The looming liability crisis

A new report from Lloyd’s finds that fear of future liabilities amongst global businesses could be increasing risk aversion, stifling innovation and curbing growth prospects.

A third of the companies surveyed by the research, produced in association with the Economist Intelligence Unit, said the stranglehold of increased litigation had made them become more risk averse.

‘Fear of future litigation appears to put constraints on the growth prospects of businesses around the world,’ said Sean McGovern, one of the report authors and Lloyd’s director and general counsel.

‘The threat of litigation creates a pervasive atmosphere of fear,’ he added.

Lloyd’s chairman Lord Levene said an increase in litigation and the fear of potential liability issues is ‘stifling risk taking amongst boards who are missing out on new opportunities.’

‘We may not be yet at crisis point but liability issues are having a more significant impact on businesses than ever before,’ said Levene.

“The threat of litigation creates a pervasive atmosphere of fear.

Sean McGovern, one of the report authors and Lloyd's director and general counsel

A number of new and emerging liability issues, combined with enhanced regulatory scrutiny and mounting shareholder activism has combined to put increased pressure on companies, said the research.

Quoting from the research findings, Lord Levene said: ‘Dealing with liability risk consumes some 13% of board time and a level of company resources which many business leaders now find problematic.’

The research, that polled chief-level officers worldwide across business sectors, found that the compensation culture may be spreading beyond its traditional confines. 55% of those polled reported that a US style compensation culture was spreading. Levene described Europe as being ‘caught in the grip of a compensation culture.’

The global impact of the credit crisis was also identified as putting company directors in the firing line of professional liability claims. Almost half of the respondents thought the number of lawsuits spawned by the credit crunch could exceed those resulting from the dotcom crash.

The respondents also noted the role of the sub-prime crisis in training the sites of regulators. 71% of respondents agreed that the credit crisis was likely to increase risks even further in the form of new securities-related legislation.

Rob Mitchell, the report editor, Economist Intelligence Unit, said: ‘At least from a litigation perspective the credit crisis is still in it’s early days.’

“We may not be yet at crisis point but liability issues are having a more significant impact on businesses than ever before.

Lloyd's chairman Lord Levene

The tendency of the US courts to pursue offenders who might previously have been considered extraterritorial was also highlighted as a trend.

66% of those surveyed thought class actions were also becoming more widespread. McGovern pointed to a number of European jurisdictions—including Italy, Germany and France—that are making moves to introduce systems for collective actions. The European Commission has also expressed its intention to enhance consumer redress, noted McGovern.

The authors pointed to a number of areas that could give rise to a major new wave of liability claims. Exposure of confidential data, health risks as a result of new technolgies, environmental damage and corporate governance all topped the list.

Despite recognition of the threat posed by these emerging risks, the report authors said discussions at board level have yet to take place at many companies.

Lloyd’s said it hoped the research would encourage companies to start thinking ahead about some of the key issues relating to liability claims in the future. According to David Lewin, managing director of Guy Carpenter: ‘Prevention not reaction is risk management.’