Surge in ‘nervous shock’ claims fuels push for national reform

With mental illness-related compensation claims almost doubling since 2018, pressure is mounting on Australia’s insurance and legal systems, as two senior lawyers at a global law firm unpack what’s driving the increase and how the system must evolve.

A recent report from the Insurance Council of Australia (ICA) has revealed a sharp rise in “nervous shock” claims, with data from the Transport Accident Commission of Victoria showing a 15 per cent increase in 2024 alone.

While nervous shock claims aren’t always recorded as a separate category, the report’s broader analysis of mental illness-related claims tells a similar story, rising from 25 per cent of all claims in 2019 to 44 per cent in 2024.

Despite this surge, Hugo Thomas, special counsel at Clyde & Co, cautioned that there is no “conclusive answer” for the rise in both the number and cost of nervous shock claims.

Instead, he explained that the rise is driven by a mix of overlapping trends, including greater “awareness of mental health and mental illness and its impact on individuals and society”, “an increase in advertising for legal services”, heightened awareness in the ability to bring a claim for nervous shock”, and “the increased cost of defending claims”.

However, Thomas warned the more concerning factor behind the rise is the growing number of medical professionals who are “willing” to diagnose a recognised psychiatric injury even “where circumstances may not warrant such a diagnosis, or where prevalent pre-existing injuries are overlooked”.

This trend has created a complex challenge for insurers, who must balance supporting genuinely affected individuals with safeguarding the system from opportunistic or inflated claims that ultimately drive up premiums.

David Lee, partner at Clyde & Co, stressed that “early investigation and assessment of each claim” is crucial for insurers to establish a claimant’s “legitimacy”, gauge their “entitlement” to bring a claim, and accurately estimate the “damages payable”.

Even with these measures, insurers face a significant structural hurdle, as each state and territory handles nervous shock claims differently.

Thomas pointed out that the biggest inconsistencies across jurisdictions involve the “definition of who can bring a claim under the relevant legislation” and how “awards for general damages or non-economic loss”, such as pain and suffering, are assessed.

To address the rising tide of nervous shock claims in Australia, pressure is mounting on the government to introduce national reforms aimed at tackling this complex and growing problem.

Specifically, Thomas argued that the most crucial reforms are needed to establish a consistent national framework, ensuring that only genuinely meritorious claims of nervous shock receive compensation.

Recognising the inconsistencies in the current system, the ICA has expressed strong support for a unified approach, with Thomas noting that the organisation has put forward key recommendations, including:

• “Amended Civil Liability legislation in Australia to impose a higher threshold for claims for nervous shock to access non-economic loss,” he said.

• “Excluding access to common law compensation for nervous shock by a third party that has not sustained the primary/initial injury.”

Looking ahead, Lee highlighted how a national approach could benefit both claimants and insurers by streamlining the claims process, delivering clearer outcomes, and helping to curb premium increases.

“A national uniform approach would reduce the time and complexity involved in assessing claims, leading to better, clearer outcomes for claimants, and would go some way towards reducing the likelihood of premium increases,” Lee said.

“Depending on what wording is ultimately included in such legislation could also limit the number of claimants (by only allowing claims be prescribed categories of claimants), limit the heads of damages awarded, and cap the maximum award for certain injuries.”