Litigation Risk Presents The Big Challenge For The Legacy Sector

Publication Date03 August 2020
SubjectInsurance, Litigation, Mediation & Arbitration, Insurance Laws and Products, Class Actions, Trials & Appeals & Compensation
Law FirmClyde & Co
AuthorMr David Wynn

The legacy run-off market has witnessed enormous growth in the past decade and developed into a key component of the global insurance market, with non-life liabilities in run-off now estimated to be in the region of $800bn.

Legacy business is no longer confined to long-tail asbestos and environmental liabilities. Solvency II and increased regulatory scrutiny, Brexit and the developing regimes for business transfers in the US, are provoking interest in books across a number of business lines, and of more recent vintage. A surge in deal activity across an increasingly wide range of business lines is predicted in the post-COVID-19 environment.

Legacy acquirers will be looking to take the cost out of the claims process and manage claims with a greater level of efficiency. Concerns will continue to exist about the potential for future legacy claims lines to develop, revealing previously unknown and emerging risks.

Talc and opioids have seen exponential growth in litigation, but perhaps the starkest example of the need for potential pre-transactional claims scrutiny is the recent glyphosate litigation in the US, which has quickly mushroomed into a mass toxic tort.

Bayer, which acquired Monsanto, the owner of the Roundup brand, just weeks before the first jury award, suffered a significant hit to its share price following that verdict, with more than $10.9bn subsequently being pledged in an attempt to settle the majority of the estimated 125,000 claims.

Hidden risks

Bayer's experience highlights the dangers of hidden legacy risks in mergers and acquisitions and insurance business transfers, emphasising the need for robust due diligence to be undertaken. Other material long-tail liabilities that are held on the balance sheets of manufacturing companies and other corporations are likely to be key issues for legacy acquirers in these sectors in the future.

All insurers, including run-off entities, will also need to monitor the developing scientific picture to ensure they remain ahead of the curve. Developments in a diverse range of areas, examples of which include perfluorinated compounds, 5G/electromagnetic technology, sugar, shift work, nano-tubes, and blue light all have the potential to raise significant legacy issues in the future, with their likely latency periods ensuring that any claims arising will come with a sting in their long tail.

A depth of understanding of the claims and litigation environment for each line of business will ensure acquirers of legacy...

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