Rehabilitation is the key to employers' liability insurance

Measures to tackle the crisis in the employers' liability system are set to include proposals to link insurance costs to firms' rehabilitation policies.


Learning points

  • A crisis in employers' liability (EL) insurance saw premiums rise by 40% in 2002, and smaller firms in some sectors are finding it impossible to obtain cover.

  • An interim report published by the Department for Work and Pensions this June sets out an action plan for tackling the crisis, but has been criticised by business for placing much of the responsibility for solving the problem on employers.

  • Rehabilitation should be at the heart of a revised system of EL insurance, the government argues, and an announcement on new proposals for getting people back to work after illness or injury are expected before the year end.

  • The government is also keen to develop closer links between the level of EL insurance premiums and the safety records of individual employers, believing that the current system does nothing to encourage better safety performance.

    Two reports published this summer by the Department for Work and Pensions (DWP)1 and the Office of Fair Trading2 sought to untangle the mess that is the UK system of employers' liability (EL), and find solutions to a crisis that saw employers' insurance premiums rise by 40% in 2002.

    Employer liability costs will double as a proportion of payroll costs over the next 12 years unless the system is revised, according to forecasts. Experts predict new areas of claims will also emerge from areas such as allergic illness, work-life balance, biotechnology and gene modification and occupational road risk. The Association of Insurance and Risk Managers adds that the market for EL will tighten further as insurers continue to react to the open-ended nature of many EL exposures, and to new Regulations on asbestos coming into force in May 2004.

    A survey earlier this year by insurance company Aon found that only one-fifth of employers believe that the current employers' liability insurance system meets the needs of employees in terms of providing timely compensation, and half feel it discourages employers from implementing effective health and safety practices. More than 90% of employers in Aon's survey believed that the system does nothing to encourage the rehabilitation of injured employees, while, at the same time, agreeing that insurers should have a duty to consult employers on getting people back to work in EL cases.

    The current employers' liability crisis is the result of a confluence of factors, including the impact on the general insurance market of the 11 September terrorist attacks and the rising cost of the average claim for a workplace accident or illness. The cost of claims increased threefold between 1996 and 2002, due partly to the rise in the use of "no win, no fee" arrangements by lawyers - legal costs now account for around 40% of the cost of a typical claim.

    Both of this summer's official reports failed to produce a long-term plan for action, but instead recommended further enquiries. A second report from the DWP is expected any day now, but the Office of Fair Trading will wait until 2004 before deciding whether to do more work in the area. Meanwhile, the EL crisis has prompted the suspension of government plans to make employers liable for the costs to the NHS of treating work-related accidents. This proposal was originally in the Health and Social Care Bill currently going through Parliament, but has been withdrawn following pressure from business representatives that it would be impossible to obtain insurance against this new risk in the current EL climate.

    The Better Regulation Task Force has recently announced that it is studying the UK system of litigation and compensation more generally. This study is looking at whether the risk of litigation promotes good practice and compliance with the law, and at the efficiency of the claims process.

    Revitalising strategy underpins review

    The government's review of the EL system is underpinned by its Revitalising health and safety strategy statement produced in 2000, which makes clear that insurance has a key role to play in the achievement of national health and safety targets. Action point five of the strategy says: "The compensation, benefits and insurance system must motivate employers to improve their health and safety performance, in particular by securing a better balance in the distribution of the costs of health and safety failures."

    The Health and Safety Executive recognises that insurance can be an important lever in motivating employers to practice good health and safety, and is looking at whether the current arrangements improve or impede it. A research report from the Executive on the impact of making business bear the true cost of poor health and safety performance opened this debate recently.

    Improving health and safety performance

    Launching the first stage of the DWP review of EL, the then Minister of State for Work, Nick Brown, said that "there are no quick or easy solutions" to the crisis, but added initiatives are already being developed. These include one within the insurance industry to give employers more notice of renewals.

    However, improving health and safety is central to any long-term response to the EL crisis, a point recognised in the recently published draft HSC strategic plan (see Occupational health will be the "new safety"). The government is also continuing to encourage industry initiatives aimed at more risk-based pricing systems for insurance premiums.

    Improving health and safety performance ought to be an explicit objective of any EL system, the DWP report concludes, and the key challenge for all stakeholders is to improve the link between EL premiums and health and safety practices. For most businesses, starting rates of EL premiums are set according to the trade average, because it is not economic for insurers to research and assess risk management information and then adjust each premium. Demonstrating good health and safety management should in future bring discounts for firms and also become a prerequisite for getting insurance in the first place, the DWP says.

    The government intends to encourage the HSE in its work on developing a health and safety performance management index. One initiative raised in the DWP report has come to fruition - a scheme launched by the Association of British Insurers (ABI) in September is designed to make it easier for small firms with good health and safety records to get insurance. The ABI will supply trade associations with criteria against which they can measure affiliates' performance. Trade associations can then submit their own health and safety schemes for scrutiny, and insurers can use this data to establish a premium related to performance. Businesses not belonging to a trade association will be able to pay a fee to an association for a health and safety check.

    The Office of Fair Trading report criticises the use of "book rating" by insurers, because it lumps together employers with good and bad safety records. A failure to link premiums to safety records can also discourage improvements in health and safety practices. The Office of Fair Trading welcomes the ABI scheme, but would be concerned were this relationship to result in "collusive or exclusionary behaviour giving rise to market power", that is, firms finding they have to join a trade association to secure EL cover.

    Culture change in rehabilitation

    The review of the EL system has raised once again the UK's poor record in getting people back to work after illness or injury. A culture change is needed to place rehabilitation at the heart of the EL system, so that the real gains of ensuring a return to health and the alleviation of an individual's suffering come before the "second best" of financial compensation, according to the DWP. The current system does not encourage early and effective action to rehabilitate employees, it adds.

    The government is reviewing the cost incentives for business and insurers connected with occupational health provision, and rehabilitation in particular. This includes the account currently taken of the opportunity for rehabilitation in determining levels of compensation in an EL case. This work links closely with the government's 10-year occupational health strategy, Securing health together (this will be covered in IRS Employment Review 790), and future plans to deliver this strategy are being reviewed in the light of new proposals on rehabilitation.

    During its review, the DWP found widespread support for putting rehabilitation at the heart of the UK's response to work-related injury, and believes there is a broad range of cases that would respond to rehabilitation where currently none occurs. The main objective of the UK's EL scheme involves providing financial compensation for employees. This contrasts sharply with the approach in other countries, where getting a person back to work is considered to be more important. For example, the final level of compensation due in a German compensation claim is only agreed after all medical help has been provided, and is based on the final state of health after all attempts at rehabilitation have been completed.

    Barriers

    In the UK, several barriers need addressing if rehabilitation is to perform a key role in future EL cases:

  • cost: incentives for employers to fund rehabilitation "do not appear to be sufficient", according to the DWP, which believes that the link between the provision of rehabilitation and the eventual assessment of financial compensation needs to be clearer;

  • timing: to be successful, rehabilitation needs to begin within six weeks of a period of long-term sickness absence. However, employers are often reluctant to provide the opportunity for rehabilitation before liability in an EL case is established, because this might be perceived as an admission of liability. Each stage of the legal process takes time, delaying rehabilitation, and so jeopardising its chances of success;

  • adversarial nature of the EL system: the UK legal system serves to operate against early intervention, and success for the employee tends to be measured purely in terms of the amount of financial compensation; and

  • occupational health (OH) provision: the capacity of OH services to provide support is limited and rehabilitation is often dependent on individual government-funded initiatives.

    Possible plans for overcoming the constraints to effective rehabilitation include:

  • creating a new national order of intervention in cases of work-related accident or illness, starting with prevention, moving through to rehabilitation and only then on to compensation;

  • employees should have timely access to rehabilitation at the earliest stage of a medical intervention in a work-related accident or illness;

  • there should be an early objective assessment of a person's medical condition during an illness or after an accident, which should include whether rehabilitation is a worthwhile option; and

  • expenditure on rehabilitation should not be dependent on the prior establishment of an employer's liability.

    Who pays?

    Which party pays for rehabilitation is critical, the DWP review concludes. Trade unions are worried that changes to the current EL system may shift the burden of funding rehabilitation onto the employee by reducing the value of compensation in cases where rehabilitation takes place.

    Timing is also crucial, because rehabilitation needs to start before liability is established. But what happens in cases where liability is not subsequently established and the employer has already paid? It is not possible to transfer these costs onto employees, the DWP states.

    Occupational health provision has grown but remains the exception rather than the rule - the business case for investing in OH has "not been made convincingly", according to the government. Employer awareness of the benefits of investing in OH and rehabilitation regardless of whether negligence in an EL case is established needs to be re-examined in the context of the Health and Safety Executive's work on implementing the national occupational health strategy, the DWP believes.

    Government programme of action

    The DWP hints at the formulation of new proposals on rehabilitation by suggesting that the movement of health and safety issues under the DWP remit could lead to a new programme for action on OH and rehabilitation, in partnership with the HSE and others. "If a sound case for rehabilitation can be demonstrated by the state, it will act as a powerful argument for employers to adopt a similar approach," the DWP's report concludes. If a link can also be established between early rehabilitation and a flow-through to EL claims, this will create the grounds for a partnership approach between employers, the government and insurers.

    Further work by the DWP is therefore exploring:

  • the scope for relating compensation awards to rehabilitation efforts;

  • encouraging employers to think more about re-channelling the "dead costs" of having people off work or making EL claims against them into demand for OH services;

  • the scope for encouraging earlier intervention, before liability for an accident or illness is established (or not);

  • the impact of preventative OH and early rehabilitation on the number of EL claims;

  • the economic case for rehabilitation;

  • the role of rehabilitation and screening in medical assessments; and

  • the development of an effective infrastructure with providers of OH whose services are shared by employers and the state.

    The CBI "supports putting a greater focus on rehabilitation", but has urged the government to turn some of the proposed short-term measures into immediate relief for hard-pressed businesses. The rehabilitation aspects of the EL review were also picked up by the TUC. Its general secretary, Brendan Barber, said: "We want the government to be more proactive about the long-term reform of rehabilitation and compensation . . . Unions want to work with insurers and employers to provide fair compensation and get injured people back to work."

    Complacency attacked

    The DWP report received a lukewarm welcome from business representatives when it was published this summer, and Nick Brown was criticised for the document's complacency in pushing much of the responsibility for sorting out the EL crisis onto the private sector.

    The Forum of Private Business, an employers' pressure group, claimed that small companies are facing premium increases of between 200% and 500% when they seek to renew EL policies. The Federation of Small Businesses has called for the government to use the income that is raises from itsinsurance-premium tax on EL premiums to provide short-term relief to small firms.

    Next steps

    Des Browne, the current Minister of State for Work, is due to make a statement later this autumn on the EL situation, including any further measures that the government intends taking. It is expected that he might be more proactive than his predecessor, and there is talk of getting tough on firms operating without EL cover and setting up a fast-track service for determining whether claims should proceed. As discussed, there could also be moves on the role of rehabilitation in compensation claims, particularly in the context of the Health and Safety Executive's strategic plan for the next five years and the need to change gear in implementing the national occupational health strategy launched in 2000.

    1. Review of employers' liability compulsory insurance: first stage report, DWP, June 2003, www.dwp.gsi.gov.uk/publications/2003/index.htm.

    2. The UK liability insurance market, Office of Fair Trading, June 2003, OFT659.


    1. Employers' liability insurance defined

    Employers' liability (EL) insurance is compulsory and insures employers against the costs of compensation for those who are injured or made ill at work through the fault of their employer. It provides greater security to employers against costs that could otherwise result in financial difficulty, and to employees that resources will be available for compensation, even in cases where firms have become insolvent. It supports the right of employees injured through their employer's negligence to be fairly compensated - the principle of access to justice - and the responsibility of employers to fund the costs of their negligence - the principle of "polluter pays".

    For many years, the EL insurance market was a stable one, with premiums costing a typical employer around 0.25% of payroll. However, there was a change in 2002, when premiums increased by around 40% due to a number of factors including a cyclical downturn in the insurance sector exacerbated by the 11 September terrorist attack on the World Trade Center, and the escalating cost of EL claims.

    A survey of more than 1,000 small firms by the Federation of Small Businesses concluded that a quarter of employers are finding it difficult or impossible to obtain EL insurance at any price, and that 8% are trading without it.

    Source: "Review of employers' liability compulsory insurance: first stage report", DWP, June 2003.

     


    2. Employers' liability - issues to resolve in the longer term

    The DWP interim report on employers' liability identifies four significant areas for further action by the government:

  • engaging with business and industry to further evaluate the evidence for separating long-term occupational disease risks from accident risks;

  • working with stakeholders to maximise the benefits for employers' liability insurance of current initiatives within the legal system. In parallel, the government will discuss with stakeholders the options for alternative dispute resolution arrangements;

  • being committed to make rehabilitation play a more central role in the UK workers' compensation system, to improve outcomes for employees and to let compensation reflect this; and

  • reforming the arrangements for enforcement of employers' liability insurance, to tackle the unfair competitive advantage gained by non-compliant firms and to better protect employees.

    Source: "Review of employers' liability compulsory insurance: first stage report", DWP, June 2003.