We are liable for ourselves

The headlines beggar belief: Insurance giant collapses; Doctors driven to the brink of bankruptcy; Amateur sporting clubs forced to close; Builders' insurance premiums rise by 150 per cent. The cause: absurd liability payouts for "negligence" which have driven up public liability premiums. The proposed solution: a no-fault national injury compensation scheme.

But this "solution" may well be worse than the problem. Businesses and individual taxpayers will end up paying compensation for injuries for which they are not responsible. Genuine plaintiffs will be denied adequate redress, while genuine malfeasants will be rewarded. And the culture of victim-hood, in which we're led to believe that someone else is always responsible for anything bad that happens to us, will be exacerbated. The only true solution involves radical reappraisal of negligence-based liability, combined with a shift towards self-insurance for loss.

Every day, people die or are injured as a result of mistakes, errors of judgment, misunderstandings and other mishaps. It is tempting to conclude that, in such cases, the injured party should always be compensated for the harm, especially when another party could have done something to prevent it. The law of negligence is derived from such an insight. In essence, it presumes that the providers of goods and services owe a duty of care to consumers. If that duty is breached, the provider is deemed liable for damages.

On the face of it, this sounds perfectly reasonable and, initially, negligence served its purpose well. Unfortunately, as the bounds of negligence widened, courts lost sight of the objective of the law, which is to guide human action. The consequences have been tragic.

Attempting to foresee harm is a costly process. It requires resources that might otherwise be spent developing better products. Over time, technological innovations tend to make products more reliable, and safer. So, if a negligence suit forces a company to add certain expensive safety features to its new products, the resultant increase in price will mean that some potential buyers of this product will delay buying and continue using their older, less safe product.

The risk of negligence suits, combined with the difficulty and cost of foreseeing and preventing harm, has forced producers to buy insurance to cover unforeseeable liabilities. For commercial producers, premiums simply became embodied in the price of the product. But, for producers not operating on a commercial basis, paying such premiums has become a real problem. Many clubs and voluntary organisations now contemplate closure because of the cost of public liability insurance.

Negligence law, ostensibly intended to protect the consumer, ultimately is reducing consumer choice without any discernible benefit. No wonder there is a public furore. But the alternative being contemplated by the Government is little better. The cost -- to be paid, of course, by the consumer-taxpayer -- could be enormous. New Zealand's accident compensation, for example, now faces an unfunded liability of around $5 billion. And the system would have no effect on the incentive to provide goods and services in ways that avoid harm.

But if the consumer pays the bill anyway, shouldn't he or she have a choice? Why not simply scrap the arcane system of negligence law and allow individuals to make whatever private contracts they like? Instead of relying on the courts or the government to set the price of compensation, we could all decide how much insurance cover we want and be free to buy whatever goods we want -- with or without warranties. Producers would still be obliged to ensure that their products are fit for the purpose and are what they say they are. But they would no longer be obliged to attempt the impossible task of foreseeing all possible ways in which people might misuse their products and harm themselves.

Imagine the consequences of such reform. Car manufacturers would not be held liable for injuries sustained in crashes caused by incompetent driving. The owners of cinemas would not be held liable for injuries sustained by people who forget how to use retractable seats. The producers of coffee would not be held liable for causing harm when a person spills their inherently hot beverage.

At the same time, people who are concerned about injuries could buy as much insurance as they want. Just imagine: We would cease to be mere victims, and take charge of our lives. Now there is a prospect.