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Winds of legal change blow across Europe

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As one German risk manager joked, if an American consumer finds a dead rat in a can of food, the first reaction is to file a lawsuit. A German shopper, however, goes back to the store and gets a new can.

The scenario illustrates what some see as a difference in mentality: litigation—happy Americans versus more common sense Europeans.

Certainly, it is a difference that has a lot to do with the contrasting legal environments, as well as how attorneys in the United States and Europe are compensated.

In the United States, lawyers commonly take on liability cases on a contingency-fee basis, getting paid out of the damages if they win. A claimant doesn't have to worry about paying the other side's legal fees if they lose, which is part of the risk of litigation in Europe.

"I think this is a major roadblock for people filing frivolous lawsuits [in Europe]," said Harry Daugird, a risk manager and president of Komposit Risk Consultants & Insurance Brokers Ltd. in Ladenburg, Germany—a unit of ABB Group.

Prevention

As long as the loser has to pay, "the U.S. system will never fully come to Europe," he added.

Indeed, lawyers point to a number of factors keeping America's litigation frenzy from invading European shores.

U.S.-type class action suits—where there can be unknown or even an unidentified class of claimants—do not exist in Europe. Punitive damages are not allowed either, meaning victims can only be compensated for the actual damages that they have personally suffered.

But there is still concern about a gradual shift, moved along by national legal changes and European Commission directives and proposals, that some believe are fostering a U.S.-style compensation culture in Europe.

"There has definitely been a growing attitude in society as a whole, partly I think fanned by television and newspapers, that anyone who has suffered some sort of injury or financial loss must have someone against whom they can reclaim it," said Christian Wells, a partner in the insurance and reinsurance group at Lovells in London.

"There is an increasing notion that misfortune doesn't play much of a part in life anymore, that if you've suffered somebody must have caused it, therefore, you must have a right to recover."

The trend may be truer for the United Kingdom, which has "a closer behavioral link" to the U.S. than mainland Europe, Mr. Wells added. However, it is still detectable on the Continent as well.

Around Europe, laws are on the books or being considered that allow for collective or group lawsuits—as a form of class action. In France, for instance, a debate over allowing class actions is expected to be taken up by Parliament later this year as it considers consumer legislation. In Italy, a similar class action law is up for consideration, as well.

Changes in how lawyers are paid have also come up for debate. In the Netherlands, the bar association favors a pilot program to allow personal injury lawyers to accept the contingency fee arrangements common in the U.S. The program, initially quashed by the government, could be revised after national elections in November.

In the U.K., lawyers have been entitled since the late 1990s to work under conditional fee agreements, which—although not quite the same as a contingency fee—allow lawyers to forgo their own fee if they lose. However, the client would still have to pay the other parties' legal costs.

Push factors

Within the last five years, the U.K. has seen a rise in the availability of legal expenses insurance, which is now often thrown in as an added benefit in homeowner policies, said James Burns, a partner in the insurance and professional risks department in the law firm Clyde & Co. in London. The policies take the risk out litigation for consumers, covering the costs of bringing a claim and paying the other sides costs if necessary.

"I think that is quite a significant development," said Mr. Burns, spawning more accident-related, employment and consumer claims. Those are the type of "low value, high volume" cases that can be as burdensome on companies and insurers as large claims, he noted.

"From an insurer's point of view or a defendant's point of view, they are actually, in many ways, the worst claims to deal with, because when somebody's got insurance, the dynamic changes completely," he said. "I think you end up having to settle at higher amounts than you would have done previously."

A number of lawyers said if the European Union attempted to introduce U.S. type contingency fees it would lead to an explosion of litigation.

"If that were to go through, and I think at the moment that is still a long way off, I think that would be something that risk managers would be pretty concerned about," said Gillian Eastwood, partner in the financial institutions dispute group of Freshfields Bruckhaus Deringer.

"I think we are certainly in a period where we are looking at a lot potential change," she added. "I think people are watching these issues very carefully, but it is probably not quite time for people to get into a serious panic about them."

However, risk managers and other lawyers believe certain European Commission directives and proposals could prove to be a tipping point.

Open system

The European Commission's concern with giving citizens easier access to justice is one area some think may eventually give rise to more liability claims. On its consumer affairs website, the E.C. says "access to justice" is a "key priority" of member states as they seek to create measures that give people easier access to address issues in court, particularly in cross-border cases.

Already, the E.U.'s anti-discrimination legislation, introduced in 2000, has caused concern by risk managers in Germany about increasing employee lawsuits. A German law passed in August, which incorporated the E.U. directives into national law, has "human resources departments all over Germany worried stiff about what may come," said Ralf Oelssner, chairman of the Deutscher Versicherungs-Schutzverband, the German commercial buyers association and director of corporate insurance at Cologne-based airline Lufthansa A.G.

"U.S. citizens may know what kind of mayhem you can initiate on some assumed discrimination," said Mr. Oelssner. "The culture [in Europe] so far has been different, that is why I am worried."

By the accounts of risk managers, lawyers and insurers, the number of liability claims against companies and their cost has been gradually creeping up over the years. None were able to provide specific liability claim statistics for Europe.

"We do not have a liability insurance crisis in Europe," said Phil Bell, group casualty director for Royal & SunAlliance Insurance Group P.L.C., based in London and chairman of the Comiteacute; Européen des Assurances' general liability insurance committee.

There are, however, certain high-risk areas, namely the pharmaceutical, medical products, and chemical industries, he said. Still, Mr. Bell said Europe's increasingly costumer-centric business focus, combined with E.C. directives on consumer protection and access to justice, could trigger more liability claims overall.

Re-activism

"When you create even more of an impression that the customer is king ... that raises expectations of customers, so that when things don't quite go right—because their expectation is increasingly high —they react," he said.

Some experts point to personal injury claims, which have been on the rise in terms of frequency and severity in various countries. In Germany, for instance, a case involving an injured motorist broke the €500,000 mark for pain and suffering, said Michael Pickel, a member of Hanover, Germany-based Hannover Re's executive board.

"What has been reimbursed a couple years ago with €100,000 is now half a million; that is certainly inflation," he said.