first published in New Statesman, Monday 8th March 2004

Stephen Grey argues that when governments are so feeble, unions so weak and corporations so powerful, we should welcome the “compensation culture”

Everyone has their favourite story of the American culture of compensation.
Mine came towards the end of last year from the Iowa court of appeals, which
upheld a jury’s award of $41,267 to a shopper, Judy Krenk, who slipped on a
grape at a supermarket checkout. The parties agreed that “a customer, other
than Krenk, dropped the grape while bagging groceries”, reported the Des
Moines Register. The judge, while noting that “the evidence in support of
Krenk’s claim is less than overwhelming”, said that supermarket employees
“should have known” there was a smashed grape on the floor.
Are we, too, developing a compensation culture? Newspapers highlight such
cases as that of a policewoman recently paid £125,000 for the stress of
working undercover. Concern about the creation of “an atmosphere of distrust
and suspicion” was expressed by the Prince of Wales last year in private
letters to the Lord Chancellor. Solicitors are frequently accused of
“leading on” the victims of accidents for which nobody is really to blame.
Yet there is scant evidence that Britain has anything like a US-style
compensation culture. But, first, another question that is rarely posed: Is
a compensation culture really such a bad thing? Governments are increasingly
reluctant to restrain private companies directly – for example, by imposing
environmental controls that would stop a power plant being built where it
might pollute drinking water, or by introducing laws that would restrain
banks from recommending worthless “investment opportunities”. In such
circumstances, the ordinary person’s only redress against the big and
powerful, and the only hope of persuading companies to act responsibly, is
through the courts. Likewise, when unions have had their powers drastically
curtailed and ministers are reluctant to limit working hours, the threat
that employees will sue companies for ill-health caused by stress is the
only way left of improving workplace conditions. Whatever the law’s
shortcomings, it can be more effective at holding corporations to account
than governments, which are all too often under the influence of private
lobbyists.
The US compensation culture may have led to customers of McDonald’s winning
fortunes for the pain of having hot coffee spilt on them – the worst
consequence of which is that American filter coffee is now undrinkably
lukewarm. But the same culture has created incentives for US companies – in
a country that supposedly abhors regulation – to deal with asbestos
injuries, diet drugs, faulty cars and vans, life insurance sales products
and tobacco additives. Thirty years of compensation litigation have forced
manufacturers to re-engineer their products and make them the most
consumer-friendly in the world – from child- proof cigarette lighters to
ergonomically designed keyboards. In the UK, even as our courts reject
similar consumer legal actions, we free-ride off the innovation that
attention to safety in the US has encouraged.
In the US, investors will get roughly $3bn in compensation from Wall Street
banks that encouraged investments in dotcom companies from which they were
earning banking fees. At least one US financial magazine considers this a
derisory sum. Here, the compensation for victims of the Potters Bar rail
crash in May 2002 is likely to be in the low thousands. The victims included
Agnes Quinlivan, whose daughters were paid an initial £10,000 and had a
subsequent claim for damages rejected by Railtrack. Legal aid to challenge
this and other awards has been denied. Insurance cover for solicitors to
fight the claims on a “no win, no fee” basis has also been refused. Yet
Railtrack was widely praised for saying that, without accepting legal
liability, it would pay compensation to the victims as though it were fully
liable. Colin Smith, Agnes Quinlivan’s son-in-law, argues that “Railtrack
lied to us when they promised to deal with the families’ cases with sympathy
and care”.
Britain, then, has not so much a compensation culture as a compensation
deficit. Louise Christian, solicitor for the Potters Bar families, says that
in America, they might get a million dollars or more. She compares the
Potters Bar victims with those of the Lockerbie bombing. Negotiations led by
US lawyers secured a $10m pay-out from Libya for each victim’s family,
regardless of their economic circumstances or whether they had dependants.
Walter Olson, a fellow of the conservative think-tank the Manhattan
Institute (and an opponent of the compensation culture who argues that
litigation has produced more safety in the US than you could ever want),
agrees that £10,000 would be a piffling sum for a fatality in the US. “It
would be more or less just the rounding error in the calculations,” he says.
“Although it varies from state to state, you could expect maybe a hundred
times more to be paid out.”
Olson points to the example of nine-year-old Perrize Washington, who drowned
on 13 June 2001 while on a field trip to a YMCA pool in Jackson,
Mississippi. After a trial televised on Court TV, the case was settled last
November for close to the family lawyer’s demand of $10m.

By international standards, the British compensation bill is still low. A
study last year found that as a percentage of GDP, the UK has the lowest
tort cost in the industrialised world – 0.6 per cent against, for example,
1.9 per cent in the US, 1.7 per cent in Italy, 1.3 per cent in Germany and
1.1 per cent in Australia. The belief that compensation is bleeding the
nation dry and that lawyers are constantly on the prowl is largely a myth
spread by the insurance industry to persuade more people to take out
policies. Over the past three years, accident claims filed to the British
government’s Compensation Recovery Unit have actually fallen from 743,593 to
706,715.
It is probably true that the number of employment compensation claims has
risen. But companies complain that insurance companies often find it easier
to accept dodgy claims and subsequently raise premiums than to contest bad
cases.
As for medicine, the problem is not so much an excess of compensation
demands as an excess of deference in the face of medical incompetence, as
shown by the cases of Harold Shipman and the Bristol Royal Infirmary, which
was able to continue for years with an alarmingly high death rate following
heart surgery on children.
Disputing Doctors, a little-noticed but powerful book by Linda Mulcahy
published last year, showed, for example, that most medical mistakes rarely
lead to complaints, let alone lawsuits – even in the US. The most
comprehensive study of medical mistakes, she wrote, found that in American
hospitals, nearly 4 per cent of patients suffered an injury which prolonged
their stay or resulted in a measurable disability; nearly 14 per cent of
these injuries were fatal. This is equivalent to 18,000 Americans dying each
year due to preventable mistakes in hospital. (A smaller-scale study in the
UK found that 7 per cent of patients suffer mistakes.) Yet, according to a
study in 1985, only one in 25 negligent injuries results in compensation. A
more recent study found seven times as many medical mistakes as compensation
claims.
Allegations that the new no win, no fee system in Britain encourages
compensation claims are false. The introduction of no win, no fee was
followed by the withdrawal of legal aid for most personal i
njury cases. If
anything, the new system makes things worse for the accident victim, because
it gives lawyers little incentive to pursue cases that aren’t “dead certs”.
In the US, lawyers can claim up to 30 per cent of the damages they recover;
in the UK, they receive only a small “uplifted fee”, which provides little
incentive to take on an expensive and risky case.
There is also a difficulty in taking on big corporations under English law.
Under the US system, each side pays its own costs. In England, if the
alleged victim loses the case, he or she pays the company’s costs, including
its expensive lawyers. The English system also prevents a lawsuit being
brought on behalf of an entire class of victims. The consequence, says
Stephen Alexander, a partner of Class Law solicitors, is that if a company
makes an illegal profit – for example, by fixing prices or giving
negligently bad investment advice – there is “no plan for the disgorgement
of that ill-gotten gain back to the victims”.
The UK should probably not follow America all the way. It would be a good
thing to bring many disputes out of the poisonous and expensive atmosphere
of the courtroom – a third of all compensation payments is absorbed by
administrative and legal costs – and into mediation. But we should try to
increase public access to the law and strengthen, rather than diminish, the
culture of compensation. Whether the bad guys are Microsoft or BP, we can’t
leave it to US courts to police our corporate world.