Doubled indemnity

After knocking back cocktails in a Soho bar for five hours, a twentysomething female professional wearing three-inch heels falls down the stairs on her way out and pulls a tendon in her ankle. Will she get a cab home, bandage up her foot and nurse her hangover? Or will she call her lawyer and decide to sue the bar for negligence?

It's clear that the UK is following American culture and becoming increasingly litigious. A recent BBC2 documentary, Sue You, Sir!, depicted solicitors who had resorted to standing at the gates of primary schools and encouraging children who'd fallen over in the playground to sue their teachers for lack of supervision. The public is being bombarded with messages from "no win, no fee" lawyers, urging people who have had an accident in the past three years to sue the person at fault.

"It seems that, regardless of how stupid you've been, solicitors have a method for getting money for you," says David Williams, UK head of claims at insurance firm Axa.

This trend is continuing in the workplace: employees are suing their companies for accidents as simple as falling off a chair.

"Everyone recognises that, if someone has a serious accident at work and the employer is at fault, a claim should be made against the employer's liability insurance," says Michelle Haste, a solicitor specialising in employment law at Jones Day Gouldens. "But there are grey areas. If someone swinging on a chair falls off and injures themselves and requires thousands of pounds' worth of physiotherapy, is the employer at fault?"

More claims mean higher premiums, and employers are footing the bill. Employers' liability insurance (ELI) has risen by as much as 1,500 per cent over the past year for some companies, according to Patricia Hewitt, the secretary of state for trade and industry, although the average increase has been 50 per cent. Employers pay around L70 annually for each worker insured. ELI costs British firms almost L1.8 billion a year, of which 40 per cent goes on legal fees.

Many employers are having problems finding affordable cover. Almost 210,000 firms in the UK do not have ELI, so around 1.8 million employees aren't covered if they have an accident at work, according to a survey by Axa. As Williams says: "If society wants a litigious culture, then it will have to pay for it."

Fears about the legal implications of high-level corporate fraud have led to large increases in directors' liability insurance premiums too. Commercial property insurance premiums have also risen by more than 20 per cent so far this year, according to insurance broker Marsh.

Despite making these premium hikes, the insurance industry is also suffering. According to figures from the Association of British Insurers (ABI), for every pound that UK insurers were receiving in premiums at the end of 2001, they were shelling out L1.47 in claims. Axa, for example, lost L86 million through ELI payouts in 2002.

About a million employees suffer work-related injuries each year, according to the 2002 Labour Force Survey. Since 1972, employers have been legally obliged to have ELI to cover them if an employee is killed, injured or contracts an industrial disease while working for them. This should also cover the claimant's costs and expenses; the employer's legal representation at a coroner's inquiry and in any court proceedings; and any costs and expenses incurred in defending a prosecution under the Health and Safety at Work Act 1974 and the Education (Work Experience) Act 1973.

The spread of compensation culture is not the only cause of the crisis. Falling equity markets have made it increasingly hard for insurers to offset their losses through investments. The terrorist attacks on New York and Washington in September 2001 exacerbated the situation, costing the global insurance industry L44 billion.

Williams also blames the reduction in the discount rate - a deduction made from the sum awarded for future loss in personal injury claims on the basis that the claimant will invest their damages award and increase the value of the original sum - from 4.5 per cent in December 1999 to 2.5 per cent in june 2001. This cost the industry more than L1 billion. But he says that Independent Insurance, which collapsed in june 2001, was keeping prices artificially low, so premiums were bound to increase.

The Office of Fair Trading is now investigating the main causes of the ELI premium increases, while the Department for Work and Pensions is considering the case for reform. One option for helping to reduce premiums would be to take industrial diseases of the past asbestosis, for example - away from most of the ELI policies and shift the responsibility for these to the government. But many groups are concerned that any proposals won't go far enough. For example, Mike Ross, chairman of the ABI, told the association's conference in April that fundamental reforms were needed.

"The current system benefits no one. Claimants are uncertain about their entitlements, employers have to pay rising premiums, rehabilitation is still undervalued and insurers are battling with massive claims inflation. The status quo doesn't work," he told delegates. "But I doubt that we need extra regulation; we need better regulation."

The CBI believes that the situation cannot be resolved until compensation culture is curbed. "One of the biggest issues is that people are more aware of their rights and more willing to take legal action," says Digby Jones, the CBI's director-general. "That is not in itself a bad thing, but it makes it even more important to stop abuses of the system."

Jones has called on the government to require claimants to bear a greater share of the costs if they lose a case to discourage the "have a go" mentality and to introduce a pretrial arbitration procedure to filter out frivolous claims and thereby ensure that only genuine cases go forward.

But employers themselves have a crucial role in cutting the costs of ELI. As with car insurance, no-claims bonuses are common. "If employers protect themselves from litigation through good risk management, they can save money on premiums," Williams says.

Some steps that employers can take are very simple - for instance, requiring employees to sign for protective clothing and equipment. "This will prove that they received it, and they are also more likely to wear it if the procedure is more official than someone simply passing around goggles," he points out.

Developing policies for certain aspects of the employment law relationship, such as unfair dismissal and breach of contract, could also help if an employer finds itself in court, according to Haste. "If an employer has put in place proper processes and procedures to deal with any employee complaints, a tribunal will be swayed by this to either find in the employer's favour or at least reduce any penalties," she says. "It gives the impression that the employer has thought seriously about risk and how it deals with this."

Even if an employer has made several claims in the past, it can still reduce its premiums, argues Chris Beer, managing director of the Resources Connection consultancy. "If you can show that remedial action has been taken in the area affected by previous claims, and that you have eliminated the risk, you can usually manage any increase in premiums," he says.

Shopping around for insurance companies does not automatically reduce premiums, Beer points out. "There is a fairly standard set of commonality with premiums. What employers need to aim for is a relationship with their insurer in which they can explain what they have done to improve risk management and negotiate over any further measures that are needed and the premium. It should be an open-book partnership."

The mood of conciliation between business and the insurance industry is getting stronger as both sides realise that they must work together to reduce the pressure. Improved risk management in firms will result in fewer claims, a healthier balance sheet for the insurance industry and lower premiums for businesses. But, until the message filters through to those who see suing their company for accidents that were probably their own fault as a chance to increase their incomes, the only people who will really benefit will be the lawyers.