A leading government think tank is set to propose a move to a US-style compensation system in a report to be published next week.

According to a senior legal source, the Better Regulation Task Force will suggest that contingency fees - prevalent in the US - could be used to fund litigation.

The Task Force is chaired by David Arculus, chairman of Severn Trent. The study is due to be published on 27 May.

The source said: "The Task Force concluded that conditional fee arrangements (CFAs) have not been successful, as they add to costs and claimants do not share in the risk of litigation if they have after-the-event (ATE) insurance. Contingency fees would pass responsibility for legal fees to claimants."

Under contingent fee arrangements, legal fees are based on a percentage of the final award of damages. This contrasts with conditional fees schemes under which the level of claimant lawyers' fees are not tied to damages.

Insurers fear that such a move would lead to increased damages awards. Allianz Cornhill claims director Jonathan Dye said: "It would encourage lawyers to inflate claims. I experienced contingency fees in the US and it wasn't good - but they have jury trials and punitive damages. Perhaps in a more sane claims environment, it would be less dangerous."

But claimant and defendant lawyers are more positive about the use of contingency fees. Jeremy Brooke, partner at claimant law firm AMS Law said: "It would take away the complexity and bureaucracy of conditional fee arrangements. But it shouldn't be rushed in, as it could diminish access to justice. There would be less incentive for lawyers to take low value claims."

Forum of Insurance Lawyers president Claire McKinney said: "There is logic in contingency fees, as it would increase certainty as to legal costs."