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Is this America, the home of compensation culture? No, this happened a year ago on a council estate in Birmingham. Even though the tenant's attempt to sue the local authority for not removing the nest failed, the council still had to pay nearly £5000 in legal costs.

Compensation claims are becoming a massive headache for councils. About £200m was spent on claims in 2001, the majority relating to incidents in council flats, according to the Institute of Actuaries. And a report from the institute in December 2002 revealed that the bill is rising 15% a year.

This is also a problem for housing associations, but little research has been carried out on the issue. As Mike Morris, chief executive of the William Sutton Trust, explains, councils have wider responsibilities – they are liable for highways and pavements, for example – so receive more claims.

"I can think of fewer than a handful of cases in my time," says Morris. "Most associations don't get so badly affected. But it is something we're wary of. We try to nip it in the bud by working compensation into our complaints procedures."

Changes in the law
The increase in council claims is a result of the government scrapping legal aid in 1995 and introducing conditional fee arrangements – the posh name for "no win, no fee" – for personal injury claims, claims for the benefit of insolvent estates and human rights claims. In these cases, a solicitor may charge nothing if the case is lost but is allowed to increase his fee to 100% of any money won if successful (although the Law Society recommends a ceiling of 25%).

Of course, not all claims are bogus but the rise in their number has forced insurance companies to increase premiums to compensate. In a survey of 212 councils carried out by the Local Government Association and insurer Zurich Municipal last week (HT 4 July, page 13), 81% said costs had increased, 68% reported that fraudulent claims had gone up and 34% said the amount of staff time spent on the issue had risen.

Accident claims at Bolton council, for example, hit £12m last year after almost 1200 people filed litigation claims the previous year. The authority says it costs £1m just to cover the legal costs.

Liverpool council has set aside £6m to cover claims made in the next year. An authority in Lancashire had 3500 claims last year, costing it £1m, and Cheltenham council received about 160 from April 2001 to March 2002. Half of these were unsuccessful but the council still paid out £103,800 with an estimated £126,000 outstanding.

Legal costs can exceed the damages awarded. We had one case involving an accident in the home where the damages awarded were £500 but the costs came to £5500 

Sharon Roots, Corporate Risk Manager, Newham Council

"Due to a generally increasing claims culture, Cheltenham is facing an increase in claims from individuals who may not have sued several years ago but are doing so now," says Mark Sheldon, assistant finance director at the council. "Councils therefore now have to work harder to manage potential risks."

"Housing is being targeted as a 'soft' area to hit," warns Sharon Roots, corporate risk manager at Newham council in east London, "and it's vulnerable to claims because of restricted budgets."

On small-value cases, she says, legal costs can outstrip the damages because so much time is wasted. "The problem is that the legal costs can exceed the damages awarded. We had one case involving an accident in the home where the damages awarded were £500 but the legal costs came to £5500."

Since the introduction of no win, no fee, several specialist companies have sprung up to capitalise on the system, and Roots and her counterparts at other councils have heard of "ambulance chasers" going door-to-door and leafleting on estates in a bid for clients.

Action to reduce costs
Clearly, councils and housing associations must act to keep down legal costs and insurance premiums. But what can they do?

Sharing information on risk management is one way forward, and the LGA held a session on the issue at its conference last week. Effective risk management means making sure all departments keep accurate records and operate regular inspections of their gardens, roads and property. For example, say a tenant sues after tripping on a carpet. If the council can produce photos from its last inspection showing what state the carpet was in, it can show them to the court and prove that either there was no negligence – if that was the case, of course.

Processing claims swiftly and admitting liability quickly will also reduce lawyers' fees. This is because, in conditional fee arrangements, if the claim is settled within three months, the lawyer can only charge 5% of any damages won.