Without a federal claims fund many companies will continue
to opt for bankruptcy as an asbestos liability solution, warn Robin Cantor and Michael Cook.

Since the Fairness in Asbestos Injury Resolution (FAIR) Act failed a crucial procedural vote in the US Senate, it appears more likely that asbestos claims will not be resolved through a federally managed claims fund.

A key issue regarding the act that could not be resolved is whether the funding mechanism was sufficient to meet the cost of all future claims against the fund. No one could predict with reasonable certainty how much it would cost, and this amplified the concerns that the funding would fall short and the government would ultimately end up with the liability.

In contrast, there is mounting evidence in the US that other reforms to control the number and cost of asbestos claims are succeeding. Examples of these reforms include: stricter medical criteria for claims made to the Manville Trust; tort reform at the state level addressing medical criteria; limitations on joint and several liability; jurisdictional limitations and/or judicial scrutiny of the actions of law firms representing claimants or bankrupt defendants. Empirical evidence includes the nearly 70% reduction in claims to the Manville Trust after implementation of the 2002 trust distribution procedures, a more than 70% reduction since 2002 in the claims filed against large defendants publicly reporting such data, and reported dismissal rates that often exceed 75%. Public filings also show that some companies are experiencing lower average settlement values even for malignant claims, or have reduced their liability estimates for pending and future claims.

Nonetheless, without a federal solution, some companies may still find bankruptcy an appropriate strategy to manage their asbestos liability. This option typically results in the creation of a trust for asbestos claims. While the value and conditions of these trusts vary, those recently proposed by Owens Corning, Federal-Mogul, Armstrong, Congoleum and USG all involve billions of dollars.

Insurers' asbestos payments might decrease due to a recent decision in the Fuller Austin case that only requires insurers of a bankrupt entity to pay for paid rather than anticipated claims, and the state reforms mentioned above. Whether insurers realise a material decrease in their liability, however, will depend upon the extent to which reinsurers modify their positions regarding such factors as the occurrence basis, among other considerations.