A new asbestos law is proposed in the US Romy Comiter and Martin Baach outline what it could mean - and its chances of success.
The re/insurance industry remains in the grip of the ongoing asbestos crisis. Since the 1970s, there have been 21 attempts to pass some form of asbestos legislation in the US. All have failed.
During that time more than 700,000 people have filed asbestos-related claims. Asbestos-related litigation has cost more than $70bn - the majority never seen by victims, but swallowed up in legal and processing fees.
Some 8,400 companies have been sued of which at least 75 have been forced into bankruptcy. Countless insurers have become insolvent. An estimated 500,000 jobs have been lost.
The current attempt to resolve the crisis, the Fairness in Asbestos Injury Resolution (FAIR) Act, is before the US Senate in a bill sponsored by veteran Republican Senator Arlen Specter of Pennsylvania. The bill is intended to create an administrative system for resolving bodily injury claims resulting from exposure to asbestos. Should the bill find its way into law, it will have far-reaching implications for the re/insurance industry worldwide.
The Specter bill takes asbestos claims out of the court system. From an insurance perspective there are a great many questions yet to be answered - or even fully addressed - by the bill.
The Specter bill would establish a national trust fund to pay all claims for bodily injury due to asbestos exposure on a no-fault basis. In exchange, asbestos claimants will lose the right to pursue their claims in court.
Claimants' eligibility and the size of any payments (ranging from $35,000 to $1,075,000) will be determined by a set of medical criteria structured to provide larger payments to more seriously injured individuals.
The terms of the proposed legislation are subject to ongoing negotiation and amendment, so any details noted here may be altered in the time it takes this publication to reach your desk. The current draft of the bill, however, proposes that total contributions of $140bn will be paid into the trust during the next 27 years. Contributions are significantly larger in the early years.
The trust would be funded by mandatory contributions from three sources.
Defendant companies with a history of asbestos liability would pay into the fund according to a formula that takes account of past asbestos payments and current revenues. All "eligible" insurance carriers - those who have spent $1m or more on asbestos defense costs and/or indemnity payments to date - would be assessed for a payment by a specially created Asbestos Insurers Commission.
Whatever their respective shares, insurers, in particular, are required to fund a disproportionate share of the early funding, with contributions diminishing over time. And existing bankruptcy trusts would turn over all of their assets to the fund.
US domestic and overseas carriers - both insurers and reinsurers - would all receive an assessment. Neither insurers nor reinsurers would have any future liabilities for asbestos personal injury claims. They would, however, remain liable for payments in respect of claims paid prior to the establishment of the fund.
Unlike defendant companies, whose payment obligations are defined by a formula set out in the statute, re/insurers will be assessed based on a formula to be created by the five-member Asbestos Insurers Commission.
In creating this formula, the Commission must consider the following: (i) historic premiums for lines of insurance associated with asbestos exposure; (ii) recent loss experience for asbestos liability; (iii) asbestos reserves; (iv) the likely cost of future asbestos liabilities; and (v) any other factor the commission considers relevant. The exact nature and composition of the Asbestos Insurers Commission is unknown at this stage.
Jeffrey Robinson, of Baach Robinson & Lewis, testified on the composition of the Asbestos Insurers Commission before the Senate Judiciary Committee.
He pointed out that the current version of legislation leaves open the prospect of a commission composed of individuals strongly associated with particular market participants who might not therefore be viewed as impartial.
"The discussion draft does not ensure that the members of the commission will be free of actual or perceived conflicts of interest when they perform their sensitive task of allocating contributions amongst insurer participants.
"As currently designed, an officer or employee of an insurer participant could leave his or her job one day and the next be in charge of allocating billions of dollars among his/her former employer and its competitors."
Finality hopes dashed
Early expectations that the FAIR Act will provide finality for re/insurers have been dashed. The act contains a provision that would see asbestos claims revert to the tort system should the trust fund's assets be exhausted before all claims had been paid at their full statutorily determined value.
In this scenario re/insurers would once again be faced with liabilities arising from the tort system despite having made substantial payments to the fund.
Nor would the FAIR Act exhaust all of an insurer's policy limits. The act currently provides for erosion of aggregate product policy limits by 59.64% of each participating defendant company's scheduled payment to the trust fund.
Concerns have been raised that the act might lead to the unravelling of previous settlement agreements, including policy buy-backs and commutations.
The FAIR Act does not explicitly address this issue. Assuming that a settlement has been completed, however, enactment of the FAIR Act should not in itself alter the obligations of the settling parties.
There is no provision in the FAIR Act directly addressing mixed dust or silica claims, and the act does not purport to regulate these types of claims. In an attempt to prevent every asbestos claim being converted into a mixed dust claim and thereby remaining within the tort system, the act bars litigation of any tort claim where asbestos exposure played a part in the alleged injury. This provision has generated substantial controversy and may well be modified in the course of the legislative process. Meanwhile fears persist within the insurance industry that silica litigation could take over where asbestos leaves off.
Many other questions remain substantially unanswered from an insurance perspective. It is the intent of the FAIR Act to break the reinsurance chain with respect to future asbestos claims while leaving the status quo in place with respect to claims paid before the legislation is enacted.
Insurers and reinsurers would have independent payment obligations to the trust fund and there would be no ability to recover from a reinsurer for such a payment. Payments made into the fund by insurers and reinsurers will not be linked to actual claims experience and there will not be any kind of audit trail back to original claimants.
Will it become law?
The structure of the US legislative system makes enacting new laws very difficult. That is part of the reason why it is always hard to predict whether particular legislative developments will actually come to pass.
There is considerable support for the FAIR Act among some of the largest and most influential business interests in the US. The chairman of the Senate committee under whose jurisdiction the legislation falls is advocating its passage.
On the other hand there is a growing strength of feeling amongst some defendants and many insurers that the trust fund approach embodied in the FAIR Act will prove unworkable in practice. This growing opposition, combined with the inherent difficulty of enacting complex legislation, suggests that the odds are against enactment.
Failure to enact the FAIR Act might not be the disaster many fear. FAIR Act opponents have been pressing for consideration of an alternative approach that would apply strict medical criteria to claims before they are allowed to proceed in the tort system. Such legislation would also address many of the other problems with the current asbestos litigation system, such as forum shopping and the consolidation of unrelated cases.
Medical criteria legislation along these lines was offered two years ago in the US Congress but failed to move beyond the House Committee.
Sound medical criteria legislation was enacted in Ohio in 2004, where experts predict that the new law could potentially weed out more than half the 40,000 asbestos cases currently pending in the state courts.
Similar legislation is also starting to receive renewed attention at the federal level and is providing the basis for initiatives in a number of key states, including Texas and Florida.
In summary, there are four main points to make. First, it must be stressed that - notwithstanding all the apparent momentum behind the FAIR Act - we could still be a long way from seeing effective asbestos legislation passed by Congress. Second, there remain many unanswered and troublesome questions as far as the role of the re/insurance markets are concerned.
Third, hopes of achieving finality are almost certainly dashed. And finally, on a more positive note, there are other initiatives afoot beyond FAIR that could yet prove equally, if not more, effective in controlling asbestos litigation abuse.
- Romy Comiter is director claims consulting at Axiom Consulting Ltd and Martin Baach is a partner at Baach Robinson & Lewis PLLC.