The ACC aftermath of a legal trainwreck

Colin James's column for the Press for 24 October 2009

John Key put his finger on the nature of the accident in his response to a question from Engineers Union secretary and Labour party president Andrew Little at the Council of Trade Unions conference on Wednesday.

Little asked him if he thought of ACC as social insurance or as based on a private insurance model.

Key said he was unsure what Little meant but stated that ACC is not part of the welfare state. It is, he said, an accident recovery scheme.

The scheme's inventor, Sir Owen Woodhouse, was reported on Monday as saying the opposite, that he saw ACC as part of the social welfare system, not as an insurance scheme.

In fact, ACC's very name -- accident "compensation" -- bespeaks its origins in law gone wrong, which Woodhouse, a lawyer, set out to remedy.

Before ACC a person wanting compensation after an accident had to establish fault -- that a tort, a wrong, had been done to him or her. Lawyers made a packet and employers took out private insurance.

ACC's introduction abolished fault, except in rare cases of gross negligence. Income compensation and treatment were paid out of levies, substituting for premiums. In effect, the government nationalised injury insurance.

Murray McCully rammed through reprivatisation in 1999 which benefited most businesses but cost some small businesses more. Notably, the Auckland Employers and Manufacturers Association was this week initially wary of "open" competition.

Labour renationalised the scheme in 2000, leaving out of pocket some insurance companies which ignored Labour's unequivocal pre-election statements.

Now ACT has prodded Nick Smith into a bill which allows competition in the work account and Key appeared to endorse full competition. Insurance companies are, however, wary of another Labour renationalisation. Smith has sent the idea off to his ACC "stocktake" group to examine its "merits" and feasibility" and develop "a process to achieve this policy objective in a way that resolves any significant outstanding issues".

David Caygill heads that stocktake group. He was one of the trio of Labour finance ministers who radically deregulated the economy in 1984-90. He chaired ACC for a time and so knows the scheme and the corporation.

Caygill's job is to navigate through Smith's tortured phrases to actual endorsement of the competition Key wants. He has many other proposals to "stocktake", including cutting the payout from the present 80 per cent of earnings for those who can't work after an accident and making accident victims pay part of the costs -- an excess. (An alternative would be to disqualify the torrents of small "accidents" like gashed fingers which clog up the system.)

This flurry is triggered by fiscal problems at the corporation.

First, there have been losses on the fund built up to cover future costs of tending to accident victims who can't work or need prolonged treatment beyond the initial impact. ACC is supposed to be fully funded for those longer-term liabilities and part of the levies have been going to building up this fund.

Along with all investors, the fund's market value fell when the international bank-wreck savaged sharemarkets. Recognising this, Labour said during last year's election campaign it would push out the date for full funding (which Smith's bill does).

Actually, the ACC fared much better than most private funds. Instead of vilifying ACC's fund managers, ministers could be praising them.

The second fiscal problem is the legacy of Labour's expansion of the scheme's benefits and coverage. That included some conditions previously not classified as accidents.

Labour was thereby implicitly highlighting the inequity embedded in the ACC system. Should someone who has a back injury at work get far higher "compensation" and more solicitous treatment than someone who contracts a spinal disease and is dumped on Paula Bennett's minimal invalids benefit?

This inequity can be explained only by Woodhouse's legal accident. It also illustrates how Little, Key and Woodhouse are all right -- and all wrong.

Little reckons ACC is "social" insurance, implying something more beneficent than profit-driven private insurers can contemplate. That is the essence of Woodhouse's social welfare comment.

But actually Woodhouse made an insurance scheme, which is Key's view.

Key distinguishes it from the welfare state, which is where illness victims are dealt with. Income maintenance for the ill is paid out of taxes and is not wage-related.

The result is a serious inequity. But don't expect a quick fix. It can be fixed only by reducing ACC "compensation" and/or making sickness and invalids benefits far higher and wage-related.

Only a daring or reckless Prime Minister would try that on. So settle in to watch the National-Labour tennis game as one contracts and the other expands ACC insurance. It's a game with no matchpoint.