The Association of British Insurers said policies taken out or renewed after the end of the year will include a cap, expected to be pounds 10m in most cases.
The trade body said that over the last five years insurers paid about pounds 1.50 in claims for every pounds 1 they received, and unlimited cover was no longer practicable.
The ABI believes there have been few incidents costing employers more than pounds 10m in awards to staff, apart from the Piper Alpha oil-rig explosion. But it said it wanted to tackle the problem of unlimited liability before it got out of control.
The ABI said improved medical techniques for identifying work- related injuries and diseases had led to more claims.
Injury awards had been rising faster than inflation and claims for industrial diseases such as asbestosis were often made years after the premium was paid - making it difficult to price the business correctly.
An increase in sub-contract labour also made it hard to work out the number of people covered on a single worksite under a policy.
Tony Baker, deputy director- general of the ABI, said that, in practice, big employers should be able to negotiate additional cover with their insurers up to about pounds 25m.
Above that, he said, there were indications that a new excess-of- loss reinsurance market would develop - as a result of the imposition of the cap. This might take cover as high as pounds 100m.
He added that the pounds 10m limit compared with a legal obligation on employers to insure for a minimum pounds 2m for their liability to employees.
The cap applies to any single incident, but a string of claims against one company for an injury such as asbestosis, repetitive strain injury or loss of hearing will be treated as separate incidents.
This means there would typically be a pounds 10m limit on payouts to workers injured by a factory explosion, even if 1,000 people claimed pounds 1m each.
But if 1,000 asbestosis sufferers claim pounds 1m each, the pounds 10m cap will apply separately to every claim.
Mr Baker said the basic pressure for the change came from reinsurers, which did not have capacity to cover unlimited risks that they could not quantify. Reinsurers had to set aside reserves to match their maximum exposure. The announcement has been timed for the Monte Carlo Rendezvous, a reinsurers' conference taking place this week in the south of France.
Mr Baker said that full responsibility for damages still rested with the employer, which would have to pay any uninsured costs.
One implication is that with the removal of the cap, businesses could be put in jeopardy if a big incident costs much more than their insurance limit and they have not arranged excess-of-loss cover.
Steven Bird, insurance analyst at Smith New Court, said insurers had been inept at predicting employers' liability claims costs.
The five big composite insurers predicted pounds 131m for 1988, but by 1992 this had risen to pounds 192m.Reuse content