Covid vaccinations: Could a compensation fund work?

In this issue, Professor Robert Vivian and Dr Albert Mushai explore the concept of a no-fault fund and the proposed Covid no-fault compensation fund.

The South African government announced it would establish a Covid vaccine injury (no-fault) compensation fund, which isn’t surprising. Similar funds are being established in various parts of the world. The local announcement was criticised for the lack of clarity, however.

There is a conceptual link between worker’s compensation and the new fund. South Africa has four worker’s compensation “funds”. These include the government’s Compensation Fund, the fund for occupational diseases in the mining industry, the Rand Mutual and the Federated Employers’ Mutual Assurance company. It can be argued that two of these are not funds in the usual meaning of the word, but are insurance companies.

The oldest of these is the Rand Mutual, which was established in the late 1800s. The Compensation Fund, Rand Mutual and Federated Employers’ Mutual have agreed to contribute R1,35 billion to fund the cost of procuring vaccines for workers who do not have medical schemes cover.

The Compensation Fund has already received more than 22 300 claims. Of these, it accepted 11 500. Earlier the government had issued the Workplace-Acquired Covid-19 Directive, in terms of which it has paid out R57 million.

What, though, is the conceptual link between worker’s compensation and the new Covid fund? When someone is injured, the fundamental point of departure is the common-law position: “the loss lies where it falls”. However, sometimes it is thought more propitious that the loss should be shifted to someone else. The two commonly accepted ways to do this is via the pursuit of remedies available from the common law and, secondly, from insurance.

The common-law remedies usually come from what is known in South Africa as the law of delict. In England and America, it is known as the law of torts. (In South Africa it is in the singular, while in England and America it is in the plural.)

Strangely, Scotland, like South Africa, has the law of delict. As we have often pointed out, the common-law remedy proved to be quite unsuited for providing compensation for occupational diseases and was abandoned when worker’s compensation was introduced. So, that leaves us with insurance.

As society developed away from the agricultural age to the industrial age – with its factories, mass transportations via railways, ships and cars – the risk of accidents became apparent and greater. With that came the accident insurance market. A mechanism was developed to provide financial support to persons injured as a consequence of accidents.

The personal accident policy filled the void. That policy would pay a sum of money in the event the insured person was injured. This mechanism was particularly efficient when the number of injured persons was small and random compared to the total. If the occupational accident statistics in 1900 were examined, it would be seen that they were small in comparison with the working population and fairly constant as a percentage thereof.

Accidents were random: who was injured was, essentially, the luck of the draw. So, the simple question to be answered was whether the loss should lie where it fell or could be transferred. With the advent of the personal accident policy, it could be efficiently transferred. All the employer needed to do was purchase personal accident cover for each employee. Group personal accident covers were developed later by the market.

The provision of compensation was therefore economically feasible. But the remaining issue of who paid for the cost of injuries needed to be resolved, and a third issue evolved – an unintended consequence of providing compensation on a personal accident basis.

The question regarding who pays was settled in the case of occupational accidents. Occupational accidents and injuries constituted an externality. It was a cost imposed on an innocent third party, which could be internalised and passed on to the party where the cost belonged. Employed persons work for the benefit of consumers. The cost of injuries could be internalised via worker’s compensation premiums and passed on to consumers. The cost of injuries was thus a cost of production.

To ensure that everyone who worked enjoyed cover, the personal accident scheme appeared as a statutory programme of worker’s compensation. (The South African legislation has a feature that differs from the UK approach. It removed the common-law claim from the employer and directed it to the fund.)

The second question is that of moral hazard. In a production or business context, where a company bears the cost of production, the company is careful to minimise or avoid the cost. Failure to do so will have the result that the cost of the goods or service are uncompetitive. Since the cost of the worker’s compensation was borne by the employer and passed on to the consumer, the moral hazard risk was subject to constraints. In any event where persons were in a close environment, such as employment, the moral hazard risk is usually managed.

An unintended consequence evolved out of the system where injured persons received compensation via the insurance mechanism. Two systems therefore existed: the common law of delict and the insurance mechanism. The unintended consequence was the impact the one system had on the other.

Conceptually these two are completely different but, as far back as 1914, Jeramiah Smith predicted worker’s compensation was incompatible with the common law and that the two couldn’t co-exist. Of course, the mistake Smith made – repeated by jurists thereafter – is to see worker’s compensation in the same light as the law of delict (torts). Workers’ compensation should have been seen for what it was – a personal accident insurance scheme.

Therefore, if we place the logic within the framework which Jeramiah Smith had developed; “if some injured people are being compensated, then why not all injured persons?” And, even worse, in the case of the Road Accident Fund, which is not a no-fault fund: “If a fund has been established to compensate persons who are injured in motor vehicle accidents, why not all persons injured in motor vehicle accidents?”

So, the possibility of no-fault schemes changing the common law became a reality. Lord Denning was the architect of the English law of torts. On the eve of his retirement he wrote several books on his long and illustrious career.

When it came to the law of torts, he explained the driving force behind the changes: “In theory the courts do not look behind the masks. But in practice they do. That is the reason why the law of negligence has been extended so as to embrace nearly all activities in which people engage. That is the reason the awards of damages have escalated so as to exceed anything that even the wealthiest individual could pay. The policy behind it all is that, when severe loss is suffered by anyone singly, it should be borne not by him alone, but be spread throughout the community at large.”

The courts look beyond who is appearing in the court; behind these they see insurance companies, large corporations, the government, and so on. As a result of this scrutiny, the law of torts changed and increasingly resembles the no-fault system of insurance-based compensation.

Where does this leave us with the Covid-19 no-fault fund? Some vaccines have, sadly, already caused the deaths of some people. In the US the figure is approaching 5 000. It seems the deaths are random. There is no reason why the cost should be borne by the families of those who have died. It would thus seem logical that a no-fault fund should be established.

The issue of moral hazard is not clear. Without the fund it is unlikely that pharmaceutical companies would have attempted to make the vaccine. The risk would simply be too great. Removing that risk creates a moral hazard risk. One must ask: has the moral hazard risk been correctly addressed? Once the details are available, this matter should be re-examined.

The other problem in South Africa is that the available funds do not appear to be efficiently managed by the government. The Road Accident Fund has been insolvent for a very long time. Reports keep appearing about the Workers Compensation Fund as well. If the government has not managed to cope with the existing funds, it is not clear if it will cope with a new fund.

On the other hand, the South African Special Risks Insurance Association is a bright light in an otherwise dark landscape. It has been very well managed, so it is indeed possible that the new fund can be managed.