Asbestos liability: managing the risks

Practical Law UK Articles 0-102-9187 (Approx. 6 pages)

Asbestos liability: managing the risks

by Linklaters, Gianni Origoni Grippo & Partners and Dal Soglio & Martens

Asbestos-related industrial disease claims are on the increase in countries such as the UK and the US, and can affect a company's survival. This feature explains how companies can manage their potential liability, and provides country-specific information on asbestos legislation and the scope for claims in France, Germany, Italy, Poland, Spain, the UK and the US.

Asbestos has been widely used in a broad range of industries such as engineering, construction, rail, power and shipping, particularly (in the UK) from the 1940s to the 1970s. However, time has revealed that it carries significant health risks. Asbestos tends to break easily into a dust composed of tiny particles that can float in the air and stick to clothes. The fibres are easily inhaled or swallowed and can cause a number of serious diseases, including cancer and other ailments, particularly of the lungs and chest. Asbestos-related diseases have long latency periods: typically ten to 20 years for asbestosis and anywhere from 20 to 50 years for mesothelioma and lung cancer. As a result, claims in the UK arising from exposure to asbestos in the post-war years are now rising and are expected to continue to increase until about 2020. In the US, an estimated 80% of all companies are thought to be exposed to asbestos liabilities to some degree and an ever-increasing number are fighting for survival because of this. In Europe, claims have been lower than in the US or the UK, in some cases because of state compensation schemes. However, this may change in the future.

Companies that used asbestos in the past can therefore reliably expect an increase in the number of claims they receive and, to the extent that they have not already done so, should consider the measures necessary to manage their potential liability.

This article:

Examines asbestos legislation and the scope for asbestos-relatedindustrial disease claims in France, Germany, Italy, Poland, Spain, the UK and the US (see box, Asbestos regulation and claims: a cross-border comparison in pdf version).
Considers how companies can manage their potential asbestos liabilities when facing claims and in the context of mergers and acquisitions.

Facing claims

Any company with a history of asbestos use is at risk of industrial claims from its employees and should consider how to assess and manage its risk. As a first step, the company should assess the extent of the potential liability, taking into account:

The potential claimant population.
When asbestos was used and what it was used for.
The type of asbestos used (certain types of asbestos are considered to be more dangerous to human health than others).
Whether any safety measures (for example, warnings, personal protective equipment, dust controls) were in place.
Liabilities that may have been inherited in corporate acquisitions (see below Mergers and acquisitions).

Information on its potential exposure will assist the company in formulating a strategy for managing any claims going forward. It also enables the company to respond promptly to any questions from investors or research analysts and to minimise negative impact on share price.

Once a company has an idea of the number of claims that it could face, the next step is to calculate its potential financial exposure. Claims may be covered by insurance, in which case, as long as the policy holder does and has done nothing to invalidate the cover, the company's exposure should be limited, provided the insurer remains viable. If claims are not insured, the insurance is exhausted, or the insurer has ceased to exist, the company will be the direct defendant in any litigation and will incur both the monetary and time costs of defending the claims.

Insured claims are usually dealt with and managed by the company's insurers. However, if the liabilities are uninsured, or the company's insurance is exhausted, the company can either fight the claims through the courts or seek some form of settlement with the claimants.

As with any other court case, asbestos litigation can be costly and protracted. Whether or not a company chooses to fight in court depends on a number of factors, including the number of claims it faces and the prospects of a successful defence. Where the case against the company is clear-cut or the likelihood of success is in the balance, one option would be for the company to seek some form of voluntary compromise with the claimants to cap its exposure and avoid defence costs. This could take the form of a settlement where a certain amount of money is paid into a trust fund, or provided for by the company, to grant compensation to those who can show they have suffered from an asbestos-related disease as a result of the company's operations.

Mergers and acquisitions

The high profile of asbestos litigation in the US and the increasing awareness of the issue in Europe means that investigation of asbestos liabilities is now an important part of the due diligence process in acquisitions, particularly of industrial and manufacturing businesses. Issues arise for both the seller and buyer.

Issues for the seller

Where asbestos claims are a concern, the main issue in the transaction is whether the seller should attempt to include asbestos liabilities in the sale or agree to retain the liabilities and manage them itself. Any attempt to include asbestos liabilities in the sale may impact disproportionately on the purchase price or even result in potential buyers refusing to bid at all. To avoid this the seller needs to make sure that any preferred bidders are given comprehensive due diligence information enabling them to assess the potential risk. Where there is actual or potential litigation, the seller needs to keep tight control over the dissemination of information to ensure that no privileged information is handed over as part of the due diligence process and that no unprivileged documents are generated. Information should only be provided to a committed buyer or to a preferred bidder(s) and only to a limited number of named individuals, subject to strict confidentiality.

Although a share sale is generally the best means of transferring liabilities, it is not necessarily the most suitable option for dealing with asbestos liabilities where there is ongoing litigation or a real risk of claims. In a share sale, the buyer assumes primary liability, so it will want the benefit of the company's insurance assets and an indemnity to provide cover if the insurance fails. The buyer will also require conduct of any asbestos claims. If the seller gives an indemnity, it could be exposed to paying out on claims over which it has no control if the indemnity is triggered. To limit its exposure, the seeker will want the buyer to agree to:

Keep the seller informed of the progress of any claims.
Consult the seller before taking any key decisions.
Obtain the seller's consent before admitting liability or settling any claims.

Rather than give an indemnity, the seller may prefer to sell the assets and retain the company with the asbestos liabilities in order to manage these liabilities itself. In most cases, asbestos liabilities relate to ex-employees and, depending on the jurisdiction, do not transfer on the sale. However, if any employees who worked with asbestos remain in the company, the buyer may inherit accrued liabilities associated with the employment contracts of these employees, including claims for industrial disease. In this case the buyer would be likely to seek an indemnity. If the liabilities have been ring-fenced within the seller's group, retaining them may be the most sensible solution as the seller then keeps control over claims.

Ring-fencing typically involves keeping the asbestos company clearly separate from the other members of the group. In particular, personnel and management systems, cash management systems, records, insurance policies and day-to-day decisions for the asbestos company are kept separate from the rest of the group. The purpose of ring-fencing is to reduce the risk of claimants being able to impose liability on the parent or other group companies in the event that the asbestos company can no longer satisfy claims against it. The extent to which such measures are effective depends on the extent to which the parent/group was previously engaged in the conduct of the asbestos company's operations or controlled its risk management procedures.

Sale of the assets out of the asbestos company must be at arm's length and for fair consideration. The seller needs to ensure that after the sale any actual or contingent asbestos liabilities are adequately funded or insured.

Issues for the buyer

The potential buyer needs to consider:

The claims profile and maximum possible exposure going forward, taking into account the period in the company's history when asbestos was used in its manufacturing processes and the typical employment history of the class of workers who may have been exposed. From this it should be possible to estimate the number of employees who were potentially exposed and the period or extent of exposure.
The availability of insurance cover, whether it is likely to be sufficient, whether top-up cover would be available and how healthy the insurance providers are.
Structuring the sale as an asset purchase rather than a share purchase.
Whether the buyer can ring-fence the liabilities on acquisition by adopting the above mechanisms (see Issues for the seller) so as to prevent liabilities attaching to other companies in its group.
If the seller retains the asbestos liabilities, whether it will be prepared to give an indemnity in respect of any liabilities that leach across into the new group, for example, in relation to affected employees who transfer across or speculative litigation. Key issues for negotiation are the scope of the indemnity and whether there is any financial or time cap on the seller's liability. The buyer also needs to assess the long-term covenant strength of the seller to determine the value of any indemnity on offer.

Whether buying or selling a company whose employees have been exposed to asbestos, or simply in the day-to-day running of a company, successful management of asbestos-related liabilities depends on understanding the level of the risk arising from historic exposure and closely monitoring the condition of existing asbestos in premises so that prompt action can be taken to prevent future exposure.

Vanessa Havard-Williams, Linklaters

View PDF

End of Document

Also Found In

Resource ID 0-102-9187

Law stated as at 01-Aug-2004

Resource Type Articles

Jurisdictions

France
Germany
Italy
Poland
Spain
UK
View all
United Kingdom
United States