COURT OF APPEAL DECISION ADDS NEW COMPLEXITY TO DUE DILIGENCE EXERCISES

The Court of Appeal has today (8 October) handed down a judgment in test case litigation that will have a significant impact on the due diligence exercises needed prior to mergers and acquisitions.

The Employers’ Liability Trigger Litigation (EL Trigger Litigation) has been seeking to resolve the question of which employers’ liability insurance policy should respond to claims brought for the fatal disease of mesothelioma.The disease is nearly always caused by exposure to asbestos, but there can be a long period of up to 40 or more years between a person being exposed to asbestos and the disease developing. Before the EL Trigger Litigation, it was accepted by insurers that the policy in place at the time of the exposure would respond to any subsequent claim. The Court of Appeal has, however, given a judgment that means subtle variations in policy wording will give rise to different results.

The decision introduces a necessity in any mesothelioma claim for each employers’ liability policy issued in respect of a relevant period of employment to be considered and construed by legal advisers acting for claimants, employers and insurers so as to resolve the issue of coverage. This is far from being a straightforward process, given that policies dating back many decades have often been lost and it may be necessary to rely on surrounding evidence to establish the existence of such policies and their terms. Delays, often substantial, will be inevitable. Even if the policy terms are located, construction may remain contentious.

Asbestos was widely used in the UK as a heat insulating material and in manufactured goods and components. Although many business will not have any asbestos on their premises or have made goods containing asbestos for many years, the long shadow of the exposure will be felt for many years to come: deaths from mesothelioma are not expected to peak until about 2030.

Due diligence investigations in relation to claims and insurance histories in acquisitions and mergers has traditionally been limited to establishing the existence of an employers’ liability policy, the precise terms of which were rarely established by any party. The Court of Appeal’s decision thus adds a costly layer of investigation for purchasers of businesses, in order to establish not just the existence of employers’ liability insurance, but also the relevant policy wording.

If policies or wording cannot be established, purchasers of businesses will need to consider the scale of the potential risk and whether it is low enough to be acceptable, or so significant that it is a deal-breaker. Alternatives might be to find insurance that will cover the risk, or re-negotiate the purchase terms so as to not acquire historical liabilities.

While those involved in the litigation are expected to appeal the decision, as it stands the judgment will result in some important decisions being taken.

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