‘Compensation Culture’ in the UK - What does the future hold? - by Paul Johnson

Media reports paint a confused picture of the compensation industry in the UK. Some studies provide evidence of an increased willingness to sue for compensation however slight the supposed injury, with diminishing consequences for society, public services and industry. Others reject claims of a widespread compensation culture as tabloid myth.

In recent years there has been a rise in the number of people claiming accident compensation; the question is whether this is a positive or negative trend and what the likely outcomes are.
Many see the upward trend as a contributing factor in the rise in insurance premiums, costing hospitals millions of pounds and contributing to an overall change in society. On the other hand, as a result of these changes, there has been an increase in the level of awareness of issues such as health and safety and employee rights. This has forced many companies and public places to raise their standards and provide safe and comfortable working environments for their employees.

What has caused this rise?

It is thought that one trigger for the rise in the number of people claiming compensation was the lifting of laws banning solicitors from advertising. This made it easier for legal firms to seek out potential claimants and develop ‘class actions’ involving large groups of people.

Another explanation for the rise is the introduction of the ‘Conditional Fee Arrangements’ in 1995 which allowed solicitors to take on cases on a ‘no win, no fee’ basis, so the claimant could take on a case knowing that if the case was lost, no legal fees need be payable. To cover themselves against the risk of losing or becoming liable for the defendant’s legal costs, lawyers could take out ‘after the event’ (ATE) insurance. These policies also offered cover for the expenses incurred by the solicitors acting on behalf of the claimants.

A significant change in the law introduced in 1995 was that in the event of winning the case, rather than recovering the legal costs from the claimant’s damages, the law allowed that both the insurance premium and the success fee could be recovered from the defendant’s solicitors.

Rising compensation claims – what are the costs?

There are those who would argue that the ‘compensation culture’ is causing an overall change in the patterns of behaviour and expectations of society. Whereas in the past one might resolve problems and differences by mediation or negotiation, now a minor issue is likely to be referred to the courts to settle disputes. Some feel that the traditional risks encountered in our daily lives, like uneven pavements and slippery floors, are now overhung by legal and financial risks. An example of how this risk has potentially had an impact upon society is with Queen Elizabeth II’s Golden Jubilee celebrations in 2002. Many believe that one reason why there were fewer street parties than there were for her Silver Jubilee in 1977 was because borough councils, town halls and public sector providers were fearful of potential litigation claims caused by an accident at such an event.

The cost to employers of claims from existing employees, and the unknown risk of future employees, has increased considerably over the last five years. This unquantifiable risk may have given rise to the volatility of share values and depressed share trading. In addition to this more managerial time is taken up dealing with claims.

It is evident that consumers are all paying for the increase in compensation claims through higher insurance premiums. For example, employers’ liability insurance premiums have recently risen by 20% for one third of the firms.

How can this trend benefit society?
To explore whether the rising numbers of compensation claims has brought benefits to society, we will focus on the changes that have taken place in the workplace.
Employers have a ‘duty of care’ to their employees and must take steps to ensure they are not exposed to potential dangers and risks whilst at work. They must meet minimum health and safety standards to prevent their employees becoming ill or getting injured in the workplace. Most employees would argue that anyone who is seriously injured at work deserves compensation. To avoid facing claims for compensation many companies have no doubt considerably improved their safety record in recent years and have set up health and safety at work committees or working groups. Trade unions have ensured that such groups are set up.

Claims for compensation have alerted employers to improve their safety record and monitor claims resulting from injury. The widespread publicity over personal injury compensation has caused people to spot dangers in the workplace, where previously safety issues did not hold much significance.

The imposition of liability or the threat of it seems to have served as an incentive to safe conduct and proper care, and the statistics bear a direct correlation to this. According The Health and Safety Executive, the number of workers fatally injured in 2002/03 was 226, a decrease of 10% from 2001/02. The trend in both the number and rate of fatal injury was generally downwards in the 1990’s, and the rate is currently a third of that recorded in 1981. On the other hand, the number of reported major injuries to employees rose by 1.5% in 2002/03 from 2001/02, but it is thought this rise may reflect changes in the level of reporting.

What can the UK learn from the USA?

The USA is an obvious example of a country that is widely held to demonstrate a ‘Compensation Culture’ in the extreme. The gloomiest predications imply the cost of compensation (tort costs) could increase twice as fast as the economy, possibly rising to 2.4% of GDP by 2005, from around 1.8% in 2000. This potential increase is fuelled by increasing asbestos-related claims, increasing medical costs and additional claims following the destruction that took place on September 11th 2001.

There are a number of class actions against big food and drink companies, seeking compensation for the adverse effect food and drink have had on the claimants’ health. For example, diets containing too much saturated fats and sugar. McDonalds and other manufacturers/outlets of convenience foods have been in the public eye as the number of US children, teenagers and adults suffering health and obesity-related problems continue to grow.

Table 1. Monetary costs of compensation in a selection of countries (tort costs)

CountryUS$ million

United States124.0
Switzerland10.8
Australia 7.3
Germany 7.2
Belgium 5.9
UK 5.8
France 5.5
Canada 5.0
Italy 4.3
Spain 3.4

Figure 1 demonstrates the considerable difference in tort costs between the USA and other countries throughout the world. Many legal scholars are concerned with the apparent Americanisation of European law and the arrival of large corporate law firms, with more aggressive approaches to litigation and dense, defensively-worded American-style contracts.

To many, America has taken their litigation and compensation rights too far and it’s American shareholders and taxpayers who are paying the real price. Europe and the USA have very different legal systems and practices, which if preserved, will prevent a further shift towards the American style of compensation.

The distinguishing feature of the American legal system is the use of juries to decide cases. In the UK civil actions are tried by a judge rather than a jury, with a much less hard-line approach towards pursuing large amounts in damages.

In addition to this, in the USA ‘punitive damages’ are imposed to serve as a punishment for the defendant and a deterrent to others who may be negligent in similar circumstances. Punitive damages are a modern phenomenon of the U.S. judicial system and enable individuals to claim compensation amounts far in excess of the realistic economic compensation for loss or injury. The problem is that the potential size of a punitive damages award is variable, and the process of arriving at it is arbitrary. There are no maximums and no minimums – the jury alone determines the amount. Problems arise because juries view the case subjectively without regard of the broader implications of their decisions.

Punitive damages do not feature in the UK legal system. Instead, only the need to establish a fault is required. This suggests that the compensation culture in the UK is less likely to accelerate to excessive levels as the USA.

The way forward

A general awareness of corporate responsibility over the last decade has increased employees/a citizen’s access to justice and raised health and safety standards within many organisations. The need to exercise these rights with responsibility is more pertinent than ever. It is important to take stock and be aware of the consequences of resorting to litigation to resolve problems when mediation and negotiation would be a more effective, economical and productive route to resolution. We have witnessed how the ‘compensation culture’ in the USA has resulted in a change in the behaviour for many Americans and whilst many countries will follow where America has led, it is important for countries such as ours to do everything possible to prevent the
replication of the American model.

The differing legal systems and practices highlighted in this article are thought to be the main checks and balances preventing the UK adopting the American judicial style of compensation. It is therefore likely that the UK’s biggest challenge in the coming years will be in trying to prevent the adoption of American policies and influences on European legal systems. If the lessons learnt from experiences in America inform Parliament and legal decision makers in the UK, one can only hope that a balance between the advantages and disadvantages of the rising number of people claiming personal injury compensation will have been achieved.

About the Author

Paul Johnson
YouClaim
paul@youclaim.co.uk

www.youclaim.co.uk is a UK based litigation company providing a no-cost, no-risk compensation claim service for people who have been injured or become ill due to someone else’s negligence.

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