Ministers must combat the crisis before it gets worse, Lord Hunt says

Ministers must act now to solve the liability crisis. Sometimes their officials advise that the problems could go away. They won't. They will get much worse if nothing is done. The average value of an employers' liability (EL) claim has trebled in the past six years. How right the ABI is to urge the government to consider fundamental reform of workplace compensation. The current system is placing intolerable strains on the liability market.

The primary function of EL is to ensure that victims of workplace injury and illness receive compensation, where they can establish that the injury is a result of negligence or breach of statutory duty on the part of the employer. It is a criminal offence not to take out EL insurance. There is, however, no civil remedy if the employer fails to take out the insurance. It is believed that many small businesses that struggle with new premiums are working without cover, thereby endangering their business and their employees.

The current EL crisis stems from a number of factors. The 11 September attacks have been considered a catalyst for these increases, but it is also because the UK is developing more of a compensation culture. Personal injury claims and the cost of these claims are escalating alarmingly, with legal costs now reaching 40% of the total. This is unacceptable. There is also the overarching problem of occupational disease, such as asbestos, which has a long latency period. Insurers now face a daunting task when trying to set EL premiums. They cannot accurately predict how many claims will occur or when.

Currently businesses are seeing their EL premiums rise substantially. The insurance industry is aware of the problems this could cause but, with asbestos becoming an ever-greater burden, they must prepare their reserves for future payouts. There is now even greater pressure on firms to comply with health and safety regulations. This is more of an issue as the H&SE Control of Asbestos at Work Regulations 2002 came into force on the 21 November.

Biba has also proposed possible solutions to the EL crisis. They include transferring to a no-fault system, capping liabilities, reforming the current EL law and getting small firms to be more health and safety conscious.

All industry bodies must consider drawing up the best possible solution. We should choose the best features of the various workmans' compensation schemes in place across the globe. Combining state benefits and liability costs would introduce a positive partnership between the insurance industry and the government. We must find a system, which will give fair compensation within a scheme that is affordable.

Lord Hunt is senior partner of national law firm Beachcroft Wansbroughs