Psychological injury and third party nervous shock claims are increasingly featuring in medical negligence and personal injury matters and Meridian is seeing both their frequency and damages grow.
Against a backdrop of rising claims costs and renewed calls for civil liability reform, this Insight takes a closer look at how these claims are being advanced and assessed and what proposed reforms may mean for the future.
Key takeaways
- Psychological injury is a major driver contributing to claims costs growth; these claims are often more difficult to assess and manage, can emerge well after the initial incident, and commonly lead to delayed payments and longer claim durations.
- The Insurance Council of Australia’s recent Insurance Catastrophe Resilience Report proposes reforms for psychological claims that include: assessing damages by reference to the most severe physical/psychological injury rather than a combination of all injuries; requiring disputed whole person impairment (WPI) to be determined by a court appointed independent psychologist/panel; and limiting recovery for the psychological component where treatment is not obtained within 12 months of the injury.
- Despite currently limitations, nervous shock claims are still expanding exposure well beyond the primary victim.
- Momentum for reform is building and international approaches show courts grappling with the appropriate scope and thresholds for recovery.
The need for reform
In acting in medical negligence and personal injury matters, Meridian has observed an increase in the frequency of psychological claims and in the number of third party nervous shock claims. In practice, most of the claims we now see involve some psychological component.
This trend appears to resonate across various areas of law. For example, the Council of Australian Life Insurers and KPMG Life Insurance have reported that permanent disability claims for 30 to 40 year olds have increased by 731.7% in 10 years from 37.9 per million in 2013 to 314.9 per million in 2022.[1]
What is particularly concerning is the substantial rise in damages attributable to these claims, with little indication that the upward trend is moderating. The Australian Prudential Regulation Authority has reported that bodily injury claims (including claims with a psychological component) represent the largest contribution to claims cost growth as they have risen by an average of 5.5% each year since 2013.[2]
With the increasing cost and frequency of these claims, it is arguable that urgent reform is required to curtail these increases. Internationally, reforms have already been introduced to restrict the extent of these claims. In 2017, the Supreme Court of Canada held[3] that plaintiffs did not need to lead evidence of a psychiatric diagnosis or expert medical evidence; instead the focus should be on whether a plaintiff has suffered a serious and prolonged disturbance rising above the ordinary norm. The Court considered this approach would help to curtail unmeritorious or trivial claims. In 2024, the United Kingdom Supreme Court went further and determined[4] that only in rare circumstances can a secondary victim claim be brought in a medical negligence case, effectively ending most of these claims.
In October 2025, the Insurance Council of Australia (ICA) published its second annual Insurance Catastrophe Resilience Report titled ‘A Sustainable Public Liability Insurance Market in Australia: The Case for Civil Liability Reform’ (the Report).[5] The Report notes that it has been approximately 23 years since the last significant review of civil liability in Australia, being the 2002 Review of the Law of Negligence (known commonly as the Ipp Review). It argues that ‘…expansive judicial decisions, a more litigious society, an active plaintiff lawyer environment and increasing claims costs particularly resulting from psychological injury claims’ have all rendered those past reforms ineffective’.
This raises an important question: is it time for a new round of reform in a new era of claims? Below is an outline of key reforms proposed by the ICA in the Report.
Psychological Claims
Meridian’s experience that psychological claims are more frequent and that the damages attributable to these claims are more substantial is also reflected in the Report. It references SafeWork Australia data indicating that psychological claims can cost four times as much as physical injury claims.
Part of the difficulty is that psychological injuries often manifest and are assessed differently to physical injuries. Physical injuries can, at least to some degree, be assessed objectively by medical professionals and are typically more acute in nature, arising at or shortly after the incident. However, psychological injuries rely more heavily on the injured person’s reported symptoms and can develop long after the initial incident. Where these injuries arise later, this may contribute to delays in payments and longer claim durations.
Against that backdrop, the ICA recommends a three-part reform package:
- In common law claims involving physical and mental/psychological injuries, damages should be assessed based only on the more significant injury rather than a combination of both physical and psychological injuries.
- Where the level of psychological whole person impairment is disputed, it should be determined by a court appointed independent psychologist/panel.
- The psychological injury component should only be considered where treatment was obtained within 12 months of the initial physical injury.
Third Party Nervous Shock Claims
While most claims are restricted to the person directly involved or injured, nervous shock claims can be brought extensively by other third parties, even where some states have restrictions in place. This is particularly prevalent in medical negligence and aged care cases.
The Report highlights a matter involving the death of an elderly hospital patient in which at least 12 nervous shock claims were brought including by the spouse, four children, each of the children’s spouses, all grandchildren, and the girlfriend of one grandchild. The cases appear to have been brought despite none of the claimants having sought medical treatment. The cases were based on uncorroborated accounts given by a psychiatrist engaged by the claimants in the matter. Having noted this matter, the Report recommends two alternative changes in order to minimise the increasing cost of nervous shock claims:
- Further restrict the eligibility of third parties who can bring a nervous shock claim, for example, by requiring the claimant to have been present at, or a direct witness to, the injury or incident.
- Alternatively, limit compensation for nervous shock to third parties who sustained a primary/initial injury.
Conclusion
Psychological claims and nervous shock claims are prevalent areas in which the frequency of claims, and the cost of these claims, has risen considerably. The practical experience of insureds facing rising premiums, anecdotal evidence regarding the volume of claims, and actuarial data demonstrating persistent and seemingly unending increases in claims costs, all point to the need for legislative reform.
Further information
This article was written by Meridian Lawyers’ Special Counsel Steven Canton and Principal Lawyer Marianne Nicolle. For further information or advice, please contact Steven, Marianne or a member of Meridian’s Health Law team.
[1] https://www.abc.net.au/news/2024-12-05/workers-mental-health-insurance-claims-spike/104682336
[2] https://in-magazine.com.au/the-pain-and-perils-of-public-liability/
[3] Saadati v. Moorhead 2017 SCC 28
[4] Paul and another v Royal Wolverhampton NSW Trust [2024] UKSC 1
[5] https://insurancecouncil.com.au/wp-content/uploads/2025/10/Civil-Liability-Report-October-2024.pdf
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