No Fault Public Liability Insurance: Evidence from New Zealan

Abstract

P ublic liability insurance indemnifies an organisation against claims made by individuals for illness, injury, loss or damage to property.The spiralling cost of public liability insurance has been a recurring problem in the United States, England, Australia, and elsewhere for well over a decade (for example, Danzon, 1990;Kessler, 1999).The cost of public liability insurance is a product of the frequency of the claims made, coupled with the size of the damages awards, plus transaction costs -the administrative costs and profits of the insurance companies, as well as the costs of justice (Goodman and Thanhauser, 2001).Recent events such as the September 11 attack in New York have highlighted the consequences of increases in both the probability of loss and the size of potential claims.As insurance companies raise premiums to cover the increased risk and the size of loss, the potential for a missing market for public liability insurance has increased.Moreover, the consequences of missing markets can extend far beyond those seeking to insure themselves against liability, and their prospective insurers.For example, societal benefits are lost when community groups cannot hold social functions because the cost of public liability insurance for hiring a venue becomes prohibitive, and where patients incur health-related costs because doctors, unable to procure medical liability insurance from a private market, refuse to treat them.Governments, as insurers of last resort, are increasingly being called upon to address these missing markets, either by underwriting some public liabilities themselves or legislating to impose compulsory no-fault insurance schemes, offered by either private sector or government-owned insurance companies.Nofault schemes have attracted significant interest and have been proposed as an instrument potentially capable of simultaneously 'solving' two important insurance-based problems: providing products in the missing markets; and reducing the sharply escalating costs of tort actions that are perceived in some cases to be giving rise to missing markets.For example, Carroll et al. (1991) report that the transaction costs to private parties in tort actions involving bodily injury account for 33 per cent of compensation expenditures and would be even higher if government spending on courts was included in the total costs.Furthermore, the costs may not always be direct.Cooter and Ulen (1986) argue that potential injurers may take socially excessive precautions to decrease the costs