Is there a compensation culture?

The battle lines have been drawn. On the one side are statisticians, personal injury lawyers and claims farmers who declare the compensation culture does not exist. On the other are insurers, small business leaders and the Tories who are saying it has reached epic proportions and action must be taken.

The antis are claiming they are right because statistics from the government's Compensation Recovery Unit (CRU) demonstrate that for the last 12 months, employers liability claims fell by 15%, public liability claims by 17%, motor claims by 6% and clinical negligence claims by 11%.

Norwich Union spokesman David Ross is having none of this: "The recent report from Datamonitor says claims are falling. What the report fails to say is that from the time the accident management companies were set up, there was a massive rise in claims. We are now at a high level of claims and what is more, they are hugely expensive. These people also seem to have forgotten the actuarial profession's report back in 2002 which said the compensation culture costs the UK £10bn a year - I don't think this figure has fallen."

He goes on to say that insurers are not just trying to avoid paying claims. "In almost all cases we don't dispute liability. The problem is with a system that is paying 40% of costs to lawyers and one which is also not placing enough emphasis on rehabilitation."

Small business
Small business in particular have been hit by spiralling liability insurance costs.

The Federation of Small Businesses (FSB) has been lobbying the government since last year about the tactics used by claims management companies to canvass for business.

Peter Troy, Darlington branch chairman of the FSB, says: "You bang your head on a piece of wood now and you think, ‘who put that there? I'm going to sue someone', whereas ten years ago you would have just said ‘ouch' and gone about your daily business. Of course there is a compensation culture."

And the Tories say the compensation culture is a real threat to freedom. Shadow home secretary David Davis has blamed both over-regulation and the human rights act for current problems.

The government is in a tricky situation. Admitting to a compensation culture is highly negative - it does not want us to be seen as aping the worst excesses of the US. It points to the fact that the US legal system uses juries to award damages and that in the UK punitive damages are not imposed.

But, it does not want to see vast numbers of companies going out of business because they cannot afford employers' liability, or insurers becoming insolvent because they cannot pay claims.

Its response has been to launch an advisory group comprising some 30 government, public and private sector bodies which met for the first time last month.

Called the Action Group, its purpose is to advise an inter-departmental ministerial steering group, chaired by constitutional affairs minister David Lammy. It will oversee action to deliver initiatives identified in the Better Regulation Task Force (BRTF) report, Better Routes to Redress.

Urban myth?
The BRTF is independent, but government backed - appointments are made by the Minister for the Cabinet Office.

Its headline-grabbing report declared that the compensation culture is an ‘urban myth', with the media partly to blame.

But, it was not a total slap in the face for the insurance industry. It admitted there were vexatious claims and that claims costs could be high. For example, it was revealed that one council spent more than £2m out of its £22m roads budget on tackling compensation claims in 2003-4.

Recommendations include requiring claims management companies to operate to an approved code of practice, raising the limit from £1,000 to £5,000 for personal injury claims in the small claims court - this would reduce legal costs since only damages are paid using this route.

Stopping hospitals from displaying no-win no-fee advertising was a further suggested measure, as was looking at alternatives to conditional fee arrangements and placing greater emphasis on rehabilitation.

Cynics would claim that the BRTF has downplayed the true situation, since it knew its report would be high profile and the government would act on it. The last thing the government would want is for the situation to be seen as out of control.

And so, while the overall message being pushed was that claims numbers are coming down, it seems no one can deny that are concerns about the present system.

Risk management
There is no doubt that over the past five years, big steps have been made to improve risk management. This can be seen in many areas, from warnings on cups of hot coffee, to disclaimers having to be signed in gyms and even beauty parlours, to schools running formal risk assessments before organising trips and activities.

Personal injury solicitors were, in general, pleased with the BRTF's report. While they are not in favour of the small claims increase, they were approving of the view that the compensation culture does not exist.

David Hartley is director of Accident Line Services, the Law Society scheme which puts claimants in touch with a local solicitor. He believes that "The report got it spot on. There is not a mad rush of claimants despite the amount of advertising."

He adds: "In many cases spurious claims are being tackled effectively and we are not seeing tarmac replacing all our paving stones. Most personal injury claims are either backed by trade unions or by before the event insurers. Those using conditional fee arrangements are only a niche market."

Hartley agrees that the media has played a part in fuelling the situation and says claims farmers have also caused problems. "There may be less door to door canvassing, but there are still some out there."

He points to a further culprit for making for more fuss than is necessary - the insurance industry.

"Liability insurers tend to have a major problem with asbestos. They need to do whatever they can to produce savings and reduce the amount of litigation. But this does not mean that personal injury claimants should be disadvantaged."

Static figures?
Analyst Datamonitor supports the view that the out-of-control compensation culture has been over-egged. Last December, it produced a report that said that far from the UK being an increasingly litigious nation, general claim figures remain more or less static.

Even so, it agreed that costs have risen: "Escalating legal fees and advances in medical science have pushed up the cost of claims by almost 10% to an estimated £7.2 billion in 2004 alone." Datamonitor forecasts costs will increase by 40%, to £10bn in 2009.

"The level of media coverage that surrounds personal injuries claims has created a myth about the rise in their numbers, and there certainly is a degree of sensationalism about it, but the underlying trend is that claims numbers are falling," comments David Stephenson, financial services analyst at Datamonitor.

No matter how much the figures suggest claims numbers are coming down, there is no doubt that claims costs are of major concern to insurers and anyone who suggests to them that the compensation culture is dead in the water can expect to receive short shrift. IT

Who is in the Action Group?
From the government:

Prime Minister

Other organisations: