The problem of uninsured drivers who have no money to pay for damage they cause is again causing debate in the industry.

While insurers are keen not to see compulsory third-party property damage insurance introduced by state and territory governments to deal with the problem – their last successful stand was in SA about 15 years ago – the pursuit of uninsured motorists for financial redress isn’t always the best solution.

That’s why a prominent consumer advocate is calling on insurers to take a “sensible” approach to third-party property damage caused by uninsured drivers who have little income and few assets.

Lawyer Denis Nelthorpe says while he understands that waiving these debts doesn’t appeal to insurers, driving individuals with no assets and no real income to bankruptcy is a waste of taxpayers’ money and gains insurers nothing.

He says a number of larger insurance companies have come to this conclusion and will usually waive these types of debts – but not all insurers are on board.

Mr Nelthorpe is currently negotiating with Chartis on behalf of a 19-year old man who wrote off a $56,000 BMW. With a poor work history and no assets, the man has a very limited ability to pay off the debt, even in instalments, and has been advised to petition for bankruptcy.

“I don’t accept that a one-off motor vehicle accident is the basis for financial rehabilitation, which is what bankruptcy is all about,” Mr Nelthorpe told insuranceNEWS.com.au.

“A debtor’s petition still requires the work of a financial counsellor or lawyer to prepare the petition, which is funded by the taxpayer, and then it goes to the (government-funded) Insolvency and Trustee Service Australia and they have to supervise the bankruptcy.

“The insurer can issue a creditor’s petition, but that would cost them anything up to $3000. So [while] they don’t want to use their money to bankrupt him, they think it is okay to waste taxpayer funds.

“It’s very disappointing.”

Insurers are perfectly within their rights to seek repayment of such debts, although financial hardship provisions in the General Insurance Code of Practice require them to consider extending the period of repayment and/or postponing payments where a person is experiencing difficulty due to illness, unemployment or other reasonable cause.

Chartis says it treats each case on its merits, taking into consideration the financial status of each individual when deciding to pursue a claim. In some cases, the firm offers repayment schedules.

But the company also insists drivers must realise they assume significant risk by driving without third-party property insurance.

That’s a stance which is common across the industry. And in the absence of feasible alternatives, it’s likely to remain a case-by-case issue.

“The case in question has been reviewed extensively by Chartis and it has been decided that the individual, being 20 years of age, has good prospects of finding employment at some point in the near future and as a result will be in a better position to repay the claim,” a Chartis spokesman told insuranceNEWS.com.au.

“It is quite a common reaction for an individual at the focus of a claim to declare bankruptcy, therefore eliminating their responsibility to pay the claim.  

“While it is a short-term benefit for the individual, the negative consequences of declaring bankruptcy are often ignored or overlooked.”

Although a number of insurers like Chartis are continuing to uphold their legal rights, Mr Nelthorpe says others have now accepted that where a person has no assets and little income, there is little point driving them to declare bankruptcy.

He says he has examined the issue on behalf of community legal centres and financial counsellors, “and I have been genuinely surprised at how sensible most of the industry has been and how willing they are to accept the reality of the financial circumstances of a lot of clients”.

“The big players with a significant market share have all accepted that there is little point pursuing Centrelink recipients who have no assets.

“It is really only insurers who are new to the Australian market or small within the Australian market who tend to adopt the position of refusing to deal with the issue.

“That just gives the whole [insurance sector] a bad name.”

Mr Nelthorpe would prefer that all vehicles have third-party property insurance cover, rather than drivers having to rely on the sense and sensibility of insurers in the enforcement of their rights.

But a compulsory scheme is unlikely to ever gain insurers’ support. The common industry view is that it would turn many motorists away from comprehensive vehicle insurance, which is a consistent revenue source in a highly competitive class of business.

The SA Government’s attempt to introduce a compulsory scheme in the mid-1990s was lobbied against by the Insurance Council of Australia, which agreed to mount an expensive public education and advertising campaign to alert young drivers to the hazards of not having property damage cover.

As long as the insurers resist a compulsory scheme, the larger personal lines insurers will presumably continue to forgive the debts of those who can’t afford to pay.

For those individuals unlucky enough to be judged capable of servicing the debt, a long life of paying off the damage – or declaring bankruptcy – are just about the only options they have.