some physiotherapists, members of the Australian Physiotherapy Association, have faced 300 per cent increases over a year. </LI>
<LI>Outside the ACP’s current membership, we understand that obstetricians have borne rises of 67 per cent in the last year, other medical practitioners 53 per cent, solicitors in New South Wales 40 per cent with more rises expected, and members of the Environment Institute of Australia are facing unprecedented premium increases.</LI></UL>
<P>18. Figures for a number of industries have been provided to the Council by an underwriter specialising in insurance for the professions, including some that are currently not members of the ACP. Tables 1 and 2 refer: </P><I>
<P> </P>
<P><A name=_Toc8807716>Table 1: Professional indemnity insurance premium increases, selected professions: Minimum premiums for sole practitioners, earning fees $30-100 000 a year, for coverage of $1 million ($ increases 2000-01)</A></P></I>
<TABLE cellSpacing=0 cellPadding=7 width=568 border=0>
<TR>
<TD vAlign=top width="50%"><B>
<P>Profession/industry</B></P></TD>
<TD vAlign=top width="50%"><B>
<P>Old premium and new premium ($ pa)</B></P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Architects</P></TD>
<TD vAlign=top width="50%">
<P>Old 1 200 New 2 500*</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Engineers</P></TD>
<TD vAlign=top width="50%">
<P>Old 1 200 New 2 500</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Interior designers</P></TD>
<TD vAlign=top width="50%">
<P>Old 750 New 1 300</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Landscape architects</P></TD>
<TD vAlign=top width="50%">
<P>Old 750 New 2 000</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Management consultants</P></TD>
<TD vAlign=top width="50%">
<P>Old 800 New 2 000</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Personnel consultants</P></TD>
<TD vAlign=top width="50%">
<P>Old 800 New 3 000</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Project and construction managers</P></TD>
<TD vAlign=top width="50%">
<P>Old 1 200 New 2 500</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Quantity surveyors</P></TD>
<TD vAlign=top width="50%">
<P>Old 800 New 2 000</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Real estate agents</P></TD>
<TD vAlign=top width="50%">
<P>Old 3 000 New 10 000</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Town planners</P></TD>
<TD vAlign=top width="50%">
<P>Old 900 New 2 000</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Valuers</P></TD>
<TD vAlign=top width="50%">
<P>Old 3 000 New 10 000</P></TD></TR></TABLE><FONT size=2>
<P>(Source: RAIA Professional Risk Services; Planned Professional Risk Services)</P>
<P>* Less for RAIA members</P></FONT><I>
<P> </P>
<P> </P>
<P><A name=_Toc8807717>Table 2: Professional indemnity insurance premium average increases, selected professions: For coverage of $1 million (% increases 2000-01)</A></P></I>
<TABLE cellSpacing=0 cellPadding=7 width=568 border=0>
<TR>
<TD vAlign=top width="50%"><B>
<P>Profession/industry</B></P></TD>
<TD vAlign=top width="50%"><B>
<P>% Increase</B></P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Architects</P></TD>
<TD vAlign=top width="50%">
<P>30-60*</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Engineers</P></TD>
<TD vAlign=top width="50%">
<P>30-60</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Interior designers</P></TD>
<TD vAlign=top width="50%">
<P>20-35</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Landscape architects</P></TD>
<TD vAlign=top width="50%">
<P>20-35</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Management consultants</P></TD>
<TD vAlign=top width="50%">
<P>20-50</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Project and construction managers</P></TD>
<TD vAlign=top width="50%">
<P>25-35</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Quantity surveyors</P></TD>
<TD vAlign=top width="50%">
<P>30-45</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Real estate agents</P></TD>
<TD vAlign=top width="50%">
<P>50-150</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Town planners</P></TD>
<TD vAlign=top width="50%">
<P>30-45</P></TD></TR>
<TR>
<TD vAlign=top width="50%">
<P>Valuers</P></TD>
<TD vAlign=top width="50%">
<P>50-150</P></TD></TR></TABLE><FONT size=2>
<P>(Source: RAIA Professional Risk Services; Planned Professional Risk Services)</P>
<P>* Less for RAIA members</P></FONT>
<P> </P>
<P>19. In view of the above instances, the ACP suspects that published estimates of professional indemnity insurance premium increases of around 20-25 per cent may understate the true current position, let alone rises still to come. Some professionals, such as pharmacist members of the PSA, have yet to receive notification of fees which reflect the impact of 11 September and HIH.</P><B><I><FONT face=Arial>
<P><A name=_Toc8807718>Reasons for the increase in premiums for professional indemnity insurance: Term of reference (d)</A></P></B></I></FONT>
<P>20. The ACP has followed the debate in this area and we can offer comment upon a couple of explanations that have been advanced by others. Material from both IEAust (engineers) and the Australian Institute of Quantity Surveyors (AIQS) throw doubt on the notion that premium increases are being driven by increases in claims or, at least, by increases in claims from the particular profession. </P>
<P> </P>
<P>21. This material instead suggests that premiums have risen for reasons internal to insurance providers and the insurance market, particularly the need to preserve or increase return on capital and changed assessments of risk profile following recent corporate collapses and the events of 11 September, rather than because of claims history.</P>
<P>22. The IEAust survey already quoted found that the steady premium increases over the years 1996-97 to 2000-01 (average of 9 per cent annually) did not reflect an increase in the proportion of those insured who made a claim or in the average number of claims being made. Only 5-7 per cent of IEAust members surveyed made a claim on their professional indemnity insurance in any one year. </P>
<P>23. Similarly, anecdotal evidence and a survey (89 responses) by AIQS suggests (the survey report is still in draft) that quantity surveyors with no claims history have borne premium increases of between 50 and 200 per cent. In five years only six insurance claims proceeded to court or arbitration and the total payout on claims was just $585 000. Yet quantity surveyors were paying total premiums of $2 million <I>a year</I>.</P>
<P>24. On the other hand, it may be the case that professions with low numbers of claims are effectively cross-subsidising claims by professions and by other insurance clients in sectors where claims and litigation are more common. The ACP is unaware of whether this proposition can be supported by statistics but it believes it would be an appropriate subject for investigation by the Australian Prudential Regulation Authority (APRA) or other appropriate body.</P>
<P>25. To the extent that claims history <I>does</I> influence premium rises, APRA could also look into whether the ‘targeting’ of insurance claims, and thus their impact on premiums, is being driven more by the capacity to pay rather than by responsibility for the damage or loss. This issue is discussed below under ‘Tort law reform and proportionate liability’.</P>
<P>26. It should be remembered, however, that professional indemnity insurance premiums are driven also by the changing nature of the insurance client’s business – more money coming in as fees means higher insurance premiums – and the degree of exposure – more ambitious, higher value projects being undertaken also means higher premiums. To some extent, higher insurance premiums are the price of success. The Council notes the ACCC’s remark that professional indemnity premiums ‘will increase in a buoyant economy without a change in premium rates as turnover and professional fees increase in volume’.</P>
<P>27. There is no doubt that premium rises cannot be sheeted home to single causes. For example, underwriters attribute rises like those in Table 2 above partly to industry issues like the effects of the collapse of HIH, past unwise decisions on capital reserves and premium levels, and the impact of 11 September. These factors might account for increases at the lower end of the ranges given. Increases above that range might be attributable to factors to do with the client such as risk profile and claims history. </P>
<P> </P>
<P>28. In this connection, the ACP has noted the ACCC’s analysis of the drivers for recent premium increases, particularly its view that professional indemnity is one of the classes of insurance where premiums have been too low in the past and where the business has shown a very low return on capital. The ACP understands that this recent history may well encourage insurers to target professional indemnity premiums for increases but it objects to the idea that professionals should carry in such amounts, and over such a short period, the burden of poor business decisions by insurers.</P>
<P>29. In summary, the ACP believes that no single cause has led to the increases in professional indemnity insurance premiums and the consequent burden on professionals. It is important not to play ‘the blame game’ or try to attribute the causes solely to one factor or one sector.</P><B><I><FONT face=Arial>
<P><A name=_Toc8807719>Schemes, arrangements or reforms that can reduce the cost of insurance and/or better calculate and pool risk: Term of reference (e)</A></P></B></I></FONT>
<P>30. The Council offers a number of possible approaches here and suggests also that cultural changes in the community are necessary. We noted above that it is important not to look for a single cause of the current situation. We believe it is important also to state that no single solution will fully address the problem. Action will be needed on a number of fronts to deal with the complexities involved. This action will also need to proceed across jurisdictions, state, territory and Commonwealth. </P>
<P>31. Further, it will be important to ensure that solutions are not confined to a particular profession or to a narrow aspect of the problem. The Council welcomes the fact that the Committee is simultaneously addressing public liability and professional indemnity insurance, as many factors are common to both areas. The Council agrees with Mr Don Armstrong, Chair of the SBC, that recent discussion on insurance issues has been too narrow and that all forms of business liability insurance – product liability, professional indemnity and public liability – need to be considered in conjunction.</P>
<P>32. Within professional indemnity insurance, too, it will be important not to see issues as affecting only one profession. Medical indemnity, for example, an area in sharp focus at present, is a sub-species of professional indemnity, not <I>sui generis</I>. <B>Attachment A </B>to this submission is a letter from the Council, recently published in the Australian Financial Review.</P><FONT face=Arial>
<P><A name=_Toc8807720>Professional standards legislation and limits on liability</A></P></FONT>
<P>33. Any services received by the public are subject to human error which may produce loss or damage for the recipient. Assets need to be available to cover compensation for such loss. Hence insurance, but insurance is becoming more expensive and, in some cases, may be unavailable. Some professionals have had to contemplate withdrawing their services.</P>
<P> </P>
<P>34. The solutions offered need to ensure that high professional standards are promoted but that professional indemnity insurance is always available to satisfy claims against professionals up to a reasonable ceiling. New South Wales and Western Australia have found a well-balanced legislative solution in the form of Professional Standards Acts. </P>
<P>35. Under this legislation professional associations commit to compulsory indemnity insurance, risk management programs and complaints and discipline procedures, in return for limitations on the liability of the service provider. Liability is limited to amounts which cover virtually all consumer compensation claims but avoid catastrophic payouts by the provider. </P>
<P>36. To be fully effective such legislation needs to be enacted in every State and Territory and the Commonwealth trade practices and corporations legislation needs to be amended to ensure complementarity, particularly to ensure that matters of error in professional judgement, arrived at in good faith, are not treated as misleading and deceptive conduct under the Trade Practices Act. </P>
<P>37. The Council understands that the Commonwealth has said that if a majority of States and Territories adopt professional standards legislation it will consider the enactment of appropriate Commonwealth legislation. The ACP believes legislative changes along these lines should be a priority of all governments and should be considered at a ‘summit’ like those recently on public liability and medical indemnity. Any legislation should include the health professions. </P>
<P>38. These issues have been worked over since at least the New South Wales Attorney-General’s Department discussion paper on limitation of professional liability for financial loss. That was in <I>1989</I>. </P>
<P>39. The 1989 paper encapsulated the key issues in terms that still apply today. Professional Standards Acts ‘must first ensure that those with valid claims have an opportunity to obtain compensation for loss suffered as a result of breach of duty by the professional, and, second, give the professional a reasonable opportunity to ensure that such liability can be met’. These unresolved issues have long since passed out of the realm of tardiness into that of failure of will – a situation that should be remedied as soon as possible.</P>
<P>40. The IEAust survey referred to above has some material on attitudes to professional standards legislation among engineers. Respondents were asked what they would be prepared to do to limit the amount of their liability under professional indemnity claims: </P>
<UL>
<LI>96 per cent said they would definitely or probably register with a professional association; </LI>
<LI>94 per cent said they would definitely or probably take out professional indemnity insurance; </LI>
<LI>79 per cent said they would definitely or probably undertake specific risk management training;</LI>
<LI>79 per cent said they would definitely or probably register with a government body;</LI>
<LI>67 per cent said they would definitely or probably agree to have their risk management practices audited; and </LI>
<LI>65 per cent said they would definitely or probably provide detailed information on claims or alerts to a government body.</LI></UL>
<P>41. The Council expects that these figures would be mirrored by other professions in other States. They indicate that professional standards legislation, developed and applied consistently across the nation, holds the promise of reinforcing appropriate professional behaviour and professionals’ accountability to the communities they serve, while reducing the costs of dealing with damages arising from professionals’ work.</P>
<P>42. The community benefits of professional standards legislation can be summarised as follows:</P>
<UL>
<LI>Liability limitations would be set at a figure which will completely cover most claims from members of the community.</LI>
<LI>Liability limitations would be linked to compulsory professional indemnity insurance, ensuring certainty for the community.</LI>
<LI>Professional bodies would have proper complaints and disciplinary procedures to deal with community concerns.</LI>
<LI>Professional bodies would bring in programs of risk management, which will help to prevent problems arising.</LI></UL><FONT face=Arial>
<P><A name=_Toc8807721>Tort law reform and proportionate liability</A></P></FONT>
<P>43. A suite of solutions also needs to ensure that professional liability is limited both as to amount and time and that joint and several liability is modified to allocate liability among multiple defendants in accordance with responsibility for loss. At present, joint and several liability of defendants can lead to the unjust situation where a professional, who may be only 10 per cent responsible for a plaintiff’s loss, pays 100 per cent of the damages. </P>
<P>44. Professionals are frequently the main target in legal actions, even where their involvement in the cause of action is minimal, because their professional indemnity insurance is the most obvious source of funds while more blameworthy defendants (such as directors of collapsed companies) are either outside of Australia or bankrupt. <B>Attachment B</B>, a recent media release by the RAIA, is directly relevant.</P>
<P>45. Legislation is needed to replace joint and several liability with proportionate liability, where the liability of defendants is apportioned according to their respective degrees of responsibility. This approach already exists in the USA and a joint study by the Commonwealth and New South Wales Governments in 1996 recommended that it should also apply in Australia. Model legislation to introduce proportionate liability has been prepared since 1996 and should be implemented by governments as a matter of high priority. </P>
<P> </P>
<P>46. Because of the different state laws, it is often unclear when the professional liability for a particular act or omission commences or ceases. In some instances the liability can commence years after the professional’s involvement but remain indefinitely. In the interests of the community and of professionals, time limitations should be reasonable, uniform between jurisdictions and based on clearly ascertainable dates. </P>
<P>47. Australia’s professional practitioners accept that they must be accountable for their actions. They also acknowledge that the community should have the right to recover reasonable damages where professionals are negligent. However, professional practitioners should not be asked, as they are now, to bear unlimited or disproportionate liability and for an indefinite period. </P><FONT face=Arial>
<P><A name=_Toc8807722>Structured settlements for the catastrophically injured</A></P></FONT>
<P>48. Structured settlements enable disputes involving people with serious permanent injuries or disabilities to be finalised in a way that increases the likelihood that funds will be available as needed to meet the victim’s requirements and that takes account of the victim’s often impaired ability to handle their own affairs. </P>
<P>49. The Council welcomes the continuing progress in this area and looks forward to the taxation law amendment legislation proposed for introduction soon. We agree with the Assistant Treasurer’s statement of 28 March that changing the tax treatment of structured settlements will remove the disincentive for catastrophically injured people to take a structured settlement rather than a one-off lump sum.</P>
<P>50. For the community as a whole the encouragement of structured settlements through tax exemption could generate significant savings from both reductions in dependence on social security and in how much the legal system is used by injured people. </P><FONT face=Arial>
<P><A name=_Toc8807723>Cultural change</A></P></FONT>
<P>51. While evidence on cultural trends is notoriously hard to pin down, the ACP believes there are signs that there is a continually growing gap between the expectations people have of professional services and the capacity of those systems to deliver. There is an ‘expectation gap’. </P>
<P>52. The expectation gap is widening and it underpins resort to litigation, where historically large payouts are being obtained, leading in turn to an escalation in insurance costs and in some cases forcing the providers of goods and services to consider withdrawing them. Insurance, a key service, is under extreme pressure.</P>
<P>53. A public discussion might bring the expectation gap to attention and seek to reduce it to more manageable proportions. Such a discussion might bring out the following points: </P>
<UL>
<LI>Actions often have unintended consequences; outcomes are unpredictable. Unmet expectations lead to increased litigation and pressure on the insurance system.</LI></UL>
<UL>
<LI>The best defence against uncertainty is the pursuit of quality by the exercise of professional judgement. Lowest price competition destroys quality.</LI>
<LI>Suppliers of critical goods and services may increasingly withdraw from the market because the insurance system is failing.</LI>
<LI>If reforms like those outlined above (professional standards legislation, tort law reform, structured settlements, etc.) cannot be made to stick it may be necessary to invest significantly larger sums in insurance premiums, with costs borne by consumers, or to recognise that individuals must carry a heavier burden of personal responsibility for unintended consequences which might befall them.</LI>
<LI>In any case, consumers need to recognise that professional expertise is not limitless and that consumers themselves must expect to bear some responsibility (and some risk). A realistic approach to risk management (like the Council’s Policy on Risk Management – see above) distributes risk between professionals and consumers.</LI></UL><FONT face=Arial>
<P><A name=_Toc8807724>Other</A></P></FONT>
<P>54. The Council has noted other possible partial solutions being advocated by professional bodies, notably the Australian Council of Building Design Professions National Insurance Task Force: </P>
<UL>
<LI>reform of relevant state and territory laws to allow contributory negligence as a defence against breach of contract;</LI>
<LI>application of the Trade Practices Act to the commercial operations of government departments and agencies;</LI>
<LI>application of unconscionable conduct provisions to circumstances where large clients, including governments, use market power to dictate untenable conditions of contract and service requirements to suppliers;</LI>
<LI>reform of the legal system to reduce costs and delays associated with claims for compensation, while maintaining fair compensation for injury and loss; and </LI>
<LI>use of alternative dispute resolution for all but the largest claims.</LI></UL>
<P>These initiatives might reduce the tendency to resort to professional indemnity insurance claims and help resolve such claims more expeditiously.</P>
<P>55. Secondly, the Council endorses the recommendations of the recent ACCC report on insurance pricing that insurers need to improve the provision and clarity of the information they offer to consumers. This would include clearly explaining reasons for increases, providing pricing trend data, boosting query and complaint handling systems, and using Plain English and standard terms in policies.</P>
<P>56. Finally, the Council recognises the role of competition in keeping premium prices under control. It regrets that unwise decisions in the insurance industry in the past, as well as recent events, have helped drive some providers out of the professional indemnity business. It notes the possibilities for individual professional associations or groups of them to establish their own member-owned insurance companies, as has been done already in some professions (for example, architecture, pharmacy).</P><B><I><FONT face=Arial>
<P><A name=_Toc8807725>Conclusion</A></P></B></I></FONT>
<P>57. The ACP believes this inquiry addresses important questions. They are not new but they have become increasingly urgent. They affect all professions to some extent and they are particularly stressful for professionals operating in small businesses, as most do. Even more importantly, these issues affect the communities that professionals serve. Robust and sustainable professional indemnity insurance is an important element of the relationship between professionals and the community they serve.</P>
<P>58. The issues have complex causes and will require solutions that traverse a number of fields. The Council commends the Senate for undertaking the inquiry and looks forward to positive outcomes and Government action.</P>
<P> </P>
<P> </P><B><I><FONT face=Arial>
<P><A name=_Toc8807726>Attachment A: Letter, Australian Financial Review, 3 May 2002, p.79</A></P></B></I></FONT>
<P>Doctors are not alone in worrying about the mounting costs of indemnity insurance (AFR, April 23-24). </P>
<P>The Australian Council of Professions (ACP) has 14 constituent organisations with some 250 000 members, including health professionals like dentists, pharmacists, physiotherapists and audiologists, as well as accountants, actuaries, architects, engineers and other professionals. </P>
<P>Medical indemnity is a sub-species of professional indemnity; each of these professions faces indemnity issues. While there are undoubtedly special aspects of medical indemnity, members of other professions have also seen their premiums rise significantly and their insurance options narrow. </P>
<P>On the positive side, too, mooted solutions, such as structured settlements and tort law reform, are applicable to a number of professions. </P>
<P>The ACP has put a lot of work into these areas and is making a submission to the current Senate inquiry into professional indemnity insurance. </P>
<P>The ACP hopes that the medical indemnity summit generates practical solutions that can flow on to other professions.<BR><BR>Yours sincerely<BR><BR>John Castles</P>
<P>President</P>
<P>Australian Council of Professions</P>
<P>Canberra</P>
<P> </P><B><I><FONT face=Arial>
<P> </P>
<P><A name=_Toc8807727>Attachment B: RAIA News Release, 1 May 2002: Professional indemnity iceberg looms</A></P></B></I></FONT>
<P>‘The problems facing the medical profession are only one sign of the Professional Indemnity Insurance iceberg that is about to impact on Australian consumers,’ said Mr Michael Peck, CEO, The Royal Australian Institute of Architects (RAIA).</P>
<P>‘Take for example, the recent decisions by the NSW, WA and Victorian governments to drop any requirement for builders of apartments to hold warranty insurance,’ he said.</P>
<P>According to Mr Peck, this will mean that the owners of defective apartments will turn to the professional indemnity insurance of the consultants rather than uninsured builders. </P>
<P>He pointed out that currently, in most jurisdictions, there are no caps on the timing and amount of claims and there are no provisions for proportional liability. </P>
<P>‘Therefore, claims against architects and engineers from aggrieved apartment owners have the potential to drive increases in professional indemnity insurance premiums in a similar manner to that being experienced by the medical profession,’ said Mr. Peck.</P>
<P>‘This will result in architects and engineers avoiding this sector of the market or foolishly operating without cover – an outcome that is not in the interest of consumers or the public in general,’ he said. </P>
<P>Mr Peck called for governments to urgently place reasonable caps on professional liability or face an escalation of the major problems now existing in respect to medical services. ENDS</P>
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<P>Contacts: Michael Peck 02 6273 1548 m. 0428 172 993</P>
<P>Stella de Vulder/Annette Dearing 02 9356 2955 m 0412 341 013</P>
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