Francis Higney reports on the background to employers' liability and analyses key sectors where insurers have been forced out by rising claims
There is no doubt that Britain is firmly in the grip of the compensation culture. New statistics show one in six Britons now consult lawyers over physical or emotional injuries, as against one in seven in the US.
It means the employers' liability (EL ) market in the UK is now in danger of coming off the rails - so much so that Railway Safety, which provides administrative support for the Wheel Rail Interface Systems Authority and the Train Protection Warning System Interface Authority, have been refused cover. Insurers said they were not "a viable risk".
It is a situation reflected throughout industry, with small and medium-sized enterprises in particular sectors claim rising premiums are forcing them to go out of business.
But all the blame cannot be laid at the door of the insurance industry. It is merely reacting to cultural and legislative changes in recent years that have squeezed profitability in the sector. The demise of Independent Insurance also had a big effect on the EL market.
"Some of the insurers who took on Independent's business are now asking themselves `just what have we taken on?'," says Biba chief executive Mike Williams.
"They are left holding a book of often poorly underwritten business at a time when the stock market has collapsed and in an environment of raging claims inflation and new kinds of claim. You can't blame companies for simply walking away - drastic problems require drastic solutions."
But turning your back on this business, as some insurers have done, can't be the answer. Biba has come forward with an imaginative package it would like to see adopted in order to cap claims.
However, the government appears to have turned a deaf ear to Biba's call for a revamp of the current law regarding EL.
Here we examine those areas suffering most and the action being taken to reduce claims.
Work on public sector construction projects such as schools and hospitals could grind to a halt because builders are struggling to get EL insurance. The National Federation of Builders, which represents almost 3,500 medium-sized contractors and small builders, says fewer insurers were quoting for "high risk" areas such as demolition and scaffolding.
This month it emerged that thousands of small companies are trading illegally or facing closure because they could not pay soaring insurance premiums.
Barry Stephens, the federation's director of policy and planning, says: "If the crisis continues, the construction industry could lose hundreds of contractors, at a time when demand - particularly from public sector clients - is at an all-time high."
Dave Harrhy runs Rushar, a scaffolding company based in Gwent, south Wales, and has seen his insurance premium - covering employees and public liability - rise from £16,000 last year to £59,500. "My concern is that although EL insurance is a legal requirement, some firms will just trade without insurance," he says.
Premium rises have averaged 70% in some areas. Insurers say pricing has been too low in the past and claims are rising.
Children's and care homes
Insurers are increasingly worried at the growing number of abuse claims coming to light and the High Court costs awarded against those found to be in breach of their duty of care. They now insist on better risk management in homes and lay down strict sets of procedures governing key areas like the hiring of staff.
They also check that all legal statutes are adhered to. If homes do not meet the standards required by the insurer, cover will not be renewed. In some cases insurers are withdrawing from this sector of the market altogether because of the amount of new legislation in the pipeline.
The case of Gogay v Hertfordshire C.C demonstrated that an employer has a duty of trust and confidence implied in a contract of employment. Gogay was a care worker suspended after a child made an allegation of sexual abuse against her. An investigation cleared Gogay but she had a breakdown as a result. The court found the employer in breach of its implied duty of trust and confidence in suspending her. She was awarded damages of £26,000. Andrea Ward, a partner at law firm Crutes, says: "Claims for children who have been sexually abused in homes has exploded over the past few years and the [time] limitation issue is effectively being ignored by the courts."
Schools and children's activities
Here, too, insurers are frightened at the growing number of abuse claims. AXA's casualty insurance manager David Williams says: "We have a huge claim from 1972 on the go. Currently, the worry is that more could come out in time."
Increases in premium are being compounded by a relatively new litigation, failure to educate. There is also bullying. Parents are bringing actions against organisations, which they believe have failed in their duty to protect their children.
The problem for the insurer is that once a court has found that an employer's behaviour amounted to bullying, harassment or victimisation, it is easier for the claimant to establish foreseeability, paving the way for an EL claim.
Insurers must also be aware of the possibility of teachers and supervisors suing for stress. The National Association of Head Teachers found that in a survey of members in Warwickshire, 40% of respondents had visited the doctor with stress-related problems in the past year, with 30% taking medication.
Insurers are encouraging insureds to immediately notify them of any employment claim where stress, bullying, harassment or discrimination is alleged, so they can protect their position.
Hotels and shops
The increasingly litigious nature of society is building up slip and trip claims to an astronomical rate.
This trend is already causing insurers to look away from rating according postcode and sum insured, and considering liability issues separately.
While good news technically, if costs continue to escalate, it will affect insurance costs which will need to be passed on to the customers.
Paul Williams, head of business insurance at high street broker Hill House Hammond says: "People have become far more aware of their rights and the courts support them on this. It will take several years for a lot of these claims to come through.
"But insurers are having to reserve against them at the moment and that is driving up premiums."
EL for shops is usually written as part of a wider insurance package - unless it is a major shopping mall where it will command a separate policy of its own.
If you employ anyone, you are required by law to arrange EL cover. You can be fined £2,500 per day without cover by the HSE for failure to comply.
Pubs and bars
Zurich offers EL insurance to some of the major pub chains in the country. EL head Richard Nicholls said the sector, in common with others, was seeing an increase in premiums of between 40%-60%.
"All claims are priced upon claims expectation and their attitude towards health and safety in the workplace," he says.
Traditionally, there are two specific areas where claims can be expected; slips and trips and back injuries.
"Our difficulty is the cost of claims have increased so sharply, going up by more than 30% in the past year," he says.
There is also a sharp rise in the number of public liability claims in this sector.
"People are much more aware of the potential to make a successful claim and there has been a marked rise in claims frequency," says Royal & SunAlliance commercial liability underwriting manager Helen Hatcheck.
And AXA's Williams believes there is the potential for suing someone for allowing you to drink too much (and subsequently injuring yourself or someone else).
There also exists the possibility of an EL problem for employers with staff working in noisy clubs and bars suing for acoustic disorders.
The reduction in market capacity is making it increasingly difficult to obtain cover for this sector - particularly for the smaller broker.
The head of one such Berkshire-based operation found it impossible earlier this year to offer any renewal for an adventure playground in Reading.
"They did have some problem with local vandals and we could not obtain any offers in the markets we had available to us. This sector is becoming almost uninsurable," he says.
AXA's David Williams says this market is misunderstood: " Since 1997 there have been 34 fatalities. Of these only six have been at licensed centres. Two of these were instructors; two others were adults who drowned (and no blame was attached). The remaining two were under 18 years of age, both collapsed and died while staying at centres, one from a previously undiagnosed heart condition the other from previously undiagnosed epilepsy.
"What this suggests to me, is that licensed centres are much better risks, the problem is that premiums for all types of `activity' centre/providers/holidays are going up by as much as 10 times."
Interestingly, third-party liability is less of a problem in the motor sector than it may appear at first glance.
AXA's David Williams explains: "In contrast with the other sectors, it is because of the increase in bodily injury awards that liability is less of an issue with regard to motor.
"This is because if someone has been hurt in an accident it is almost instinctive that they'll sue and that eventuality has already been built into the policy. Therefore the increases here for liability have been less."
Hill House Hammond's Paul Williams is aware of one huge hike in premium. "There was a motor trader installing body spray booths into garages and using international labour. The only quote available was 1,000% higher than his last," he says.
The fact that the motor market has hardened in the past year also puts it in a better state to absorb any claims increase. Chris Lay, executive director, corporate clients, at broker Marsh, explains: "The motor market has gone through a significant rise over the last six to nine months. Much of the realignment of premiums in this market has already taken place."
The Employers' Liability (Compulsory Insurance) Act  sets out the requirement for employers to insure their liability for personal injury to their employees.
Cover is compulsory with few exceptions in the UK. Recognised psychiatric or mental illness falls within the scope of personal injury and by implication, therefore, within the scope of the Act.
In compliance with the Act, an EL policy covers that part of the legal liability of an employer which relates to bodily injury or illness, or death or disease sustained by an employee and which arises out of the employment.
The legislative background makes EL insurance an unattractive class of business for underwriters.
Conditional fee arrangements: No-win, no-fee arrangements are estimated to have increased an EL policy by 5%.
Pressure on premiums
Civil Justice Reforms: The Woolf Reforms attempt to speed up justice has put another 2% on EL policies.
Ogden Tables: The change in the discount rate in June 2001 when the amount of reduction to the award was reduced from 2.5% from 3% (previously 4.5%). The impact on the claims costs to the industry is estimated at £900m. Impact on rate increase is 8%
Law Commission Reforms: Extended scope of damages in personal injury claims. Rate increase for a typical Employers' Liability policy, 2%-3%.
Abolition of claims agreements between insurers: Changes in the way of dealing with long term exposure claims. Agreements for noise and vibration white finger have been abolished. Every claimant now taking individual action causing significantly higher settlement and administrations costs. EL rate increase of 5%.
Recovery of National Health Charges
The NHS has the ability to recover medical costs of treatment provided to people injured in a motor accident from the insurer of the person who caused the accident. Under legislation, this cost may be passed to the Employer's Liability insurer if appropriate. Rate increase 2%.
(All figures supplied by Zurich)