The cost of the UK's increasingly litigious culture is to be investigated by the Better Regulation Task Force.
The government watchdog said litigation was the driving force behind steep rises in premiums for employers' liability cover.
The study is set to examine whether lawyers should be paid a fixed-fee tariff, or whether compensation payments should be needs-based.
It will also examine whether compensation costs could be curbed by the use of rehabilitation.
Task force chairman David Arculus said: "Fear of litigation can make businesses and public sector organisations improve their performance, but it can also put a huge drain on resources - both in time and money - and result in over-cautiousness."
The CBI welcomed the study, claiming that the dominance of legal costs for businesses could not be easily justified.
CBI director general Digby Jones said legal costs in all areas of liability were quite "unacceptable".
"A growing have-a-go mentality means too many claimants are launching dubious cases in the hope of a pay-out.
"This creates a huge burden for companies who often find it cheaper to settle out of court, even when right is on their side.
"This is fuelling huge rises," he said.