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European companies are getting hit with an ugly legal stick as more companies engage in U.S.-style litigation, a new survey shows. The disputes rarely come cheap, and the costs are showing up in the form of higher premiums for commercial policyholders.

Are you surprised? Don't be. The trend is to be expected, given the general liberalization of markets and the global reach of law firms. With the opportunity of higher profits through expansion comes the risk of greater liability of getting sued by emboldened plaintiffs.

Government incentives to dissuade plaintiffs from pursuing deep-pocketed defendants and cultural differences that for years kept corporate spats within the hands of arbitrators and out of the courts are disappearing, according to the survey of Lloyd's underwriters.

"In the U.S., there is little consequence for those making claims that are near frivolous," said Henry Udow, chief legal officer of Cadbury Schweppes who was quoted in the survey. "European countries are worried about the influx of such an attitude."

The survey was conducted in partnership with The Economist Intelligence Unit, and the results were released in a report titled "Directors in the Dock: Is Business Facing a Liability Crisis?"

In the past three years, 38 percent of companies have seen some increase in the number of cases brought against them, and 34 percent have experienced growth in the size of claims, according to the report.

When asked about whether the scale and extent of litigation is changing in other parts of the world, more respondents said it is worsening compared with those who said it is improving.

Size matters, according to the report. The larger the firm, the more likely it is to be sued because it is a wealthier target

Among companies with annual revenues of more than $1 billion, nearly 90 percent have faced a lawsuit at some point in the past three years; and 30 percent have faced lawsuits aimed at their directors and officers, the report found.

"Those launching claims go for the deeper pockets, and the deeper pockets can handle it," said Joanna Page, the U.K.-based head of insurance litigation for the law firm of Allen & Overy who is also quoted in the Lloyd's report.

According to the survey, at some time in the past three years, 38 percent of the respondents said that their company had experienced a lawsuit brought about by a customer, and 36 percent said that their firms had experienced a lawsuit brought about by an employee.

All this comes at a cost, of course. Companies spend thousands of dollars on lawyers, and even millions or tens of millions in payouts if they lose the case.

Carriers are responding by simply raising rates, and in some cases becoming more cautious in their risk taking cultures and in launching new products.

More than 40 percent of the respondents said they've seen an increase in their overall cost of insurance and higher rates for directors' and officers' liability coverage.

"There is a general impact on consumers and others," Udow also said. "The cost is built into products and services. It is a hidden cost to the consumer, a real inefficiency."

While companies are more likely to engage in U.S.-style legal disputes than they used to, the other trend uncovered by the survey is that U.S. courts are ruling on cases traditionally considered to be outside of their jurisdiction.

In one case dating back to 2004, Diageo, the brand drinks giant, was sued in U.S. courts by the Colombian government for alleged money laundering.

"Jurisdiction used to be a fairly technical point over which lawyers would argue," said Phil Haberman, a partner at Ernst & Young specializing in litigation who is quoted in the report. "Now, it seems to have become a big issue."

Examples of what he called "competitive jurisdiction-seeking," abound as lawyers look to shop their case around in search of the friendliest courts.

"I think some of European litigation is attracted to the U.S.," said Brad Gans, general counsel, markets and banking, Europe, Middle East and Africa at the financial services giant Citi. "There is no culture of 'loser pays.' "

In addition, punitive damages are much larger in the U.S. than in other parts of the world, Gans also said.

July 1, 2008

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