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<br><SPAN style="FONT-SIZE: 12pt; FONT-FAMILY: Arial">
<P>7 March 2003</P>
<P>The Hon Steve Bracks MP<BR>Premier of Victoria<BR>1 Treasury Place<BR>MELBOURNE VIC 3002</P>
<P> </P>
<P>Dear Premier Bracks,</P><B>
<P align=center>CONSUMER IMPACT IN VICTORIA OF SERIOUS MARKET FAILURE IN</P>
<P align=center>PROFESSIONAL INDEMNITY (PI) INSURANCE</P>
<P align=center></P></B>
<P>On behalf of a wide range of professions, this letter is to strongly emphasise to you that consumers of professional services in Victoria are being threatened by the serious market failure in professional indemnity insurance.</P>
<P>In short, professional services in an increasingly wide range of occupations are being withdrawn, or are being carried out by uninsured persons, to the risk of consumers.</P>
<P>The most recent evidence of this is the CPA Australia survey, released on 3 March</P>
<P>2003, which shows that almost 30% of members in public practice have withdrawn or</P>
<P>are considering withdrawing services offered to the public because of the high cost of</P>
<P>PI insurance or policy exclusions. Services most likely to be withdrawn are audit and</P>
<P>financial planning services, as well as pro bono services to community and not-forprofit</P>
<P>organisations. The knock-on effects of the withdrawal of these services will</P>
<P>impact particularly on small and medium businesses that rely on accountants for</P>
<P>critical business services and advice. The effect is also likely to be most acute in</P>
<P>Victoria, as this is where CPA Australia is based.</P>
<P>In terms of Australia's consulting engineering firms, recent surveys, including one</P>
<P>completed just 10 days ago, show that a number of business closures are imminent,</P>
<P>and some 40% of firms are unable to continue to deliver key services in areas such</P>
<P>as environmental, asbestos removal, building certification, water quality and a range</P>
<P>of other areas related to community health and safety. Some firms also face the</P>
<P>unpalatable choices of either working uninsured or facing breach of contract actions.</P>
<P>Eleven percent of firms are proposing to work uninsured. A continuation of the</P>
<P>current trend of rapidly escalating costs for PI cover will ultimately lead to the close of</P>
<P>a number of small to medium consulting engineering firms whose businesses cannot</P>
<P>absorb these costs.</P>
<P>While architects have experienced an average 94% increase in premiums in the last</P>
<P>two years, many are being forced to create asset free contract entities in order to</P>
<P>continue their services. Pre-purchase building inspections and cost estimation are</P>
<P>being excluded from policies.</P>
<P></SPAN><SPAN style="FONT-SIZE: 12pt; FONT-FAMILY: Arial">We request your Government to treat this as a matter of urgency by proceeding with complementary reform measures - proportionate liability (PL) and professional standards legislation (PSL) required to protect plaintiffs and professionals. The delivery of services by professionals is typically by practitioners in small and medium business who represent a significant part of Australian society and the economy.</P>
<P>PSL will mandate insurance and risk management schemes in return for safety</P>
<P>ceilings on claims. This is similar to the general trend over many years now for</P>
<P>ceilings to be introduced for State-regulated insurance, such as workers'</P>
<P>compensation and compulsory third-party motor bodily injury cover, to keep</P>
<P>insurance cover available and affordable in these areas.</P>
<P>Recent public liability reforms in a number of jurisdictions have introduced further</P>
<P>caps on payouts for a range of damages for personal injury.</P>
<P>Under Professional Standards legislation, practitioners commit to compulsory</P>
<P>insurance and comprehensive risk management schemes, which deliver benefits to</P>
<P>consumers, in return for limits on liability payouts. There is a trade-off that benefits</P>
<P>both the community and professionals. The requirement for public reporting also</P>
<P>adds an extra dimension to risk management. There is accountability as well as</P>
<P>consumer protection.</P>
<P>Together with similar action by other jurisdictions, and with appropriate amendments</P>
<P>to Trade Practices and other Federal laws (which the Commonwealth has</P>
<P>undertaken it will do) this reform action by your Government will usher in a national</P>
<P>scheme of effective professional indemnity liability reform. Such action will also</P>
<P>complete the overall package of liability reform, already substantially achieved by you</P>
<P>and other government leaders in Australia in respect to public liability and medical</P>
<P>indemnity.</P>
<P>The folio of evidence and background material that accompany this letter</P>
<P>demonstrates beyond doubt that the PI insurance market is haemorrhaging - the</P>
<P>number of insurers offering PI insurance has collapsed, businesses are being</P>
<P>refused cover, subjected to increasingly tight restrictions and are being forced to</P>
<P>respond by withdrawing from offering high-risk professional services to consumers.</P><B>
<P>Forced withdrawal of professional services in Victoria and other jurisdictions</P></B>
<P>Recent surveys by professional associations have indicated that a range of more</P>
<P>than 30 professional services have been refused insurance cover or have had</P>
<P>conditions or restrictions imposed, including in Victoria for essential public health and</P>
<P>safety and many environmental services, through to essential small business and</P>
<P>community organisation services in audit, tax advice and other needed accounting</P>
<P>services.</P>
<P>The accompanying material includes current (January/February 2003) member</P>
<P>surveys across the major professions revealing that as a consequence of the PI</P>
<P>insurance market failure, professionals are now being forced to withdraw from</P>
<P>offering services to small and medium businesses and to many categories of</P>
<P>community, sporting, charitable and other non-profit organisations.</P><B>
<P>Evidence of serious market failure</P></B>
<P>The substantial evidence of serious market failure contained in the accompanying</P>
<P>folio of materials includes member survey and case study material reporting premium</P>
<P>increases of 1000% and beyond, widening exclusions, increasing refusals to cover</P>
<P>specific categories, plus huge increases in excess amounts and conditions.</P>
<P>In addition to forced withdrawal of professional services, PI market failure is resulting</P>
<P>in the further effects of:</P>
<P> </P>
<P>Professionals 'going bare' - providing services without PI insurance cover for</P>
<P>their liability to consumers;</P>
<P>Professional associations being obliged to reduce their mandatory levels of PI</P>
<P>insurance cover as a condition of membership. For example, the Institute of</P>
<P>Chartered Accountants in Australia (ICAA) announced on 20 February 2003 that</P>
<P>it was lowering mandatory insurance standards required of members working in</P>
<P>public practice due to a situation of market failure. Ironically, as a result members</P>
<P>of the ICAA in NSW who are members of the Accountants' Professional</P>
<P>Standards Scheme under the professional standards legislation in that State</P>
<P>continue to be required to carry insurance ranging up to $20m for accountants. In</P>
<P>other states, including Victoria, ICAA members will now be required to carry only</P>
<P>$500,000;</P>
<P>Other professional associations (eg the Association of Consulting Engineers of</P>
<P>Australia (ACEA» are being forced to consider the removal of mandatory</P>
<P>insurance requirements as a condition of membership, because of the</P>
<P>impossibility for some of their members of obtaining it in the market.</P>
<P>These trends make it self-evident, we submit, that as more professional services</P>
<P>become uninsurable in Victoria and other parts of Australia consumers will be</P>
<P>exposed to several very negative consequences:</P>
<P>Increasingly being denied access to professional services to which they should</P>
<P>be entitled in a modem competitive society;</P>
<P>Risk the prospect of obtaining no compensation for valid claims, as the service</P>
<P>provider will not be insured and will have protected personal assets;</P>
<P>Consumers being unaware that service provision may be by unaccredited</P>
<P>providers not subject to professional standards including: compulsory PI</P>
<P>insurance cover; adequate risk management programs; and meaningful</P>
<P>complaints and disciplinary procedures.</P>
<P>.</P><B>
<P>Proportionate Liability (PL) alone does not resolve the PI insurance crisis,</P>
<P>either for consumers or for professionals</P></B>
<P>As envisaged by CLERP 9, the introduction of proportionate liability will improve</P>
<P>corporate governance by encouraging directors and management to be more</P>
<P>diligent. Over time, this should also encourage insurers back into PI insurance as</P>
<P>professionals will no longer carry liability rightfully resting with others who have</P>
<P>caused economic loss. However, insurers advise this second benefit of reduced</P>
<P>premiums may take five to seven years, due to the 'long tail' nature of claims and the</P>
<P>fact that new State laws and Commonwealth amendments would be tested through</P>
<P>the courts.</P><B>
<P>Consumers, professionals and the general community will benefit from a</P>
<P>national scheme of professional standards legislation (PSL)</P></B>
<P>Professional standards legislation must ensure not only that high professional</P>
<P>standards are promoted, but that PI insurance is always available to satisfy claims</P>
<P>against professionals up to a reasonable ceiling - a safety ceiling which covers</P>
<P>virtually all consumer claims, but avoids catastrophic payouts by the service provider.</P>
<P>NSW and W A have found a well-balanced legislative solution to these issues in the</P>
<P>form of Professional Standards legislation. Material describing the operation of this</P>
<P>legislation is included in the attached folio.</P>
<P>Briefly, PSL requires that professional (and other occupational) associations commit</P>
<P>to compulsory PI insurance, risk management programs and complaints and</P>
<P>discipline procedures, in return for limitations on the liability of the service provider.</P>
<P>Not all occupational liability is subject to limitation. Liability arising from death or</P>
<P>personal injury is not limited, nor is any liability arising from fraud, dishonesty or</P>
<P>breach of trust. To ensure that the majority of claims and all consumer claims are</P>
<P>met in full, only claims above a threshold value (which has been set at $500,000 in</P>
<P>the case of the NSW and WA PSL) are subject to limitation.</P>
<P>But to be fully effective, PSL needs to be enacted in every State and Territory.</P>
<P>It is sometimes argued that such legislation limits the consumer's right to full</P>
<P>compensation disadvantaging those with a rightful claim exceeding the safety ceiling.</P>
<P>And, secondly, that by limiting liability it treats the professions differently from other</P>
<P>sectors with regard to the consequences of negligent actions.</P><B>
<P>The reality is that 'full compensation' without adequate insurance is a myth.</P></B>
<P>The increasing incidence of cataclysmic and/or exorbitant insurance claims is</P>
<P>encouraging insurance companies to avoid offering insurance at all, or forcing them</P>
<P>to cover possible multi-billion dollar claims by massively increasing the cost of all</P>
<P>cover, large and small. The serious market failure in PI insurance is the</P>
<P>consequence. Liability ceilings are needed to restore some certainty and sanity to</P>
<P>the PI insurance market, so encouraging insurers back into the market. The risk of</P>
<P>an individual consumer being disadvantaged by exceeding the ceiling, if such a risk</P>
<P>exists at all, is insignificant - as the experience of professiona1 standards legislation</P>
<P>in NSW clearly demonstrates. The safety ceiling would in no way prevent consumer</P>
<P>claims being brought or pursued - on the contrary it will ensure through affordable</P>
<P>insurance that funds are available to support judgements obtained by the public.</P>
<P>Without insurance, in the present situation there is little prospect of consumers</P>
<P>obtaining compensation at all.</P>
<P>Secondly, on the issue of special treatment for professionals - professional</P>
<P>standards legislation on the NSW/WA model gives protection to any member of an</P>
<P>'occupational association'. That is, it could apply to all providers of services, not only</P>
<P>to professions.</P><B>
<P>Conclusion</P></B>
<P>We accept that your Government will want to test our claim of market failure in PI</P>
<P>insurance - the inability of professionals to access affordable levels of insurance to</P>
<P>meet the scale of risk they face in providing the full range of professional services.</P>
<P>We strongly submit that when the Victorian Government is satisfied of the</P>
<P>seriousness of this situation it should urgently proceed with the introduction of</P>
<P>professional standards legislation (PSL) in tandem with proportionate liability (PL</P>
<P>legislation as part of a national reform program which will include appropriate</P>
<P>amendments to Federal Trade Practices and other laws. These measures will lead</P>
<P>to improvements in the cost and availability of PI insurance and produce positive</P>
<P>benefits for consumers of services by ensuring that professionals are insured and are</P>
<P>subject to improved and more transparent standards of risk management.</P>
<P>We seek an early opportunity for a professions' delegation to meet with you to review</P>
<P>this urgent situation.</P>
<P>Yours sincerely,</P>
<P>John Castles</P>
<P>President</P>
<P>Professions Australia</P>
<P>Therese Charles</P>
<P>Chief Executive Officer</P>
<P>Association of Consulting Engineers</P>
<P>Australia</P>
<P>Greg Larsen</P>
<P>Chief Executive Officer</P>
<P>CPA Australia</P>
<P>Ron Heinrich</P>
<P>President</P>
<P>law Council of Australia</P>
<P>Stephen Harrison</P>
<P>Chief Executive Officer</P>
<P>Institute of Chartered Accountants In Australia</P>
<P>Catherine Beall</P>
<P>Chief Executive Officer</P>
<P>The Institute of Actuaries of Australia</P>
<P>Graham Jahn</P>
<P>President</P>
<P>Royal Australian Institute of Architects</P>
<P>Peter Greenwood</P>
<P>President</P>
<P>Institution of Engineers, Australia</P></SPAN><SPAN style="FONT-SIZE: 12pt">
<P> </P></SPAN>
</body>]]>