The liability crisis is closing down businesses. Christine Seib asks whether there is a solution in sight

It's official - Liability is in trouble. The government knows it, insurers know it and companies know it. But there is much less consensus on how to fix it or, indeed, whether it needs fixing.

The difficulties in obtaining affordable liability cover faced by companies, particularly in unpopular sectors such as scaffolding, roofing and demolition, have been well documented.

For all companies, employers' liability (EL) has proved much less popular than its bedfellows - professional, product and public liability - with rate increases of up to 1,000% for small companies and between 40% and 200% for their larger counterparts.

Some companies claim they have not been able to find EL cover at all and, faced with contravening the Employers' Liability (Compulsory Insurance) Act [1969], have been forced to shut up shop.

The Broker Network managing director Grant Ellis can testify to this. "Each of our 100 members says it has two or more companies that have gone out of business over liability cover recently," he says.

It does not take rocket science to figure out why cover is expensive, if available at all.

RJ Wallace is the biggest non-US liability syndicate in Lloyd's. Active underwriter Bob Wallace explains the unpopularity of liability lines, and particularly EL: "It's a free market, so when capacity is as limited as it is at the moment, the first thing a prudent underwriter will do is allocate capacity most likely to produce a profit."

That certainly is not the case with EL. A number of Lloyd's syndicates and company market insurers have pulled out of writing liability altogether. Others have placed stringent rules on what sectors they will cover.

British Insurance Brokers' Association (Biba) chief executive Mike Williams puts it succinctly: "They're saying, on a selective basis, `enough is enough'.

"They can't go on subsidising UK plc forever."

And, as Heath Lambert executive director David Barnes said at the recent Association of Insurance and Risk Managers (Airmic) conference: "Those left in the market can choose their price".

Who can blame them? They have received a flogging from every side. Long-tail diseases like asbestos and newly recognised and costly medical problems like stress continue to cost liability insurers heavily. They have also been hit by rising numbers of bodily injury claims, damage awards and legal costs. Liability insurers have started to refuse to bleed money to cover a class of business the government has decreed compulsory.

This is where opinions diverge. The Association of British Insurers (ABI) is in talks with the Treasury over the problem. ABI general insurance head John Parker said the association has put the view forward that the current EL system is "unsustainable", but warns that immediate action is unlikely.

"It's unrealistic for a government to tackle this issue mid-term," he says.

EL does not come under the Treasury's jurisdiction. It was originally under the Department of Transport, Local Government and the Regions. When the department was split, it remained with the Department of Transport, although the EL Act is enforced by the Health & Safety Executive.

A department spokeswoman says: "We're aware of difficulties in the insurance market at the present moment, but these are expected to ease over time."

Insiders in the department say this is because insurance is seen as a cyclical business that can improve its absorption of liability risks as capacity improves.

Wallace has other ideas. He predicts the situation will worsen, with next year's renewals even more strict than this year.

"I think it's going to get worse, much harder still for people to buy EL," he says.

"There's no sign of anyone new saying they want to write EL, there's no sign of any real appetite."

Wallace says government intervention is needed, although he is not hopeful that this will actually happen.

"The government needs to introduce some changes that make it more attractive to write EL," he says.

Royal & SunAlliance (R&SA) is known as the only large insurer still to be writing large construction all-risks policies. R&SA technical insurance manager Phil Bell says any change to the system needs to be discussed between all parties.

"We need government support to change the law and it needs to address the needs of all stakeholders, not just insurers but employers and employees," he says.

"If we're going to replace it, we have to replace it with something better."

Wallace says the UK needs to take a leaf out of Australia's book. Within six months of noticing a similar squeeze in its own liability market, the Australian government introduced laws gearing legal fees to the size of claims and limiting damages.

"It sets a tone that says society cannot continue to bear this cost,' he says. N

Family businesses on the brink of ruin

Alastair Mill's voice comes close to breaking when he speaks about his family businesses Scotia Handling Services and Scotia Rigging Services.

"I've never in my life felt so depressed," he says.

"I've put heart and soul into this business."

The two companies specialise in lifting tackle, load testing and stainless steel rigging.

They are the favoured suppliers of a number of highly regarded companies, including Amec, Balfour Beatty and Tarmac.

Yet Mill will have to close his businesses and lay off his 14 staff if he cannot get affordable liability cover by tomorrow.

He paid £2,037 for his employers', public and product liability cover with Trenwick last year.

Although Mill admits he may have been underinsured, because he suspects his broker did not fully understand the nature of his business, he was shocked when his broker told him that this year, he could not get cover of any kind, at any price.

After further phone calls by his broker, he received a quote from RJ Wallace for £35,000.

Mill says he will be forced into debt if he cannot find a cheaper quote.

"Over the last 15 years, I've run this business in the black, I've not borrowed money from anyone and I don't want to start," he says.

"This unbelievable situation becomes ironic in the extreme when you consider that in the last 20 years, Scotia has not made one claim against any of these policies."

Mill has written to his local MP Irene Adams and faxed Prime Minister Tony Blair to alert them to the difficulties some businesses are experiencing in finding liability cover.

Motivation for better health and safety
Higher employers' liability (EL) insurance costs would motivate UK employers to improve health and safety and push for rehabilitation, a Health & Safety Executive (H&SE) report says.

"Changing business behaviour: Would bearing the true cost of health and safety performance make a difference?" was released by the H&SE earlier this year.

It reports that the UK EL system is "not designed to motivate health and safety or rehabilitation", unlike the US, Canadian, Australian and German systems.

It says Germany prioritises rehabilitation over compensation by limiting compensation to loss of earnings after rehabilitation and retraining, while the US, Canada and Australia operate no-fault schemes with capped benefit levels to reduce legal and compensation costs.

The report says most large and medium-sized companies believe the cost of their EL cover is related to their health and safety performance, but most small firms do not.

"If the cost of EL were to increase significantly, the majority of firms would attempt to improve health and safety, contest claims, improve rehabilitation and avoid the recruitment of previously injured persons," the report says.

"About half would consider changing insurers to reduce costs."