What is compensation culture?

Compensation culture was popularised in the US in the 1990s after cases such as that of Stella Liebeck, an elderly woman who in 1992 was awarded $2.9m in damages by a jury after spilling a cup of hot McDonald's coffee on her lap, scalding her legs.

If the number of accident claims is going down, why are my premiums going up?

Big insurers say they make no money on liability insurance so they can't be profiting from continual rises in premiums. In fact, they say, most liability insurers pay £1.10 for every £1.00 paid in premiums. They argue that "vexatious and frivolous" claims have driven up liability premiums and led to an explosion in claimant costs. Fuelling this, the insurers add, are "claims farmers" and "no win no fee" lawyers who take on all types of case regardless of their merit.

Research from Datamonitor this week backed this view by saying that soaring legal fees and medical advances have pushed up the overall cost of claims by almost 10 per cent to about £7.2bn in 2004. The advances are unearthing new diseases and health problems over which to launch claims.

Lawyers are sceptical of the insurers' focus on legal costs, when the fairness of fees can be challenged in court. They also say the industry could be more transparent about its premium policies. The government has also raised an eyebrow at insurers, saying all too often increases in premiums are often "unjustifiably" blamed on a rising number of claims or the compensation culture. Sceptics, such as journalist and academic George Monbiot, also believe that insurers use compensation culture as a "convenient bogeyman". That is because it allows big business to associate many victims such as thousands of asbestosis sufferers with "scroungers and conmen".

What's stopping us from going down the same route as the US?

The Better Regulation Task Force, which prepared a report on compensation culture for the government, identified several reasons why US-style litigation wouldn't take off in the UK:

¦ Juries, which are often more sympathetic to a claimant, are seldom used in civil cases here, unlike in the US.

¦ Punitive damages, which have been large in the US, can be awarded only in limited circumstances here.

¦ The UK has measures to weed out vexatious claims such as pre-action disclosure and a requirement to consider mediation. In spite of these measures, the government admits that there is a widespread belief here that a compensdation culture exists. The prevalence of advertising by claims farmers promoting the "have a go culture" and the arrival of mobile X-ray clinics, which screen people for asbestos-related diseases in shopping centre car parks in the north of England, were said to be signs of a creeping US-style litigation culture.

How are other countries dealing with this?

The insurance industry has focused on the Irish Republic which has put in place legislative changes to restrain the growth of premiums which were the among the highest in Europe, particularly in motor insurance. Axa UK, which has a large presence in the Irish market, says the number of compensation claims in Ireland fell by 20 per cent in the first six months of 2003 following a government clampdown on fraudulent claims and other measures, such as the banning of "no win no fee" advertising.

In the same year the Irish government also set up the Personal Injuries Assessment Board, which requires all parties to appear before an independent board without lawyers.

Australia has also taken measures to tackle the level of its compensation payouts, which in 2000 were almost twice as much relative to GDP as in the UK. The Australian government has curbed the right to sue for pain and suffering which has lead to a fall in claims for injuries such as dog bites.

What's changing here?

The government has recently warned claims management companies and "no win, no fee" firms that they face regulation if they can't improve their practices. The government has taken steps to discourage "have a go" ads in hospitals and is working with insurers to make premium costs more transparent and more closely aligned with risk in some sectors.

Meanwhile, insurers suggest that one way to modernise and simplify the system would be to concentrate first on the medical treatment of claimants, before compensation is discussed. Norwich Union has recently suggested that personal injury claims of less than £1,000 which might be for bruises and cuts should be excluded from compensation claims.