Jim Hickey, the founder of the Environmental Insurance Agency in Portland, described environmental claims in general and asbestos claims in particular as “the shroud over the industry,” or harbingers of impending doom. Hickey, like everybody else, expected asbestos-related claims to diminish after the first wave hit in the late ’70s and ’80s. They did, for a while, but a recent sharp rise is playing havoc with companies, property owners and the insurance industry.
“Almost all these cases are product liability claims; workers’ comp is pretty small,” said Dave Ream of the Defense Research Institute in Chicago. “There are also defense costs but most of these cases are settled, and usually for pretty high amounts.”
Claims arising from health hazards seem to be an inevitable by-product of industrial activity. As soon as one dangerous compound or process is identified and countermeasures are taken, something else takes its place.
More complex and sophisticated perils are increasingly hard to isolate and identify. It took decades to discover that microscopic asbestos fibers constitute a major health hazard.
According to the National Safety Council: “The most dangerous asbestos fibers are too small to be visible. They can become airborne when asbestos-containing materials are disturbed or during improper removal. Once they are inhaled, the fibers can remain and accumulate in the lungs. Breathing high levels of asbestos fibers can lead to an increased risk of lung cancer, mesothelioma (a cancer of the chest and abdominal linings), and asbestosis (irreversible lung scarring that can be fatal).
“The risk of lung cancer and mesothelioma increases with the number of fibers inhaled. The risk of lung cancer is also greater to people who smoke. Symptoms of these diseases do not show up until many years after exposure begins. Most people with asbestos related diseases were exposed to elevated concentrations on the job.”
The dangers have been known for over 25 years. But the use of the fire retardant mineral fiber was so widespread—it was employed in a huge number of products, including insulating and building materials of all kinds, roofing and floor tiles, adhesives and patching compounds, clutch plates, brake linings and fire retardant clothing—and lasted for such a long time, that virtually anyone who has ever worked in a factory or on a building site where it was used is at risk, and thus becomes a potential claimant.
In addition, the conditions it causes take a very long time to develop—up to 30 years, and perhaps more, by most estimates. Thus the products’ liability exposure has a very long tail and the estimates of the amounts that will have to be paid are very high.
Claims stack up
A recent study of asbestos-related insurance claims by consultants Tillinghast-Towers Perrin (TTP) concluded that, “Settlements to individuals exposed to asbestos in the U.S. and related expenses will ultimately reach $200 billion.” Thirty percent of that amount—around $60 billion—”will be borne by the U.S. insurance industry.” TTP also estimated that “39 percent of the costs will be retained by the asbestos defendants (i.e., manufacturers, distributors, premises owners, etc.), 31 percent will be borne by overseas insurers (including London, Continental Europe, Asia, Australia and South America).”
The study confirmed the explosive growth of asbestos-related claims. According to co-author Jenni Biggs, a consulting actuary at TTP, “The number of plaintiff filings has increased dramatically, with 50,000 to 60,000 claims filed against some defendants in the last year, compared to averages near 20,000 in the early to mid-1990’s.”
TTP’s Mike Angelina, a consulting actuary and the report’s co-author, believes the increase is because, “A significant majority of the new claims do not relate to individuals with mesothelioma or lung cancer, but rather to non-malignant diseases. The propensity to sue for non-malignancies has clearly increased. Over 450,000 claims have been filed to date, and we project that close to 1,000,000 claims will be filed before litigation ends, absent some type of federal legislation.”
Jim Burcke, the head of communications for Equitas, the Lloyd’s runoff vehicle for pre-1992 liabilities established in 1996, goes even further. “The majority of these cases involve inventory settlements made by law firms who specialize in these types of claims; you may have as many as 10,000 plaintiffs,” he said. “A small number of those may indeed be suffering from mesothelioma, lung cancer or stage 3 asbestosis, but the vast majority have no real injuries apart from maybe some lung scarring, and they can’t establish any link between that and any specific product.”
The costs are mounting. In an earlier report, “Asbestos Claims Surge Set to Dampen Earnings for Commercial Insurers,” A.M. Best stated that, “The property/casualty industry may be facing a surge in asbestos claims that could cumulatively cost the industry as much as $65 billion.” It noted that the “insurance industry’s asbestos claims payments have increased dramatically, averaging nearly 15 percent during the past two years,” and that “annual paid claims will increase by at least 20 percent” over the next three to five years.
The road to bankruptcy
Asbestos producers and users are being forced to the wall, creating a new wave of bankruptcies, following those by Johns-Manville and others in the late ’70s and early ’80s. USG Corporation became the latest victim when it filed for Chapter 11 reorganization on June 25 for itself and subsidiaries United States Gypsum Co., USG Interiors Inc., and L&W Supply Corp.
Echoing Burcke’s and Angelina’s analysis, William C. Foote, USG’s President and CEO stated that, “The asbestos litigation system is clearly out of control. Lawsuits continue to be filed at a high rate with no slowdown in sight, and most of the claims are filed by people who are not sick. In addition, the recent bankruptcies of other asbestos defendants have dramatically increased U.S. Gypsum’s asbestos costs to the point that they are completely out of proportion to its legitimate liability.”
As other companies filed bankruptcy petitions, pressure mounted on USG. “We have said repeatedly that U.S. Gypsum can afford to pay for its own liability,” Foote explained, “but it cannot pay for the liability of other companies or pay everyone who was exposed to asbestos-containing products—yet that is exactly what is happening because of the high volume of new cases and the other asbestos-related bankruptcies.”
Foote isn’t exaggerating. Under applicable bankruptcy law, once a company files, litigation is suspended. The judge then sets a “bar date” by which claims against a debtor have to be presented; the time period varies, and may be extended for personal injury claims or under exceptional circumstances. However, as the trustee in bankruptcy takes over the assets of the debtor, and administers a trust to satisfy claims, all litigation is effectively condensed into one forum, rather than spread out in courtrooms all over the country, and claims aren’t paid until the reorganization is complete.
Thus, the pressure mounts to file claims against companies that haven’t gone into Chapter 11 in hopes of getting a higher settlement in a shorter period of time, and before that company too files.
“Since 1994, U.S. Gypsum has been named in more than 250,000 asbestos-related personal injury claims, and has paid more than $450 million (before insurance recoveries) to manage and resolve asbestos related litigation,” said the company. So far this year, 22,000 new claims have been filed against it. The costs (before insurance) “have risen from $30 million in 1997 to more than $160 million in 2000, and were expected to exceed $275 million in 2001.”
In the last 18 months, eight companies—including Owens Corning, Armstrong Holdings and W.R. Grace—have filed, adding up to 27 over the last two decades. Burcke indicated that, “In the short term [a bankruptcy filing] is good for cash flow as it stays all claims,” but he also said that it causes more claims to be filed, and that ultimately, whether it’s harmful or beneficial from the insurers’ point of view depends a great deal on the terms of the reorganization plan approved by the bankruptcy judge. A favorable plan permits insurers to maintain policy reserves, while an unfavorable one requires large claims payments and may exhaust policy limits more quickly.
Corralling the litigation
With some justification, insurers lay the blame for the increasing number of claims on personal injury law firms. Burcke stressed that the pending lawsuits are not class actions. The Supreme Court denied this status on the grounds that the class—anyone claiming damages related to asbestos—was too diverse. As a result, the “inventory settlement” procedure evolved, which is open to abuse. Not only are large numbers of marginally ill people filing suits, but the same person may also file several different actions in different jurisdictions against different companies.
A number of London market insurers, led by Equitas, took action last May to try and stem some of the abuses. They implemented “documentation requirements,” effective June 1, that are “designed to reimburse only those asbestos bodily injury claims that are supported by adequate medical evidence of a claimant’s injury and the identification of a defendant’s product responsible for that injury.”
Glenn Brace, Equitas’ head of asbestos, pollution and health hazard (APH) claims, characterized the decision as “one step to limit abuses in what has become an asbestos litigation industry.” He urged other insurers to take similar action. “We support a system in which injured people receive fair compensation from companies responsible for their injuries, and we support reimbursement of such payments by insurers,” he emphasized. “However, payments to people who are not harmed, or by companies which did no harm, are not justified.”
The policy is sure to meet with opposition in the U.S., as it confronts defense lawyers with the prospect of producing the necessary documentation, or risk losing their client’s coverage. Plaintiffs’ attorneys may be more likely to go to trial on serious injury cases that are now being settled and to seek higher compensation awards.
Despite the Supreme Court’s invitation to Congress to take action, no bill has not yet made it out of committee. President Bush’s commitment to tort reform could perhaps have led to the introduction of measures concerning asbestos, but with the Democrats now controlling the Senate, it doesn’t appear that this will happen soon. By contrast, insurers and government in the U.K. have cooperated more closely, reaching a settlement last May which guarantees payments to as many as 5,000 Scottish shipyard workers.
Looking for a bail-out
Equitas and other insurers face the additional burden of increasing their reserves to cover the estimated costs in future years. Figures released in March 2000 showed Equitas with £784 million ($1.1 billion) in excess surplus, i.e. net of outstanding claims. The latest figures, released July 20, showed a decrease to £700 million ($990 million) and a reduction of the solvency margin from 11.2 to 9.5 percent—a direct consequence of strengthening its gross asbestos reserves by £1.7 billion ($2.4 billion).
The addition follows a £1.5 billion ($2.12 billion) increase last year. Equitas’ asbestos reserves now total £8 billion ($11.6 billion), a figure it says “would be consistent with the upper end of the range predicted by ratings agency A.M. Best Co. and other published analysis.”
In the U.S., CNA recently announced increased charges on its balance sheet to cover anticipated asbestos, environmental and casualty losses, and plans to raise $1 billion to strengthen its capital base. AFG’s Q2 earnings were significantly lower than expected due to asbestos claims.
Equitas at least has Lloyd’s to look to in an emergency. Burcke pointed out that while Lloyd’s itself has “no obligation whatsoever to bail out Equitas,” if it can’t meet its commitments, it would have a powerful incentive to do so. “Any break in the firewall could result in Lloyd’s becoming insolvent in the U.S., thus threatening its entire U.S. operation.” He explained that, “There are two interlocking trust funds under the supervision of the New York Insurance Department of £100 million ($141 million) each, one for reinsurance and one for surplus lines. New York can seize those funds and ask Lloyd’s to replenish them.” It’s highly unlikely that Lloyd’s would refuse, as it could jeopardize its U.S. market, which accounted for $5.9 billion in 2000, 35 percent of its gross premium income.
The long-tail liabilities for APH claims are increasing. They “now represent 70 percent of net discounted liabilities, up from 65 percent on 31 March 2000 and 40 percent on 4 September 1996 when Equitas began operations.” While the outlook is not good, it so far appears manageable. However, if a similar situation were to arise in another area of liability, toxic mold for instance, insurers might face a severe crisis.
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