Insurers and brokers agree there's a crisis with employers' liability cover. But they can't agree on how to solve it. Rachel Gordon reports

Working always has and always will be potentially dangerous. From the industrial revolution, when children were mangled in mechanical looms, to present-day clerical staff suffering the effects of RSI, injuries and accidents are bound to happen.

As Britain developed its social reforms, workers still faced dangers, but gained increasing protection. The early Factory Acts were hard to enforce, but were precursors of our current legislation.

In 1825, local magistrates were supposed to ensure children under 16 worked no more than 12 hours a day. Then came a series of Workmen's Compensation Acts and gradually insurers stepped in to provide an all-encompassing system, which became law under the Employers' Liability Act [1969].

Now it is insurers who face danger. Scarcely a day goes by without a press update on the so-called insurance crisis. Biba chief executive Mike Williams is centre stage, master of a public relations coup, as his trade body seeks to offer remedies and reassurance.

But many insurers are silent. Some are doubtless relieved that Williams is occupying the media stage, while they ponder the mess employers' liability (EL) is in and ask whether it can be cleared up.

The problem is summed up by Paul Meehan, managing director of Harrogate broker Smart & Cook: "We're dealing with a model that is fundamentally bust. Insurers are paying claims from more than 30 years ago that even the brightest actuary would have been incapable of pricing or reserving for."

Brokers too are in trouble. "It's a case of using your buying power, which makes it far harder for smaller brokers. We're finding we can quote for many cases, but it's often a case of relying on an existing relationship with an insurer," says Meehan.

Biba is calling for legislative change to ease the situation. This was top of the agenda at a recent ABI conference, which focused on the plight of smaller, higher risk firms that find it almost impossible to obtain cover. Whether or not there will be any action is another matter.

Off the record, those who have had Treasury meetings admit the government is loathe to get involved. It wants to let market forces handle it. The only way new legislation might come about is if there were another Independent-style collapse, or if lack of cover forced widespread numbers of businesses to go under.

Meantime, the industry must set out a clear agenda and keep lobbying for change.

Intolerable crisis

ABI head of general insurance John Parker describes the current situation as "intolerable" and has argued for a single benefit incorporating EL and the state-funded industrial injury disablement benefit.

ABI spokesman Malcolm Tarling says: "We're certainly not expecting immediate changes, but we can see benefits in moving to a no-fault system, although this in itself is not perfect and could lead to higher incidences of fraud. While there are advantages in a pooling arrangement, I don't think the government would want another Pool Re. Whether or not changes are made, we must continue to develop higher rehabilitation standards."

No fault is one of the solutions being mooted and industrial injury disablement benefit is paid on this basis, as were claims under the Workmen's Compensation Act.

Zurich casualty manager Jamie McNab says: "These systems are in operation in much of Europe, Australia, New Zealand and the US. Typically, an injured employee would be paid by his employer for a specified period before the insurer stepped in. He would then be paid a monthly or weekly benefit - around 60%-80% of his salary - until he was able to return to work.

"It is likely to mean quicker payouts and should allow rehabilitation to start earlier. Lawyers would also benefit less. EL insurers pay out around £1bn a year in claims and about £400m goes to lawyers."

Parker points out that the current systems of EL and industrial injuries disablement benefit cost around £700m a year each, but the cost of a single system, taking into account possibly higher fraud and reduced legal costs, has yet to be assessed.

Other solutions suggested by Biba range from pooling arrangements for higher risk groups, to a reinsurance pool, perhaps financed by a market levy on premiums. It has also suggested retro cover via an Equitas-type arrangement. A further choice is for awards to be capped, meaning insurers could better plan for liabilities.

But these changes remain speculative and, meanwhile, the crisis continues. Kennedys partner Kieron West says: "The present system is almost no fault, in that some diseases - asbestosis is an example - are almost impossible to defend, although stress is an area where we can mount an effective challenge. Capping awards is one area to be looked at, although the government will be reluctant to intervene. But with a disease such as mesothelioma, an asbestosis-related cancer, awards can vary from £100,000 to £1.5m. There are now fewer people contributing to the pool, yet there is a time-bomb of cases out there. We may end up going full circle and back to a workmen's compensation-style, state-run scheme for these types of cases."

But there is an argument that insurers have simply messed up and must face the consequences. Tom Jones, a partner at personal injury solicitors Thompsons, says his firm represents 70,000 TUC claimants, winning 98% of cases.

Costs spiralling

He argues: "This whole issue is scaremongering. The stories about the compensation culture have not been backed up. We are dealing with the same number of cases and I would like to see figures from insurers showing the situation is out of control and costs are spiralling.

"Insurers need to be more selective. In the case of genuine claims, the insurer should deal with it. It is not the victim's fault if cover was underpriced. Insurers are stoking the fire of fear, saying lawyers are cackling all the way to the bank. This is untrue.

"It's time for insurers to stop this sideshow - the result combined with press stories is just winding people up," says Jones.

The Association of Personal Injury Lawyers says it believes changes to EL are necessary. Lorraine Gwinnutt, press and parliamentary manager, says: "We're aware EL insurance does not work in the way we want it to work, in terms of improving standards of health and safety in the workplace. We're currently looking at recent Health and Safety Commission research on the issue and have a meeting planned with insurers within the next few weeks.

"We've always said the insurance industry could play a bigger part in improving health and safety and we believe EL insurance could play a key part in this. There's no reason why EL should not operate in the same way as motor insurance. If a firm has a good safety record and assesses risk accurately and responsibly, it should have a lower premium."

Pay or be damned is certainly the short-term option. St Paul general manager David Bevan believes rates will continue to rise until the industry can make a profit or at least break even.

"Companies will have to realise they will need to pay premiums that are far higher and they will need to pass those costs on to their customers," says Bevan.

And, despite shrinking capacity, the big players insist they are not pulling out.

Zurich's McNab says: "As EL remains the law of the land, we'll be dealing with it as it stands and our message to brokers is we're here to stay." N

The growth of employers' liability

1897 First workmen's compensation Act is introduced and amended in 1906

TUC drafts further amendments to Workmen's Compensation Bill. This seeks compulsory insurance by employers to cover risks to their employees, so that injured workers and persons suffering from diseases contracted at work are provided for. The Bill is presented to parliament as a Private Member's Bill on several occasions in the 1930s, but never reaches the statute book.

Labour government passes Industrial Injuries Act [1946], enforced from 1948, allowing no fault benefits

Employers' Liability Act is passed, enforceable from 1972. Places duty on employers to take out and maintain approved insurance policies with authorised insurers against liability for injury or disease sustained by employees during employment.

Pneumoconiosis (Workers' Compensation) Act [1979]: Compensation for dust diseases. Act aimed at those unable to claim damages from employers where the dust exposure that caused the disease occurred.

Walker v Northumberland County Council - landmark ruling on stress.

Introduction of the employers' liability regulations, employers to keep their certificates for not less than 40 years, starting with certificates issued in 1999. Minimum limit of cover required by employers is lifted from £2m to £5m. Most policies issued to a standard limit of £10m.

Collapse of Chester Street. Partnership between insurers and government. Insurers to fund payments for the Financial Services Compensation Scheme (FSCS), set up particularly for those affected by asbestos and where an insurer becomes insolvent.

Government announces temporary extension of the Pneumoconiosis (Workers Compensation) Act [1979], to allow claimants affected by the decision to receive compensation. Maximum payment under the scheme is about £55,000, significantly less than from a successful civil claim for damages.

Fairchild ruling. Courts impose duty on insurers to pay compensation where the individual affected by asbestos worked for a number of employers. Expected to cost the insurance industry between £6bn and £8bn. Asbestos is the greatest single cause of work-related deaths in the UK, according to the HSE. It expects mesotheliomas to peak at around 3,000 per year by 2020 and predicts that one in every 150 men born in Western Europe between 1945 and 1950 will die of the disease.