Compensation vultures

A man sued a casino because he gambled away his life savings. A woman won $2.9m (£1.625m) from McDonald's because she spilt hot coffee on her lap. An inmate sued a prison authority because he was banned from looking at pornography.

As absurd as these examples of cases that happened in the US may sound, we also seem to be seeing some pretty ridiculous lawsuits in the UK.

A teacher who slipped on a potato chip won £55,000, the parents of a Girl Guide won £3500 after she singed her fingers cooking sausages and a prisoner successfully sued the government when he fell off the roof while trying to escape.

The Shadow Home Secretary, David Davies, gave these as examples when he recently hit out at the compensation culture in the UK.

Davies says the UK is being badly affected by a huge increase in claims, many of which are spurious. He argues that teachers are being urged not to take children on excursions and field trips, that doctors have to practise 'defensive medicine' and local authorities are having their budgets plundered to pay for 'trippers and slippers'.

The impact of all these claims has been massive hikes in the cost of insurance. Employers' liability cover rose, on average, by 50% in 2002, with some sectors such as construction seeing far higher rises. The number of employment tribunals has spiralled and, according to the Institute of Actuaries, compensation costs UK businesses £10bn a year and rises by 15% annually.

The Tories say they want the law changed so that people think twice before jumping on the litigation bandwagon. Davies blames the Human Rights Act, but there has also been a plethora of EU directives that have led to more people taking legal action.

US liability influence

Trends in the US liability market invariably have an influence on the UK and European markets. Many UK underwriters will follow what US insurers have in their wordings - an exclusion for terrorism, for example, may well be expressed in similar terms on both sides of the Atlantic. Both countries too have been beset by similar claims crises.

Peter Elliott, marketing manager for St Paul, says: "Asbestos continues to be a major challenge and it's a long way from over. Experts say there could be as many as one million more claims to arise in the US and it is not likely to reach a peak until 2020. The use of asbestos was much more widespread in the US than here and the UK authorities are thought to have acted more promptly in banning its use once the dangers became apparent."

Even so, the problems affecting Royal & SunAlliance, which experienced ongoing claims linked to asbestos, have been well documented.

A more recent issue emerging in the US is silica, a substance used widely in construction and as a grinding agent in manufacturing. It causes respiratory and related health problems and US insurers are braced for up to one million claims over the next few years. UK insurers are expected to review their EL policies and exclude silica.

There is also the distinct impression that many US lawyers are limitless in their greed. And, some feel the UK legal profession is sinking to an all-time low in public opinion. 'Ambulance chasing' is a term that stems from the US because it really happens - but anyone who has been in a UK NHS casualty unit will probably have seen marketing material from lawyers.

And, both countries have also experienced significant increases in their liability premiums - although those in the US remain generally higher.

Important differences remain, however. James Kininmonth, executive director, non-marine, for Lloyd's broker Cooper Gay, explains: "There are some growing cultural similarities. Certainly many British firms will be even more aware of the importance of corporate governance following the collapse of Enron. But, in the US, awards are made by juries and judges are elected. When you have big, flashy trials, the tendency is for headline-making awards to be given."

As a UK and US broker, Cooper Gay is well-placed to pick up on similar trends. Kininmonth adds that risk management, while a more advanced industry in the US, is now far more commonplace and is viewed as crucially important by many underwriters.

"One specialist area is medical malpractice. Lloyd's will tend to want to cover mutual practices that are owned by the doctors. They want evidence of high standards of risk management and that will include the whole practice, including non-medical staff."

While the NHS continues to receive a regular pasting in the press for its shortfalls, including the spread of superbugs, there is no doubt in recent years that risk management is now taken extremely seriously.

EL versus workers' compensation

But, marked differences remain. While we have EL in the UK, the US operates a workers' compensation system, designed to ensure that employees who are injured or disabled on the job are provided with fixed monetary awards, eliminating the need for litigation. And, the UK, for example, bases its injury awards on the Ogden Tables.

Experience of certain classes of business also differs. In the US, directors' and officers' cover has produced huge losses - Faraday and SVB were among those taking large hits.

Zurich London pulled out of writing US-domiciled business, although it continues to provide D&O for firms that have US subsidiaries and may look to re-enter the market at a later stage.

Chris Hewitt, Zurich's head of D&O, says: "Surprisingly, and despite the dreadful claims experience, rates are softening in the US, prompted in part by the large number of carriers. In the UK, there has been some flattening off, but we would not want to see any further reductions."

He points out that many UK company directors are starting to realise the importance of D&O cover. Although charges of corporate manslaughter were rejected in the case against Railtrack in the Hatfield rail crash, a case is still being prepared against maintenance company Balfour Beatty Rail and a number of its former executives. The case will go to trial in January 2005, with a pre-trial hearing set for this month.

"We could see a new law of corporate killing introduced. Whatever happens, it is evident how the blame culture has escalated here," he says.

Hewitt says Zurich is now increasingly in favour of health checks being carried out on its insureds. "We need, with our brokers, to show that companies will benefit from this, not least in more favourable rates," he adds.

Meanwhile, in North America and the UK, the press has been filled with stories of the Hollinger International scandal, where ex-chief Conrad Black is accused of taking $400m (£223m) of its money.

A court case is now anticipated, with Black and others accused of making it their business to line their pockets in almost every way they could devise. In response, Black's office described the allegations as "exaggerated claims laced with outright lies".

Stringent regulatory environment

Mark Hardinge, managing director of Aon Professional Risks, says that cases such as Hollinger may cause increased nervousness among some board members, but emphasises that UK D&O underwriters have reason to be positive because of the UK's stringent regulatory environment. "The US is still more litigious and I believe there is a reputation for social responsibility here; UK employers are considered diligent on the whole."

There is also less litigation from shareholders, while in the US, there are at least 400 lawsuits pending related to the dotcom crash.

"No one can be complacent, because we never know if there is going to be an economic meltdown or what the impact would be of another major terrorist attack. But most D&O insurers have remained in the market and are looking to recoup their losses and, in the UK, will view this as a sector with potential."

Hardinge adds that D&O is practically mandatory in the US and that any director, including non-executives, is likely to insist on this insurance being in place. This is becoming more evident in the UK and Gary Head, UK head of professional indemnity at Hiscox, says brokers using his company are likely to ask the client to sign a disclaimer if they do not buy D&O.

"It has become clear that brokers are far more knowledgeable about this cover and we are also now seeing claims in the UK. I think it is vital that brokers also talk to their clients about the claims service - a smaller company, for example, is unlikely to have access to the top law firms. This is ultimately what they are buying and is something we concentrate on offering."

Nigel Tocknell, senior D&O underwriter for St Paul, says his company provides D&O training for brokers who require it and agrees it is a class of business poised to take off in the UK.

"There is now widespread confidence among brokers - and their clients tend to realise that directors are seen as fair game."

Hewitt points out that more directors are now aware that, even if their company is insolvent, they lose their personal wealth. At the end of the year, the Serious Fraud Office is expected to report on its investigation into Independent Insurance - and whether Michael Bright, its disgraced former chief executive, will be pursued for his remaining assets.

While liability remains one of the most difficult classes of insurance to underwrite, most experts agree there is softening in the market. Craig Bennett, director of DA Constable, Syndicate 386, says the last two years of rate increases have been welcome, but that he is disappointed to see some rivals start to cut rates. "They are not taking into account claims inflation; there has to be concern for the future if we see further falls and we are still looking to implement small rises - this also makes it easier for brokers when going to see their clients."

DA Constable tends to provide cover for more difficult areas such as construction - a sector in which the UK does not have the best safety reputation and that played a part in the demise of providers such as Generali and The Underwriter.

Bennett agrees that more risk management is the answer and his company is about to launch 386 Cares, an initiative linked to assessment, rewarding good practice and promoting rehabilitation.

Certainly rehabilitation is one area in which the UK is looking to follow the US, which has a far more advanced infrastructure of provision and greater buy-in from insurers.

Tort reform

In the US, there is a movement for tort reform. This includes the insurance industry, which has borne the brunt of so much frivolous legislation.

It has been stated that the societal costs of tort actions now equal a 5% tax on wages in the US.

In a recent speech, Lord Levene, chairman of Lloyd's, warned: "The US litigation system, if left unchecked, will destroy the American spirit of enterprise and drain the US economy. We need to strike a balance so that individuals have a means of redress and risk-takers have a safety net should things go wrong but aren't dragged into court at the most inconsequential slip."

This was a Briton addressing US citizens, but the way things are going, he could well have been addressing his fellow countrymen.

UK/US LIABILITY TRENDS - FACTS AND FIGURES

- The American tort liability system is the most expensive in the world, with total costs more than double the average of other industrialised nations. A 2003 study, conducted by Tillinghast-Towers Perrin, found that the US tort system cost $205bn (£115bn) in 2001, which translates to $721 per US citizen.

- In the UK, according to the Commission for Architecture and the Built Environment, the rise of compensation has coincided with the loss of many of the most attractive aspects of parks and public spaces.

- Lloyd's chairman Lord Levene has attacked the US compensation culture, describing it as pernicious, cancerous and ruinous, and claiming that the UK was falling into the same abyss of blame culture.

- Seven insurers, including Royal & SunAlliance and Equitas, had to pump more than $500m into reserves against US asbestos and casualty claims in 2003.

- Clinical negligence, which cost the NHS £6m in 1975, cost nearly £0.5bn by 2002.

- According to Robert P Hartwig, senior vice president and chief economist of the American Insurance Information Institute: "Tort costs in the US now exceed $200bn annually. That is 2% of gross domestic product and represents a 'tort tax' of $721 for every man, woman and child in the country. It is an international embarrassment and a tragedy that we have the highest tort costs relative to GDP of anywhere in the developed world."

- The cost of asbestos litigation is taking a severe toll on businesses. So far, more than 60 US companies caught up in asbestos litigation have filed for bankruptcy, according to the American Insurance Association.