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In a new report Directors in the Dock - is business facing a liability crisis?, published by the world's leading specialist insurance market, businesses are urged to anticipate and prepare for future liability risks.

Shareholder activism

Lloyd’s research has shown that boards everywhere are feeling increasingly challenged by litigation and are spending more time and money addressing these issues.

The report reveals that there is a growing concern among business leaders about the rise of a US style compensation culture in Europe and Asia and the liability fallout from the current instability in the financial markets. It also highlights the future liability issues for which boards should be preparing.

Product recalls are now a daily occurrence, rising 50 per cent in Europe in the last year. Shareholder activism is on the rise, operating environments are becoming ever more complex and new legislation such as the Corporate Manslaughter Act is increasing risks even further.

As a result the price of products and services is increasing and innovation and risk taking is being stifled.

Liability claims to exceed Dotcom crash

The report found that two-thirds of European business leaders expect to spend more time on litigation-related issues over the next three years.

Thirty-nine per cent expect the growing risk of litigation to increase the cost of their products and services and stifle risk taking over the next three years.

Two in three business leaders believe that the scale of liability claims arising from the credit crunch will exceed those arising from the Dotcom crash.

Boards most fear future liability issues arising from advances in technology, environmental damage and corporate governance.

Lord Levene, chairman of Lloyd’s, calls litigation a leveller of modern businesses. No matter what their size, location or industry, all businesses are facing increasing liability risks.

He points out that an increase in litigation and the fear of potential liability issues is impacting customers through a rise in the cost of products and services.

It is also stifling risk taking amongst boards, which are missing out on new opportunities.

Robust policies and processes 

“At Lloyd’s we know that taking risks is part and parcel of doing business but our research shows that there are clear benefits to thinking differently about the liabilities they face and developing the right culture and structure to manage them more effectively,” Lord Levene adds.

To manage the risks involved effectively, businesses first need accurate information – on both current issues and likely emerging trends.

Just as importantly, however, they need to put in place robust policies and processes to anticipate and mitigate what is becoming a more prevalent and costly problem.

Directors feel increasingly exposed, while fast-growing companies may be most at risk. There is widespread agreement among business leaders that a US-style compensation culture is spreading, especially within Europe.

Globally, most firms have experienced a lawsuit within the past three years, with actions brought by employees and customers being the most frequent.

Resources allocated to litigation issues 

While suits brought against individual directors and officers are less widespread, half of directors feel more exposed then three years ago.

Large companies are most likely to be targets for lawsuits, but smaller and fast-growing companies may be more exposed if they lack the infrastructure and experience to respond effectively.

Boards are allocating increasing resources to litigation issues, which is pushing up the price of products and services and leading many companies to adopt a more cautious business strategy.

On average, boards now spend 13 per cent of their time discussing litigation and expect this to increase further over the next three years.

There is strong agreement that valuable resources are being spent on legal issues that could be deployed elsewhere.

With 58 per cent of respondents using lawyers more frequently and 47 per cent reporting a rise in the cost of directors’ and officers’ insurance, one third of companies are passing the cost on to customers through higher prices, and even more expect to do so in future.

Most significantly of all, about one third of businesses have become more risk averse and less likely to invest in new business opportunities as a direct result of concerns about litigation.

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