"Ambulance-chasing" law firms, which bring "frivolous" personal injury claims, must behave or face government regulation, the constitutional affairs secretary warned today.
Lord Falconer said that though the aggressive advertising of many claims firms had not lead to a rise in claims it had had a "negative impact on the way many organisations work".
"Schools, hospitals, local authorities are beginning to feel they are more at risk from litigation than they really are. They have the impression that they are at risk from being sued for activities that, in a healthy society, we would want and expect them to carry out," he said.
"In the last few months we have heard of local authority councillors standing down because of fear of being sued, even conker trees being chopped down, all because of an over-inflated fear that there is no such thing as a genuine accident."
Lord Falconer blamed this phenomenon on the spread of aggressive "no win, no fee" advertising and the media's often inaccurate reporting of high compensation cases.
And he cited posters which have appeared in some hospitals urging people to seek compensation if their doctor or nurse made them worse as an example of how claims management companies were fostering a compensation culture.
"There is absolutely no place for advertising that raises false expectations or promotes the bringing of frivolous claims. This is not providing a service to the consumer. It is misleading and harmful," he said.
Responding to a report by the Better Regulation Task Force (BRTF), Lord Falconer insisted that there had not been a rise in claims, quoting figures showing that they had fell by 9% in the year to March.
He also dismissed Tory claims that the Human Rights Act was fuelling the compensation culture, saying: "It has got absolutely nothing whatsoever to do with the Human Rights Act.
"The Human Rights Act is a convention of human rights drafted in the 1950s, which sets out things like the right not to be tortured and the right to a fair trial. That is not encouraging greater claims."
He also rejected suggestions that constitutional fees or "no win, no fee" agreements need to be banned, saying that they make justice "affordable to all".
Lord Falconer backed the BRTF recommendation that claims companies should agree on a code of practice with the Claims Standards Council but warned that he would act if it failed to abide by it.
"We want to see the claims management sector regulated properly and the sector has the last opportunity to do so itself before further formal regulation is consider."
He added: "If the claims management sector does not put its own house in order we will consider how new formal regulations can be introduced."
Lord Falconer also announced that a ministerial steering group, chaired by David Lammy, would be established to take forward the BRTF's other recommendations.
