It would have been hard to avoid the news headlines on the Royal Commission over the last year. With prominent members of churches and other institutions being examined in public hearings, the revelations have been shocking to many, and all too familiar to others.
The work of the Royal Commission could lead to substantial liabilities for liability insurers who have insured institutions in the last 40 years. This article explores the aims of the Royal Commission and the potential impact on insurers.
THE ROYAL COMMISSION
In January 2013, the Australian Government announced the establishment of the Royal Commission to investigate the sexual abuse of children in both religious and non-religious public and private institutions in Australia since 1970.
PURPOSE AND SCOPE
The purpose of the Royal Commission is to:
- minimise the risk of child sexual abuse in the future by providing recommendations on policy, laws, administrative practices and structural reforms; and
- provide victims with a forum through which they can talk about the abuse they suffered and gain acknowledgement that such abuse should not have occurred.
Although the Royal Commission does not intend to address matters of individual compensation or criminal prosecution, there has been a special police unit formed to prosecute any perpetrators identified during the inquiry. As of 31 May 2014, the Royal Commission had referred over 160 allegations to the police.
The Royal Commission provided an interim report on 30 June 2014 which discussed the work to date, but made no recommendations. The final report is due at the end of 2017, by which time the cost of the Royal Commission will have reached half a billion dollars.
SOME SIMILAR PREVIOUS INQUIRIES
The Royal Commission follows a similar Victorian Parliamentary Committee investigation in 2012-2013 into the handling of child abuse in religious organisations.
In Ireland from 1999 to 2009, the Ryan Commission into Child Abuse in Irish Institutions for Children led to the establishment of the Residential Institutions Redress Board to provide compensation to claimants. To 31 December 2013 nearly € 1billion has been paid to victims and in scheme costs, funded by the Irish Government with contributions from religious organisations and their insurers.
IMPACT OF THE ROYAL COMMISSION
There have been past investigations into child sexual abuse, claims made by victims and settlements both by institutions and their insurers. The Royal Commission will have a radical impact on victims, institutions and their insurers2.
THE ROYAL COMMISSION WILL INVESTIGATE WIDELY
The Royal Commission has the power to compel organisations to provide it with information. As part of its systematic and wide-ranging investigations, the Royal Commission will build up a much deeper understanding than in the past of the extent to which abuse took place, the number of children abused, the number of offenders, and the number of institutions affected.
These investigations may give rise to increased financial compensation and care and support costs payable by churches, governments, charitable organisations, private schools, sports clubs and other institutions involving children. The Royal Commission has already identified allegations of child sexual abuse in over 1,000 institutions, although it does not expect to investigate all of them. In turn, this may give rise to additional claims against insurers that provided liability cover to such institutions. However, there are significant obstacles for successful claims as discussed below.
THE ROYAL COMMISSION WILL IMPROVE UNDERSTANDING OF THE INCIDENCE AND PREVALENCE OF CHILD SEXUAL ABUSE IN AUSTRALIA
Currently, there are no reliable and comprehensive statistics on the incidence and prevalence of child sexual abuse in institutions in Australia. Through its own research and publications, the Royal Commission is already providing insights into the nature and prevalence of child sexual abuse in institutions. Appendix C of Volume 1 of the Royal Commission’s interim report contains statistics based on the private sessions it has conducted. For instance, the interim report notes that:
- 90% of perpetrators were male;
- On average, female victims were nine years old and male victims 10 years old when the abuse started;
- On average, it took victims 22 years to disclose the abuse, men longer than women; and
- 95% of survivors had previously disclosed their abuse, and 5% reported their abuse for the first time at the Royal Commission.
The Royal Commission has already completed 21 research projects and is scoping more than 30 additional projects. Two future research projects are on the Prevalence and incidence of child sexual abuse in institutions in Australia, which are likely to be useful in understanding the implications for insurers.
THE ROYAL COMMISSION WILL LIKELY INCREASE REPORTING OF CHILD SEXUAL ABUSE
Most of the victims of sexual abuse do not disclose their abuse to authorities, nor do they take legal action against their offenders. It is here that the Royal Commission may have the greatest impact in increasing reporting rates and the willingness of victims to seek redress from offenders and the institutions where the abuse occurred.
As noted earlier, 5% of survivors approaching the Royal Commission had not previously disclosed their abuse, suggesting a potential 5% increase in reports. However, this likely understates the potential increase in reports as victims who have not previously disclosed their abuse may take longer to come forward to the Royal Commission. Further, the Royal Commission does not have the power to award any compensation, and the prospect of compensation may further increase the reporting rate.
THE ROYAL COMMISSION WILL INCREASE THE PROSPECT OF CLAIMS AGAINST INSTITUTIONS AND THEIR INSURERS FOR PAST ABUSE
To establish a claim against an institution, a victim would have to show that the institution was sufficiently aware of the potential risk, and failed to act appropriately, or acted inappropriately. By specifically investigating institutional responses, the Royal Commission could well establish that institutions failed to respond appropriately. Further, by bringing together victims of the same perpetrator, the Royal Commission could also establish that an institution should have known about the risk of abuse because of previous allegations and hence establish a duty of care for the institution. By legally establishing such a duty of care, claimants could then argue that the institution failed to act appropriately.
Limitation periods theoretically reduce the ability of victims to bring complaints for past abuse. Different limitation periods apply for each jurisdiction in Australia. These can vary if the claimant was a minor at the time of the alleged incident. Some jurisdictions allow extensions of the limitation period, particularly for minors.
There are some further complexities that may extend the window for historical claims. There has been significant academic discussion3 surrounding the psychological barriers to victims of abuse commencing claims before the limitation period expires.
Thus, while it may seem that many abuse claims may be subject to limitation periods, the extent to which this actually occurs is very uncertain. In practice, insurers are likely to enter into commercial settlements for any claims, irrespective of limitation periods.
Further, the Royal Commission is specifically investigating the extent to which limitation periods are reducing access to justice for victims, and may recommend changes to existing limitation periods.
To the extent that institutions had insurance cover that responds to claims, insurers will face the prospect of increased claims.
However, even where institutions are found liable for sexual abuse, there are significant hurdles to successful claims against their insurers, including:
- common policy exclusions against illegal or dishonest conduct and specific exclusions against molestation mean that insurers are unlikely to indemnify perpetrators of sexual abuse for the consequences of their conduct;
- accurately identifying the policy and the relevant insurer at the time of the abuse;
- establishing whether that insurer still operates or if the liability for past claims has been transferred to another entity;
- if the institution had elected to deal with the allegations in-house, and not referred the matter to their insurer, then issues of prejudice may arise;
- policy references to an accident (being an outcome not expected or intended by the insured) may extend cover to an institution, but not to an offender;
- occurrence may be undefined or lack clarity regarding aggregation of claims, particularly where the offender is a serial abuser;
- potential exclusions such as professional duty and exemplary damages may apply;
- there may be coverage disputes where there is evidence that the institution knew of the abuse and did not take steps to stop it; and
- some insurers may have only provided very low policy limits.
THE ROYAL COMMISSION WILL INCREASE THE PROSPECT OF CLASS ACTIONS
The Royal Commission has brought together victims of abuse who are now able to form class actions against institutions that the Royal Commission concludes had insufficient or inappropriate responses. Litigation funders have already indicated that they are researching the potential of funding such class actions. This could trigger substantial liability claims for specific failures by individual institutions. Prior claims might be reactivated where the Royal Commission uncovers additional evidence of abuse, or opens up additional avenues for compensation of victims.
THE ROYAL COMMISSION MAY CHANGE THE AVERAGE AWARD TO VICTIMS
Historically, most abuse claims were settled for relatively small amounts, as in many cases the victim is not motivated to seek a financial reward and would rather settle out- of-court and receive an acknowledgement and apology for the abuse4. Further, economic loss can be extremely difficult to establish in the absence of physical injury. Most court awards arise underexemplary, punitive and aggravated heads of damages, which tend to be much less than those for economic loss.
Past inquiries into abuse at state institutions in Queensland, Western Australia and Tasmania have led to compensation payments to claimants ranging between $7,000 and $80,000 each5. The Catholic Archdiocese of Melbourne currently awards up to $75,000 in compensation payments to victims6. The Royal Commission has found that the Catholic Church in Australia has paid over $43m to claimants since 1997, but does not comment on the number of claimants or the average claim amount. As noted previously the Residential Institutions Redress Board in Ireland has awarded on average €62,496 to each victim. To 31 December 2013 there have been 16,151 cases processed, with an average award of €62,496 funded by the Irish Government with contributions from religious organisations and their insurers’.7
Insurers may pursue quick commercial out-of-court settlements in order to avoid adverse publicity and minimise legal costs. Alternatively, where class actions have been established, there may be substantial legal costs involved.
While the historical average cost of abuse claims may be relatively low, the Royal Commission’s inquiry into the efficacy of civil litigation in providing redress could also lead to an increase in future settlements. The Royal Commission has already established substantial evidence that the impact on victims of child sexual abuse can be lifelong and devastating. This may well have implications for the cost of care and support to victims, and consequently increase the cost of settlements.
To date, the small size of awards, together with potential aggregation issues, has limited the potential compensation,
and discouraged legal activity. However, should awards increase as a result of the recommendations of the Royal Commission, and aggregation issues be resolved in favour of institutions, then this may stimulate legal firms to pursue compensation on behalf of victims. Litigation funding may also stimulate claims activity.
THE ROYAL COMMISSION MAY INCREASE ACCESS TO JUSTICE AND FINANCIAL COMPENSATION FOR VICTIMS
The Royal Commission has released an issues paper examining the scope for justice for victims, including the question
of financial compensation. It has also invited submissions on whether current civil litigation provides an effective form of redress or whether alternatives, such as a redress scheme similar to that established in Ireland, are required.
The Royal Commission expects to produce a report in mid-2015 recommending changes to civil litigation to improve access to justice for victims. As noted in the interim report, such changes might include:
- making institutions vicariously liable for the actions of their staff;
- requiring institutions to incorporate and hold insurance;
- removing limitation periods for claims involving child abuse; and
- moving to an inquisitorial rather than an adversarial legal system.
These changes, designed to improve access to compensation for victims, could have a significant impact on the liability of insurers, particularly if the requirements for bringing a class action are reduced, or if a redress scheme is established.
THE ROYAL COMMISSION MAY ESTABLISH A REDRESS SCHEME
The redress scheme issues paper considers the scope, eligibility (e.g. past claims and/ or future claims), standards of proof, and funding arrangements for a redress scheme, including whether it should replace civil litigation, or run in conjunction.
Any redress scheme would also have a significant impact on the liability of insurers. Ordinarily, insurance policies would not respond to redress payments. However, insurers could be asked to contribute to the funding of a redress scheme in return for extinguishing their liability to institutions for such claims. Such a contribution would be difficult to estimate, due to the widely varying exposures and policy conditions of each insurer, which have also changed over time. Nonetheless, insurers may agree to a commercial settlement. Such an arrangement would substantially reduce the uncertainty of past claims; as well as bring positive publicity from assisting victims.
A working group of the Actuaries Institute recently provided advice to the Royal Commission on factors to consider when setting up a redress scheme. This submission8 was based on actuaries’ extensive experience with:
- accident compensation schemes and victims of crime compensation schemes;
- civil litigation and statutory schemes;
- addressing issues of equity between stakeholders; and
- funding models and efficient scheme design.
The working group referred extensively to the recent models of the National Disability Insurance Scheme and the National Injury Insurance Scheme.
THE ROYAL COMMISSION WILL CHANGE FUTURE UNDERWRITING
The Royal Commission expects to issue recommendations designed to reduce the incidence of abuse, by identifying risk factors and recommending policies and procedures for institutions. This may well lead to lower claims incidence in future, and would have implications for future underwriting. Future underwriting might also be affected by any changes to limitation periods, changes in the duty of care of institutions, whether any redress scheme extends to future claims, and whether or not religious organisations may be forced to incorporate so that claims can be brought against them.
In many ways, the Royal Commission has so far raised more questions than answers for insurers. It is clear that sexual abuse in institutional settings has been a significant issue both in terms of its prevalence and the lasting harm to victims. Addressing the consequences will have significant ramifications for both institutions and insurers; hopefully enable the survivors of past abuse to rebuild their lives; and also ensure that in future all children will get the care and protection they rightly deserve.
1 Royal Commission into Institutional Responses to Child Sexual Abuse – Interim Report 30 June 2014.
2 Annual Report of the Residential Institutions Redress Board 2012, appendix (I).
3 Astbury, J. (2013). Violating children’s rights: The psychological impact of sexual abuse in childhood InPsych (October).
4 Law Commission of Canada, Restoring dignity: Responding to child abuse in Canadian institutions, Minister of Public Works and Government Services, Quebec, 2000.
5 Bravehearts response to Royal Commission’s Issues Paper 6 on Redress Schemes.
6 D Hart, Archbishop Hart to revisit Melbourne Response compensation cap, media release, Catholic Archdiocese of Melbourne, 4 April 2014.
7 Annual Report of the Residential Institutions Redress Board 2012, appendix (I).
8 Actuaries Institute submission to Royal Commission, 8 August 2014.
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