Britain's "compensation culture" is a myth but its costs are very real, according to the red tape watchdog.
The watchdog is worries about claims adverts in hospitals
David Arculus, chairman of the Better Regulation Task Force, said fear of claims was making town halls and other groups cancel events unnecessarily.
His new report also calls for claims management companies to create a code of practice by the end of next year or face government regulation.
It also condemns "no win, no fee" advertising in hospitals.
The watchdog worries that "no win, no fee" cases have become too complex in recent years.
And in too many cases, solicitors on the losing sides try to challenge the other lawyers' conditional fee arrangements, pushing up costs.
The watchdog says the government should give "serious thought" to alternatives for conditional fee arrangements if those concerns remain in two years time.
Mr Arculus argues an "urban myth" of spurious compensation claims, partly propagated by the media, had led to some businesses becoming less innovative.
He says: "The compensation culture is a myth but the cost of this belief is very
"Almost everyone we spoke to in the course of this study told us that they
did not believe that there is a compensation culture in the UK.
"They argued that the reality is somewhat different because the number of
accident claims, including personal injury claims, is going down."
The report suggests that the outcomes of litigation cases often go unreported in the media and many claims actually never make it to court.
It says one large council spent more than £2m out of its £22m roads budget on tackling compensation claims in 2003-4.
That cost would come to a "staggering figure" if it were replicated over all 409 local authorities in England and Wales.
Arculus says new guidelines are needed for NHS adverts
Insurance premiums have also risen.
But often schools, rather than cancelling trips, have become much better at assessing risks.
The report continues: "Of course, some of the claims ... will be genuine but a large number will be
vexatious or frivolous."
The Claims Standards Federation, which represents firms offering "no win, no fee" actions, should set out a code of practice by September next year.
If it fails to do so, the government should step in to regulate the industry.
Some hospitals and GPs' surgeries are paid to carry advertisements for claims companies but the task force is not convinced this is the most appropriate way for the NHS to get funding.
It points to one poster which asked: "Did the doctor or nurse make
Telephone numbers of a claims management company were also sometimes printed on the back of appointment cards.
"We find this sort of advertising totally distasteful," says the report.
"The vast majority of doctors and nurses do not deliberately set out to harm
"Whilst it would be difficult to ban such advertising we would like to see
strict guidelines on such advertising introduced."
The report urges the NHS chief executive to issue immediately guidelines to hospitals and surgeries on the content of such adverts, which could also feature details of in-house NHS complaints system.
And for advertisements more generally the regulators should enforce the rules more rigorously, it says.
The watchdog also presses the government to examine the impact of allowing small claims courts to hear more personal injury cases.
The courts' current claims limit of just £1,000 could be extended, it suggests.
Recent figures showing claims against schools have risen to £200m a year - enough to pay for about 8,000 new teachers.
Similarly, NHS medical error claims rose from £1m in 1974 to £477m in 2003 - equal to 22,700 extra nurses.