Asbestos: Unending Liability (Even In Less Litigious U.K.)

Asbestos was widely used until the 1970s and is still present in many buildings in the United Kingdom.

The frequency of claims is likely to fall after that date, but for practical purposes, asbestos-related disease represents a potentially unending stream of future liabilities for which insurers are exposed under the wording of past policies. Insurers have already incurred significant costs and current attempts to draw a line under this problem have the potential to cause significant problems for businesses requiring insurance in the United Kingdom.

A distinguishing feature of the asbestos problem is the huge size of the potential liabilities, and this is what is driving insurance industry concerns. Even the strongest of insurance and other businesses can be overwhelmed by the associated costs.

Ratings agency A.M. Best estimates that the U.S. insurance industrys asbestos-related liabilities amount to around $65 billion. This exceeds its estimate of $56 billion for general environmental liabilities and makes asbestos the biggest problem facing the sector.

A proposed bill to alleviate this burden, by ending the victims right to sue and creating a trust fund to cover compensation costs, is currently bogged down in the U.S. Congress and faces an uncertain fate. The aggressive nature of U.S. litigation has magnified the impact of the asbestos problem in the United States, but the same fundamental issue of large-scale exposure to the substance exists in every jurisdiction where it was widely used.

In response to fears about the potential costs, Europes major reinsurers have largely withdrawn cover for asbestos liabilities as of July 1, 2003. As a result, primary insurers are assessing the feasibility of continuing to offer open-ended cover without recourse to reinsurance.

There is little doubt about the ultimate outcome. Asbestos exclusions are likely to become widespreadat least in the United Kingdomand probably in the rest of Europe as well.

As the market tightens, it will become increasingly difficult for ordinary businesses with an asbestos exposure to find cover with the result that they may be unable to obtain the compulsory employers liability insurance, which they need to operate legally in the United Kingdom.

This looming problem has yet to fully emerge, but in the worst-case scenario, many perfectly viable businesses may be forced to shut down as a result. It is already the case that many U.K. asbestos removal firms have been forced to close this year due to a significant hike in premiums and there is concern that this may, in turn, be repeated in the wider business community.

Although it may have unfortunate and unintended consequences, the reinsurers and insurers actions are a response to a real concern about developments outside the United States. Sentiment has been shifting towards the plaintiff recently in the U.K. courts and new laws are likely to bring more asbestos problems to light.

Last years House of Lords case, Fairchild v. Glenhaven, relaxed the rules of causation applicable to asbestos injury so that the plaintiff was no longer required to prove which one of three former employers, each of whom had exposed him to asbestos, was responsible for the specific particle of the substance that had triggered his mesothelioma.

In 2000, in the Lubbe v. Cape Plc. case, the House of Lords allowed South African miners to bring asbestos injury claims in the U.K. courts against the U.K. parent of their South African employers.

The approach of these cases significantly widens the pool of potential litigants threatening U.K. business and lowers the evidential hurdles which they have to overcome.

Taken together with the Control of Asbestos at Work Regulations [2002], which come into force in the United Kingdom next year and impose new duties on business to identify and manage asbestos risk, the effect is likely to be an increase in the incidence of asbestos claims.

Although the United Kingdom has not developed a sophisticated U.S.-style plaintiffs bar to drive the litigation bandwagon by reinvesting contingency fees into further law suits, the U.K. insurance industrys exposure to asbestos claims is already high with the Association of British Insurers assessing the expense of asbestos claims at about 200 million ($318 million) annually.

Additional volatility in asbestos exposure could further undermine insurers ability to cope with claims. Royal and Sun Alliance, for example, is struggling with the aftermath of a High Court decision in July of this year that it is liable under past policies for the liabilities of the asbestos manufacturer, Turner & Newall.

Royal and Sun Alliance is also said to be using a significant slice of the proceeds of a recent 900 million ($1.4 billion) rights issue to strengthen its U.S. asbestos claim reserves as the price of U.S. regulatory consent to the sale of its U.S. business.

When dealing with a long-term liability issue such as asbestos, the impact of legislative and judicial trends on insurance companies can clearly significantly affect their commercial strategies and prospects.

It is not surprising then that European reinsurers have withdrawn cover, which is further affecting primary insurers desire to insure asbestos risk.

This is likely to mean that U.K. businesses with asbestos exposures will face increasing difficulties both in insuring normal day-to-day operations and in defending themselves from liability for their past behavior.

The implementation next year of the Control of Asbestos at Work Regulations will lead to more businesses discovering that they do have an asbestos problem.

When they do, they may struggle, not only to find insurance, but also to find an asbestos removal firm that is still operating and whose expertise they may need to rely on in order to comply with those regulations.

Neither the insurance industry, the legislature, nor, presumably, the judiciary intend to create such problems. They are each taking their own view of the required response to the enormous human and financial cost of asbestos-related disease.

The insurance industry is looking to protect its solvency. The legislature is trying to create a sensible framework for managing the asbestos legacy and the judiciary is giving greater access to justice to victims. None of these aims is fundamentally wrong, but their combined effect may be to prevent otherwise viable businesses from operating in the United Kingdom to the detriment of the wider economy.

It remains to be seen how severe this problem may be, but if it is significant, the withdrawal of insurance will help to erode the critical mass of successful U.K. businesses which U.K. insurers need in order to thrive themselves.

The insurance industry could shoot itself in the foot if it is not careful. Over the long term, it has an interest in the safe removal of the substance, but this hasnt prevented the spate of closures of specialist removal firms due to recent unaffordable premium increases.

Asbestos is a complex problem with large financial implications manifesting themselves over long periods of time.

To avoid the dangers of unintended consequences in the future, a more coherent approach to the interaction between law and insurance will be required. U.K. legislators may find that, like their U.S. counterparts, they too will have to try to outline a balance between the health of asbestos victims and the health of important sectors of the economy.

Nick Flynn is an environmental lawyer with Weil, Gotshal and Manges in London.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 15, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.