K Touhey - "A duplication of effort: the Compensation Act 2006 and the Employers'...

Kevin Touhey Law Reform Essay Competition 2012 4 October 2012

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A duplication of effort: the Compensation Act 2006 s.1 and the Employers' Liability (Compulsory Insurance) Act 1969

In May 2005, then Prime Minister Tony Blair gave a speech to the Institute for Public Policy

Research, the topic of which was the 'compensation culture' widely thought to be prevalent in

Britain.1 In his speech, he spoke of the Compensation Bill, and of its purpose being to provide

'reassurance to those who may be concerned about possible litigation, such as volunteers, teachers

and local authorities'.2 This language suggests that one of the aims of the bill was to protect those

participating in socially useful activities, and this is confirmed by s.1 of the eventual Compensation

Act 2006, which provides that:

1. A court considering a claim in negligence or breach of statutory duty may, in determining whether the defendant should have taken particular steps to meet the standard of care (whether by taking precautions against a risk or otherwise), have regard to whether a requirement to take those steps might -

(a) prevent a desirable activity from being undertaken at all, to a particular extent or in a particular way, or

(b) discourage persons from undertaking functions in connection with a desirable activity.

Though the protection of individuals who choose to undertake desirable activities is no doubt

laudable, this section has been the subject of a great deal of criticism. For the most part, this

criticism has condemned the section as being essentially pointless and, in the words of one

commentator, 'an unnecessary solution to a non-existent problem'.3 The courts have been equally

dismissive, stating that it 'adds nothing to the common law'.4

We may well consider the creation of pointless legislation to be a waste of our elected

1 'Full text: Tony Blair's speech on compensation culture' Guardian (London 26 May 2005)

<http://www.guardian.co.uk/politics/2005/may/26/speeches.media> accessed 28 September 2012. 2 ibid. 3 K. Williams, 'Legislating in the echo chamber?' (2005) 155 NLJ 1938. 4 Uren v Corporate Leisure (UK) Ltd [2010] EWHC 46 (QB), para 19.

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representatives' time, but the section is worse than pointless; it is damaging and counter-productive.

This is exemplified by a concern raised by the Trades Union Congress (TUC): that it would 'lead to

a two-tier civil compensation system with workers in occupations deemed a “desirable activity”

being denied access to the civil courts'.5 I intend to show, by reference to the example of the Fire

and Rescue Service, that this is a real concern, and that rather than protecting those who serve the

community, the section undermines them by not addressing situations where both the claimant and

the defendant undertake a 'desirable activity'. In response to this state of affairs, I will propose an

amendment to the Compensation Act 2006, the purpose of which will be to protect those employees

who choose to spend their working lives helping others.

Tackling the problem of risk-averse behaviour

The two main arguments made in support of s.1 can be found in the statement made by Baroness

Ashton upon introducing the bill in the House of Lords on 3 November 2005, in which she said

that:

The Bill forms part of a wider programme of work ... to tackle perceptions that can lead to a disproportionate fear of litigation and ... to find ways to discourage and resist bad claims.6

This suggests two aims in the creation of this section: tackling the deterrent effect of liability, as

manifested in 'a disproportionate fear of litigation' and risk averse behaviour, and combating the

compensation culture to which the existence of 'bad claims' seems to be attributed. The often

lamented, but rarely substantiated, 'compensation culture' that is said to exist in Britain is outside

the scope of this essay, but it should be noted that there is little, if any, statistical evidence for its

5 House of Commons Constitutional Affairs Committee, Compensation Culture, HC 754-II, Ev. 120, para 32. 6 Hansard HL vol 675 col WS30 (3 November 2005).

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existence.7

The 'disproportionate fear of litigation', and its role in justifying the legislative response found in

s.1, is premised upon the idea that the imposition of liability has a deterrent effect, influencing

individuals' behaviour as they attempt to avoid it. But this raises a fundamental question to be

addressed, namely: does potential civil liability have a deterrent effect? The literature on this topic

is voluminous and conflicting, the deterrent effect of liability being extremely difficult to measure

in an empirical fashion, bearing in mind that the 'reasonable' standard of behaviour required by

negligence will inherently be a reflection of social norms, which themselves effect a powerful

influence on behaviour.8 But studies comparing existing liability and non-liability regimes,

particularly in the context of no-fault compensation for motor accidents, suggest that the imposition

of liability does have a deterrent effect, leading to a reduction in the number of accidents.9

The problem the legislation seeks to address is the risk-averse behaviour which results from this

deterrent effect. This proposition has been stated thus: 'If those participating in a particular activity

are charged with the full cost of the injuries that activity causes, they must determine whether,

given the costs, they can afford to continue with the activity. If the cost is prohibitive, they are

forced to cease the activity or seek ways to reduce the cost of the activity'.10 Internalising costs in

this manner is, in most circumstances, considered to be desirable; it applies an economic

disincentive to disproportionately dangerous activities, and encourages safety by making the costs

of injury greater than the costs of prevention. This also has the appeal of common sense, in that

those who derive a benefit from a given activity are expected to shoulder its burden, as 'it is seen to 7 For a detailed statistical analysis, comparing media attention with the case load of the courts, see J. Hand, 'The

compensation culture: cliche or cause for concern?' (2010) 37(4) J. Law & Soc. 569-591. 8 W. J. Cardi et al., 'Does tort law deter?' (2011) Wake Forest Univ. Legal Studies Paper No. 1851383

<http://ssrn.com/abstract=1851383> accessed 3 October 2012, p.26. 9 See, eg. A. Cohen & R. Dehejia, 'The Effect of Automobile Insurance and Accident Liability Laws on Traffic

Fatalities' (2004) 47 J.L. & Econ. 357; J. Chelius, 'Liability for Industrial Accidents: A Comparison of Negligence and Strict Liability Systems' (1976) 5 J. Leg. Stud. 293, 303-06.

10 C. Brown, 'Deterrence in Tort and No-Fault: The New Zealand Experience' (1985) 73(3) Cal. L. Rev. 976, 976.

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force them to take the interests of others into account'.11 However, internalisation of costs is not

desirable in those situations, alluded to by Mr Blair in his speech,12 where the benefit of the activity

rests not with those who undertake it, but with society as a whole. In such situations, the deterrent

effect of tort liability is counter-productive, as it provides no disincentive to those who derive the

benefit of the activity, and fails to force consideration of the interests of others. All it achieves is to

increase the burden on those who act in pursuit of a public good, and that cannot be considered

desirable. In this way, s.1 of the Act does pursue a worthwhile goal, in seeking to alleviate this

deterrent effect where the defendant is engaged in a desirable activity.

A duplication of effort

The issue with s.1 as it stands arises where this deterrent effect has already been substantially

removed, as is clearly the case in most circumstances where the defendant is an employer and the

claimant is their employee. In such a case, s.1 operates in much the same way as it would were the

defendant an individual; the court may take into account the fact that imposing liability upon the

employer may prevent the undertaking of a desirable activity. But the claimant, who in this

scenario will almost certainly have been responsible for carrying out the desirable activity, will be

left without a remedy. In this sense it provides a perverse disincentive to seeking employment in

any occupation deemed to be a desirable activity, preventing those who do so from obtaining a

remedy when they are injured as a result of their employer's negligence. As such, where s.1

operates to allow the exclusion of liability, employers engaged in desirable activities are effectively

insulated from the costs associated with their own negligence towards their employees.

Aside from being counter-productive, and leading to the creation of the 'two-tier civil compensation 11 S. Sugarman, 'Doing Away with Tort Law' (1985) 73 Cal. L. Rev. 555, 560. 12 n.1 above.

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system'13 feared by the TUC, it also ignores the fact that the vast majority of employers have been

insulated from these costs for more than forty years. The Employers' Liability (Compulsory

Insurance) Act 1969 s.1(1) requires an employer14 in Great Britain to insure 'against liability for

bodily injury or disease sustained by his employees, and arising out of and in the course of their

employment'. The insulating effect of liability insurance is well established, and is, of course, its

sole function as far as the employer is concerned. Upon the second reading of the Bill in the House

of Lords, Lord Pargiter acknowledged the dual purpose of the legislation, stating that '[t]here have

been cases where employees who have been entitled to damages or compensation have been denied

them because of the failure of their employers to meet the liability. On occasion this has even

resulted in the employer himself going bankrupt.'15

While the Act undoubtedly helps ensure that employees do not go without compensation solely

because of their employer's impecuniosity, it also protects employers from the consequences of

their own negligence. In limiting the internalisation of costs, 'it remove[s] the primary incentive

toward the observance of care'.16 In this way, liability insurance substantially removes the deterrent

effect of tort liability, so much so that it has been said that '[t]he deterrent function of the law of

torts was severely, perhaps fatally, undermined by the advent of liability insurance'.17 This

conclusion can only be reinforced by the fact that, under the Act, liability insurance is compulsory,

and as a result ceases to be a cost associated with negligence, instead becoming factored in to the

cost of doing business. It is clear then that, for those employers engaged in a business considered to

be a 'desirable activity', there exists a twin shield against the deterrent effect of tort liability, and

against the consequences of their negligence: on the one hand, s.1 of the Compensation Act 2006

13 n.5 above. 14 With some exceptions; see s.3 of that Act, and the Employers' Liability (Compulsory Insurance) Regulations 1998

(SI 1998/2573) (as amended). 15 Hansard HL vol 304 col 1059 (23 July 1969). 16 J. Fleming, 'The Role of Negligence in Modern Tort Law' (1967) 53 VA. L. Rev. 815, 824. 17 ibid, 823.

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allows them to deny breach; on the other, s.1(1) of the Employers' Liability (Compulsory

Insurance) Act 1996 allows them to externalise the costs if they are held liable.

The argument could be made that the shield provided by the Compensation Act is undermined by

the non-mandatory language of s.1; the court 'may... have regard', it is not required to do so. To

counter this, we need only look at Watt v Hertfordshire County Council,18 which predates the Act

by more than 50 years, but applies the same principles. In that case William Watt, a fireman,

attended the scene of a motor accident. The incident called for the use of a heavy jack, but the

vehicle fitted out to carry it was unavailable. Instead, it was transported unsecured on the back of a

truck, and when the truck was forced to stop suddenly at a red light, the jack became dislodged,

injuring Mr. Watt. The Court of Appeal dismissed his claim, for reasons put most succinctly by

Lord Justice Denning (as he then was):

One must balance the risk against the end to be achieved. If this accident had occurred in a commercial enterprise without any emergency there could be no doubt that the servant would succeed. But the commercial end to make profit is very different from the human end to save life or limb. The saving of life or limb justifies taking considerable risk.19

We can see clearly here the elements of the Compensation Act 2006 s.1: the distinction drawn

between commercial enterprises and the emergency services parallels the distinction in the Act

based upon desirability of the activity, and the latter is held to a lower standard of care as a result.

Clearly the court showed no reluctance to leave the claimant without a remedy, on the strength of

factors analogous to those contained within the Act. The language of the Act may not be

mandatory, but Watt shows that the court will not hesitate to apply its principles.

18 [1954] 1 W.L.R. 835. 19 ibid, 838.

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Punishing public servants

Prior to the coming into force of the Employers' Liability (Compulsory Insurance) Act 1969, the

decision in Watt may have been justifiable as a measure to help keep the cost of running the fire and

rescue service manageable, but it becomes far less justifiable if we look at a similar factual matrix

under the current legislative position. Let us imagine, similarly to Watt, that a fire fighter is injured

in an accident at work as a result of his employer's negligence. This fire fighter is forty-five years

old, with a salary of £28,481,20 and has worked for the fire and rescue service for twenty-five years

prior to the accident. His injuries are severe, and as a result he is rendered quadriplegic. He issues

a claim against his employer to compensate him for his injuries, a claim which, by virtue of the

compulsory employers' liability insurance that his employer holds, they can afford to pay without

risk of placing any burden on fire and rescue service funding. But the employer does not pay any

compensation, because it is successfully argued in court that s.1 of the Compensation Act 2006

operates to protect them as defendants who undertake a 'desirable activity'. Instead, the fire fighter

is left to manage on the funds allocated to him under the Firefighters Compensation Scheme 2006.

This is no trivial difference. The recent judgment in Burton v Kingsbury includes a detailed

assessment of the damages due to a victim of negligence who suffers quadriplegia as a result,21 and

applying the same principles to our fire fighter, with a life expectancy of approximately 20 years,22

would result in damages of around £5,000,000. But, with this avenue currently closed to him, our

fire fighter would instead receive a settlement under the Firefighters Compensation Scheme 2006

worth around £520,000.23 Based on the estimates for annual care costs in Burton v Kingsbury, this

20 'RBFRS - Recruitment - Wholetime Firefighter: Pay Scales' <http://www.rbfrs.co.uk/job_ff_wt_pay.html> accessed

3 October 2012. 21 [2007] EWHC 2091 (QB). 22 NSCISC, 'Annual Report for the Model Spinal Cord Injury Care Systems' (2006)

<https://www.nscisc.uab.edu/PublicDocuments/reports/pdf/NSCIC%20Annual%2006.pdf> accessed 3 October 2012, p.56.

23 The Firefighters' Compensation Scheme (England) Order 2006, Schedule 1 Part 1 paras 1 and 2.

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is equivalent to less than four years of the cost of care for a quadriplegic patient. Obviously this is

an unacceptable state of affairs. Those who work in public service, and particularly those who risk

life and limb in service to the public, ought not be receiving inadequate support should their

employer's negligence cause them injury. This is especially true when their employer is required by

law to be able to meet the costs of their own negligence, and it is worth noting that, under the

Employers' Liability (Compulsory Insurance) Regulations 1998, the amount of insurance under any

policy must be at least £5,000,000 in respect of any one occurrence.24

The proposed amendment

In order to correct this injustice, I propose an amendment to the Compensation Act 2006, making

s.1 subject to the following clause:

1A. Where: (a) the defendant is an employer required to maintain employers' liability insurance under s.1(1) of the Employers' Liability (Compulsory Insurance) Act 1969; and (b) the claimant was, at the time of the alleged negligent conduct, the defendant's employee; and (c) the bodily injury or disease complained of arose out of and in the course of that employment; s.1 of this act shall not apply.

This amendment will effectively remove the overlap between the Compensation Act 2006 and the

Employers' Liability (Compulsory Insurance) Act 1969. Both pieces of legislation act to prevent

the deterrent effect of tort liability from provoking undesirable risk-averse behaviour, and this

amendment will ensure that, in any given situation, only one of them will apply. This will ensure

that, in cases where the costs associated with a negligent act will not in any case be borne by an

24 SI 1998/2573, regulation 3.

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employer undertaking a 'desirable activity', the nature of an employee's occupation will not prevent

him from receiving compensation.

Further, this change will, far from being a burden on the public purse, actually save money. It will

allow the government, under s.6 of the Social Security (Recovery of Benefits) Act 1997, to recover

benefits paid to the victims of accidents who, as a result of the amendment, will be able to claim

compensation from their employer. By way of an example of the sums involved, following the

judgment in Burton v Kingsbury the Compensation Recovery Unit was able to recover

£35,186.59,25 which would otherwise have been spent supporting the victim of an accident.

Conclusion

I hope that I have shown how, under the present legal position, the Compensation Act 2006 can, in

some circumstances, have the opposite effect to that which its creators intended. The amendment

proposed will allow us to correct this oversight, protecting those who engage in desirable activities

for a living, and without imposing any great expense on their employers. In addition to being good

policy, this solution to the problem makes economic sense, as the amendment will allow for the

recovery of benefits paid to accident victims, at a time when the state can ill afford unnecessary

expenses.

Word count: 3000.

25 n.21 above.