House of Commons - Constitutional Affairs

Select Committee on Constitutional Affairs Written Evidence

Evidence submitted by the Kevin Williams, Reader in Law, Sheffield Hallam University

SCOPE OF SUBMISSION AND SUMMARY

1. This memorandum is in two parts. Part 1 reviews the recent evidence concerning the so called "compensation culture" and its claimed adverse effects. Part 2 considers clause 1 of the Compensation Bill, which seems unhelpful and, maybe, unnecessary.

PART 1. THE "COMPENSATION CULTURE"

2. Assertions that Britain is (or is in danger of becoming) a "blame and sue" society are so frequently repeated in the media and elsewhere that they have all but become received wisdom. The growth of a "compensation culture" implies an increased and unreasonable willingness to seek legal redress when things go wrong, whilst the idea of a "litigation crisis" suggests that this shift in social attitudes has been translated into undesirable (perhaps unbearable) levels of formal disputing. Yet, as a government commissioned report pointed out in 2003, there is usually "very little analysis of what this term [compensation culture] means, let alone proof that such a `culture' exists".[96]

3. The definition of the "problem" may depend on who is asked. Seemingly, there may be a number of different problems. These include too many claims, fear of litigation provoking risk-averse behaviour, compensation payouts that are too costly, excessive fees charged by lawyers and "claims farmers": sometimes a mixture of all of these. What kinds of claims should count is also disputed. Candidates include claims before employment tribunals, largely on the basis of their number, and family law disputes because they consume the biggest slice of the civil legal aid budget. Usually, however, attention focuses on claims for damages for personal injury.

4. In December 2002, a report by the Institute of Actuaries, The Cost of Compensation Culture, concluded that there is a growing compensation culture, estimating the cost at about £10 billion a year or 1% of GDP. However, as the report candidly admits, the figures "are by no means precise and in places rely on some heroic assumptions". Claimant injury lawyers have criticised it for including the costs of a very wide variety of claims, including criminal injuries' payments and the substantial sums paid to farmers following outbreaks of foot and mouth disease and BSE. Nevertheless, the Actuaries' headline-grabbing figure is frequently cited in the media as gospel without any qualification.

5. In May 2004, the Better Regulation Task Force, published Better Routes to Redress, which was largely accepted by the government subsequently.[97] It concentrated on personal injury litigation because this "attracts most attention from the media . . . and was raised most frequently in our stakeholder meetings". Drawing on an international review of the cost of injury claims, the report listed the UK's expenditure (at 0.6% of GDP) as lower than that of 10 other industrialised nations, including Canada (0.8%), Australia (1.1%), Germany (1.3%) and the USA (1.9%): only Denmark spent less.

6. The report denied there was any sound basis for the belief that Britain was in the grip of a compensation crisis, basing itself partly on the opinion of "almost everyone" who gave evidence and partly on the declining number of injury claims reported in recent years.[98]

7. Settlement costs, on the other hand, have increased. This is mainly due to the fact that compensation calculations are nowadays more favourable to claimants than formerly. In Wells v Wells, the House of Lords decided that damages for future pecuniary losses (consisting principally of loss of earnings and care costs) should be based on the likely rate of return available if an award was invested in index-linked government securities rather than the stock market. The effect of this change to the "discount rate" has been to increase significantly the lump sums awarded in order to offset the expected lower levels of investment return.[99] The following year, the Court of Appeal held that the conventional sums awarded in respect of non-pecuniary losses (such as pain and suffering and loss of amenity) were too low. In consequence, this element of awards to the most seriously injured has increased by approximately a third with proportionately smaller increases for the less seriously hurt.[100]

8. These judicially inspired increases have affected the cost of liability insurance, though not in a directly linear manner. The legal system has operated for more than a hundred years on the largely unspoken assumption that the principal categories of defendants are able to insure themselves. In 2003, sensitive to misgivings expressed by some business lobbies about the affordability of liability (especially employers' liability) insurance, the government instituted separate inquiries by the Office of Fair Trading and the Department for Work and Pensions.[101] These reports confirm that the cost of employers' liability cover, in particular, had risen steeply over a relatively short period. However, the rises appear to have more to do with insurers belatedly attempting to rectify accumulated losses caused by poor underwriting or investment decisions and historically unrealistic pricing policies, rather than to the increased cost of injury claims. Fortunately, most forms of liability insurance continue to be available at prices that are not prohibitive, though there have been reports of difficulties faced by some in the voluntary and community sector.

9. There are two other matters connected with the number of claims. First, the great majority of injured persons never resort to the law. Arguably, it is the absence of a compensation culture that characterises our liability system; and that not much has changed overall since the time of the Pearson Royal Commission almost thirty years ago.[102] The picture is, however, mixed. The claim frequency rate by road accident victims has increased in recent times,[103] while it is still the fact that comparatively few of those hurt at work are compensated.[104] Given that perhaps only one in a hundred negligently damaged patients sue, claims against the NHS attract disproportionate (media) attention.[105] In some areas too many wrongful harms go uncompensated.

10. A second question is whether well-founded claims should count as part of the "problem" at all. One reason why "compensation crisis" stories find such ready audiences may be related to the way they tap in to anxieties about declining social and moral values, such as self-reliance and personal responsibility. Tales of greedy lawyers egging on grasping claimants chasing compensation for trivial harms that in an earlier era would have been stoically shouldered without complaint feed such fears. Accordingly, attempts to test for the existence of a "compensation culture" should look beyond the absolute numbers of claims to whether there has been an increase in those that are substantially without merit or are bought off simply for their nuisance value. Unfortunately, there is no direct or reliable evidence concerning this. In the post-civil legal aid era, the economic imperative underpinning "no win-no fee" deals (together with the "loser-pays" costs' rule) may have to do duty as the gatekeeper against frivolous claims. We know that lawyers are unlikely to act for clients with poor chances of success.[106]

11. Whatever the statistical facts, the Task Force saw the "real" problem as lying elsewhere. A combination of exaggerated media stories and the avaricious advertising of some claims management companies had, allegedly, generated an "urban myth" about a "have a go" culture which, in turn, had inclined some undefined minority of the public to press speculative or spurious claims. Like the Actuaries before them, the Task Force made no attempt to quantify the size of this supposed problem, asserting merely that there is a "perception" that the public is more likely to seek legal redress than "ever before". Conveniently, perhaps, this chimes nicely with the findings of several surveys concerning changing attitudes to blame and responsibility. Inconveniently, the results of most of these surveys are unreliable.[107]

Somewhat despairingly the Task Force concluded that "quoting statistics will not win the argument whilst the papers run `compensation culture' stories". By definition, claims reported in the media are unlikely to be representative—exceptionally they are simply fabricated. Nonetheless, they may be highly influential in shaping public debate, including the direction of law reform, as the United States' experience shows.[108]

12. Commonly expressed opinion says that mere fear of (excessive) litigation results in undue caution with dire social consequences. Reputedly, organisations become less innovative, scarce resources that would be better applied elsewhere are unproductively diverted, unnecessarily costly safety precautions are taken, sometimes beneficial activities are fearfully abandoned altogether. Examples range from the potentially serious, such as defensive medical practices[109] to the cancellation of downhill cheese-rolling competitions. Here again, however, there is a good deal of mythologizing but little hard evidence documenting the extent of the phenomenon.

13. In some quarters, the number of injury claims has been made to appear as a yardstick to measure the moral (and economic) condition of the country. Are we less tolerant and more litigious? On balance it looks as if the British continue to be a nation of "lumpers" rather than litigators. There is good evidence that some sorts of accident claims have risen (from a relatively low base) and that the overall costs of personal injury settlements have gone up. But there is no reliable evidence about the number of bogus or exaggerated claims and whether they constitute a grave (or increasing) problem. What has plausibly been suggested is that "some insurance industry commentators rely heavily on anecdotal evidence of a worsening environment in order to justify price increases, quoting individual cases of highly doubtful or speculative claims that cannot be truly representative of claims in general".[110] When Lord Levene, the Chairman of Lloyd's of London, complains that a "deluge" of claims is "plundering the economy",[111] we sense this may not be a totally disinterested assessment.

PART 2. THE COMPENSATION BILL

14. In March 2005, the Prime Minister said that too many public servants (particularly teachers and healthcare workers) were worried they might "be subject to unfair legal action" and promised that ways would be found to "protect" them from what he called this "real problem". Within eight months, the Department for Constitutional Affairs has produced a bill which appears to be a response to this Prime Ministerial concern. The fact that Better Routes to Redress had denied that Britain actually was beset by a "litigation crisis" seems to have been overlooked.

15. Part 2 of the Compensation Bill introduces powers to control "claims farmers". The government having earlier accepted a Task Force recommendation that regulation was desirable, something of the sort was widely anticipated. No more will be said about this here. Instead, Part 1 is considered.

16. Part 1 of the Bill consists of a single clause. As presently drafted it provides:

Clause 1. Deterrent effect of potential liability.

A court considering a claim in negligence may, in determining whether the defendant should have taken particular steps to meet the standard of care (whether by taking precautions against a risk or otherwise), have regard to whether a requirement to take those steps might—

(a) prevent a desirable activity from being undertaken at all, to a particular extent or in a particular way, or

(b) discourage persons from undertaking functions in connection with a desirable activity.

17. Being addressed to the courts this looks uncontroversial—technical lawyers' law. Moreover, the "Explanatory Notes" accompanying the Bill tersely say the clause does no more than "reflect the existing law". How this will give effect to Mr. Blair's wish to see potential (especially public sector) defendants better protected from (unfair) litigation and judgments is obscure. Will they be reassured when told the clause is merely declaratory of how things already are?

18. Clause 1 is expressly confined to questions of breach—with how the standard of care is to be applied—and not with the prior duty issue. The Bill will, therefore, not affect the power of courts to recognise new responsibilities in negligence, which may not be quite so welcome to those defendants facing recently minted causes of action, such as complaints of educational neglect or child protection failures.

19. Clause 1 is side-noted "Deterrent effect of potential liability", an effect which courts sometimes assume exists, but which is more commonly questioned by academic commentators. For example, doctors frequently assert that litigation leads to "defensive medicine", though we saw earlier that reliable evidence concerning its precise nature, extent or effects is scarce. What we do know is that the medical profession has a strong tendency to exaggerate its exposure to the risk of being sued: a critical misperception that teachers now also seem to share.[112] If attitudes such as these are thought to be a (perhaps the) problem—because they promote socially and economically damaging risk-averse behaviour—clause 1 seems poorly suited to changing them.

Given the paucity of demonstrable connections between (the threat of) liability and real world behaviour, instructing judges to have regard to whether a "desirable activity" may be "prevented" or "discouraged", and to what extent, seems potentially fraught. Moreover, uncertainty over what activities may qualify to be regarded as "desirable" may provide more, rather than less, scope for litigation. So far, the government has merely said that courts will be able to "consider the wider social context of the activity".[113]

20. By offering a statutory steer to the courts, clause 1 purports to be improving the lot of defendants while simultaneously allowing judges to continue to act as they have always done. It looks like an unnecessary solution to a non-existent problem. More to the point, it seems unlikely that it will reduce fear of unfair litigation, risk-averse behaviour, or the number of allegedly frivolous claims. Nor, one suspects, will it actively encourage more out-of-school opportunities, community volunteering or other socially valuable activities. Loose talk of a "compensation culture" no doubt helps to sell the very sorts of newspapers that purport to despise it most: however, it ought not to dictate the legislative agenda.

Kevin Williams

Reader in Law

Sheffield Hallam University

November 2005