MAY 2017

INSURANCE UPDATE

New test for reparation topping-up ACC

On 22 May 2017, a company and its director process. The reason for that is founded in the social were ordered by the District Court to pay its contract which underpins ACC: the right to sue was removed in return for a universal benefit payable without employee $226,300 to top-up ACC in respect having to prove fault, and the compromise that 80% rather of future loss of earnings as a result of his being than 100% of lost earnings is paid. rendered a tetraplegic by a workplace accident Only through the criminal process can the 20% top-up involving farm machinery. of income which is not paid by ACC, be recovered by the injured person. In that respect, the change in the This is the first award in criminal proceedings of a law creates a two-tiered system of compensation for significant sum compensating loss of earnings. It arises personal injury in New Zealand. That has been enabled from a change in the law in December 2014 designed to by the government on the basis that victims of crime improve the lot of victims of crime, but it presents a are in a different category to other injured people. difficult balancing act for the Courts in preserving the The difficulty there is that not all victims of crime integrity of the ACC system of universal benefits. will likely receive the same compensation, because This change represents a shift in financial exposures for offenders who commit crimes requiring proof of business. To address this exposure, statutory liability intent are not insured for the injury they cause to has routinely been included in portfolios of others. It is only crimes of negligence that will be business cover, but at limited premium because the insured, thereby ensuring the offender has the ability exposure has in the past been limited to modest awards to pay such awards. for emotional harm and defence costs. Premiums may increase to reflect the new exposure. WORKSAFE NEW ZEALAND V WAI SHING LIMITED THE DEVELOPMENT OF AWARDS OF Wai Shing Limited and its director were prosecuted and REPARATION FOR LOSS OF EARNINGS pleaded guilty to offences under the Health & Safety in Until the law was changed in 20141, no recovery of the Employment Act 1992, arising from an accident at work. 20% shortfall between actual earnings and the 80% paid Some agricultural equipment fell on the worker and he is a by ACC could be recovered, either through suing for tetraplegic as a result. He is 29 years of age and unable to 2 negligence in the civil courts, or through the criminal work again.

1 The Sentencing Amendment Act 2014 amended s32(5) of the Act 2 WorkSafe New Zealand v Wai Shing Limited [2017] NZDC 10333. There was also an award of $110,000 for emotional harm (which is not controversial) and a fine of $50,000, payable as to $37,500 by the company and $12,500 by the director personally

Insurance Update - New test for reparation topping-up ACC | 1 The Court has adopted a calculation of the victim’s loss by Clearly there is a significant difference between the reference to his current salary at the time of his accident assessment of loss as calculated under the ACC scheme, (he had been given a raise due to a change in his job profile and actual loss by reference to what a particular person only a week before the accident). That calculation takes might predictably have earned over a lifetime’s work. account of an increase over time by reference to the Labour The defendants said that the correct approach for Cost Index (inflation) with no allowance for promotional calculating the injured person’s loss was to adopt the increases, or change of hours. The sum adopted was $455,600. assessment made by ACC, because the purpose of the The Court then deducted sums already paid by Wai Shing amendment to the Sentencing Act was to enable the and then discounted that sum by 50% to arrive at $226,300. recovery of the 20% that ACC does not pay. Under that The Court set out the reasons for the introduction of ACC legislation the benefits are ‘fair’ not full and it would the accident compensation scheme which are found in be inconsistent with the scheme of compensation under the Royal Commission report known as the Woodhouse that Act to assess reparation to victims of crime on a Report. It noted the many disadvantages of the common different basis. In turn, because its expert evidence was law process identified in that report. The Court’s reasons that sadly the victim was unlikely to live until he was 65, for the discount are as follows: the period for which the compensation was properly payable was shorter, and the calculation should be done [87] …The injuries are so catastrophic that they have on the basis the Court has previously applied to the rendered the victim incapable of making any decision investment of lump sum payments3. The Court disagreed that would have had an impact on his future earnings. on both those counts. [88] However, one cannot deny the fact that the victim has obtained a degree of ‘benefit’ from the accident COMMENT compensation scheme. Therefore the question turns to what value one can put on this benefit. The victim The assessment of future loss is commonplace in other has avoided the time, cost and stress of litigation that countries where the right to sue for personal injury would be necessary if we did not have the current remains open to those who have suffered due to the system. The ACC scheme provides a degree of certainty negligence of others. Of course the process is quite to the victim. The victim has not had to initiate his different, because those injured parties have to first prove own proceedings to benefit from the system. negligence of another person in Court, with all the uncertainty, delay and cost that entails. The injured [89] Any value one places on this benefit is arbitrary, person and the defendant will each have professional but at the same time a significant value does need to be accountancy evidence and their witnesses will be open to placed upon it to protect the integrity of the system and the full trial process. In cases of serious injury, a number the societal benefits gained out of the no fault system. of factors are taken into account in calculating the loss, [90] In this respect I consider it appropriate to such as past earnings and prospective earnings in light of discount the figure, representing the 20% not covered past educational attainment, and the like. by ACC, by half. To a certain extent, this also takes In New Zealand, we have not undertaken such calculations account of the fact that the victim will be entitled to a since the advent of ACC in the early 1970s. Injured lump sum payment - another ‘benefit’ to be gained persons simply fill in the ACC form and receive their from the ACC scheme. This will result in an award of entitlements under the scheme. reparation at a higher level than has previously been seen. However, the amendment to s32 allows it and in In calculating the loss the Court did not squarely adopt my view justice requires it for Mr [x] and his wife. the ACC methodology for calculating the top-up. Instead the Court adopted a calculation of actual loss and then WorkSafe’s expert had advised the Court that the ACC discounted that amount by 50%. The methodology top-up, i.e. the 20% shortfall as calculated by reference to adopts a different method of calculating the top-up to the ACC scheme was $226,800. The Court did not the method used by ACC. As the Court says, the adopt that as a starting point, but having applied the 50% discount is arbitrary. deduction, ended up at a similar amount of $226,300.

3 For example the way superannuation entitlements are normally settled under the (Relationships) Act

Insurance Update - New test for reparation topping-up ACC | 2 The result is not altogether different from the calculation All employers will be advised to check they have statutory of the ACC top-up amount (though the defence said that liability insurance in place and to ensure they have sufficient should have been discounted further to reflect reduced cover for awards of reparation at this level in the event of life expectancy and the appropriate investment rate). accidents in the workplace.

KEY CONTACTS

Neil Beadle Special Counsel T +64 9 300 3865 [email protected]

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