Zurich Municipal, the UK's leading insurer of local authorities, has admitted the soaring claims burden is losing it premium volume as more councils opt for greater self-insurance.
A spokesperson said that claims against councils had now risen to £800m a year, up from £200m in 1993, and would soon top the £1bn mark.
School bullies could be the next claims headache for insurers after the recent spate of dyslexia claims.
Currently, Leah Bradford-Smart is claiming £75,000 in damages against West Sussex county council because she suffered bullying at school.
Back in July, Pamela Phelps successfully sued Hillingdon borough council claiming an educational psychologist employed by the council had failed to diagnose her dyslexia.
The House of Lords had decided to allow former pupils suffering from dyslexia to sue the school if it failed to recognise the condition.
Spokesperson David Forster said most local authorities were now taking larger excess and implementing risk management rather than opt for higher insurance premiums.
“The cycle of more claims, more insurance, is not the answer,” Forster said.
“Premiums haven't gone up but they've taken out less and less conventional insurance and moved into self-funding.”
Forster estimated ZM, which has a 60% market share, was involved in more than 100,000 cases each year, covering issues such as local authorities' failure to provide appropriate care and failure to cater to special needs.
Andrew Cooper, partner at law firm Weightmans' public sector division, said more claims against local authorities would follow the bullying judgment.
“Defending these actions will prove costly and time-consuming for authorities, who are faced with bills for damages out of their own pockets,” he said.