It seems it's a problem that's just not going to go away. APH (asbestos, pollution and health hazard), A&E (asbestos and environment) – whatever you want to call them, re/insurers with long-tail books are bracing themselves for another round of reserve strengthening. And for some, the latest bouts of claims may prove the last straw.
In particular, asbestos-related claims have been accelerating recently. Equitas' results to end March 2001 showed an additional undiscounted gross provision of £1.7bn, bringing its total asbestos-related reserves (gross and undiscounted) to £8bn – about the same amount as the assessed total claims reinsured into it when it took over Lloyd's pre-1993 book five years ago.
Some might argue that the very nature of Equitas means that this move was not a complete shock, though it is interesting to note that environmental pollution claims settlements were “favourable” during the year. At the same time, the company's auditors are still qualifying Equitas' accounts because of the inherent uncertainty of APH business, now accounting for 70% of net discounted claims liabilities.
CNA's announcement at its Q2 results that it was adding $800m (after tax) to reserves for asbestos, environmental pollution and mass tort claims, as well as selling off its UK reinsurance operation, was yet another heads up that long-tail liability pain is beginning to hit. Estimates from Morgan Stanley Dean Witter (MSDW) point to CNA now holding just over $2bn in A&E reserves, with Berkshire Hathaway – a recent purchaser of a number of asbestos manufacturers – coming in at $1.5bn in reserves. While some re/insurers such as Ace, CGNU and Everest Re have reinsurance reserve covers in place, and others like Swiss Re appear to have commuted a substantial proportion of their liabilities, yet others such as American Financial are finding life heavier going and are expected to add to reserves in the foreseeable future.
Asbestos-related claims have reached new heights recently, and third parties are increasingly finding themselves the target of litigation, particularly in the US. A recent report by the RAND Institute for Civil Justice, a not-for-profit organisation based in the US, revisited asbestos litigation almost 20 years after it first looked at the subject.
Asbestos litigation is now the longest-running mass tort litigation in US history, and the bad news is it doesn't look to be reaching its peak yet. In its preliminary report – it will publish further research next year – RAND notes that the typical claimant now files against several dozen defendants, and at least five firms in the US have had between 300,000 and 500,000 suits apiece. The closest estimate, given the lack of a national register of asbestos claimants, is that there are more than 500,000 claimants in the US, and it is clear that both cancer-related and non-malignant claims are on the increase.
Taking a sample of five major defendants, the filings against four of them rose sharply over the course of the 1990s, and some saw claims more than double in a year. However, the volatility of the claims filings means it continues to be difficult to predict future trends. For example, the RAND study discovered that mesothelioma (an asbestos-related cancer) claims fell in the early 1990s, while non-malignant claims rose over the same period. That trend led some analysts to conclude that mesothelioma cases had stabilised and were going to decrease over time. Instead, they started rising again in the mid-1990s, and for some attorneys, this is seen as the most important recent change in the litigation.
Nobody knows how much has been spent on asbestos-related litigation in the US. In May, ratings agency AM Best issued estimates that the property/casualty industry has paid out about $22bn in asbestos-related claims and may face a claims surge that could ultimately cost the industry $65bn, two-thirds higher than its previous 1997 estimate of $40bn. At the moment, the estimates reckon the industry's exposure is about 50% unfunded. MSDW research estimates, based around CNA Re's reserve strengthening, indicate that broker market reinsurers are likely to have between a $2.5bn and $5bn deficit in their related reserves.
At the beginning of August, Standard & Poor's issued commentary on asbestos-related claims, assessing that they are a significant but not terminal threat to the US re/insurance industry. The recent increase in asbestos manufacturers filing for bankruptcy protection appears to have accelerated claims filings against p/c insurers, and more claimants with asbestos exposures but no signs of illness are emerging. Equitas has decided to deal strictly with such claimants, requiring medical evidence of injury, as well as evidence that it is indeed the defendant's product that was responsible for the injury.
Estimates from Tillinghast-Towers Perrin indicate that asbestos-related litigation will ultimately reach $200bn in claims and expenses – to be paid 39% by the manufacturers ($78bn), 31% by overseas insurers ($62bn) and 30% by the US insurance industry ($60bn). “A significant majority of the new claims do not relate to individuals with mesothelioma or lung cancer, but rather to non-malignant diseases,” said Tillinghast consulting actuary Mike Angelina. “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 the litigation ends, absent some type of federal legislation.”
With the increase in bankruptcies in asbestos manufacturers has come an increase in the types of defendants targeted, as plaintiffs' attorneys have looked further afield for remediation. Now, defendants are product users as well as manufacturers, and S&P reckons that “the implications to the insurance community are potentially devastating.”
In addition, a Supreme Court decision in 1997 to lift an injunction which had slowed down claims activity in the mid-1990s and tort reform have added to the recent flurry of claims. Added to this is pending tort reform, which is pushing plaintiffs' representatives to front-load all possible claimants before any related illness has manifested itself, according to S&P. With substantial additions to reserves on the horizon for a number of US insurers, S&P is expecting to make some downgrades, though it is confident that the number of large reserve strengthening moves will be limited and manageable. While it does not believe that the area of asbestos-related claims is a “catastrophic-loss event” for the industry, it does take up the cry for tort reform in the area. “In a sense, the commercial general liability policy has a built-in perpetual put against insurers and in favour of the legal community,” it commented. “Asbestos will come and go, but exposures such as mould, construction defect and electromagnetic waves are looming in the background and threaten the long-term financial strength of the industry and individual insurers.”
Electromagnetic fields (EMFs) started causing a ripple of concern in the last decade, originally emanating from worries over the effects of EMFs around electricity pylons. With the rise of the cell/mobile phone came further worries about EMFs potentially causing brain disorders and cancers. To date, scientific findings have been mixed, though website chatrooms are teeming with stories about brain damage in rats caused by mobile phones. It is accepted in the scientific community that the effects on humans will take years to manifest themselves.
Another liability exposure which has been waiting in the wings is organophosphates (OPs). After a court decision in the mid 1990s that found in favour of a musician who had developed severe physical problems following a rehearsal in a Hong Kong concert hall while it was being treated with OPs, concerns started that claims activity would increase. In particular, the agricultural community which frequently uses these chemicals looked like a likely source of claims. In the event, just last month the UK court dismissed the Organophosphate Group action in a preliminary judgment, and Mr Justice Morland's full reasoning is expected to be issued later in the year. The group action had been brought by farm workers, alleging ill health following prolonged OP exposure in the course of their work. The defendants, comprising OP manufacturers and farm labour employers, applied to the court for the action to be struck out as an abuse of process, on the grounds that the claims were unviable, particularly in the light of a scientific pilot study carried out on behalf of the claimants. The study's findings did not provide sufficient evidence to link OP exposure and ill health.
Toxic mould is another liability area currently hitting the radar screen, and receiving a lot of media exposure in the US. Coverage issues are currently under discussion: are the claims covered under CGL policies? Is the pollution exclusion triggered? Litigation is continuing apace, and re/insurers of homeowner policies are advised to keep a watching eye on developments.
Yet another source of new liability litigation in the US is methyl tertiary-butyl ether (MTBE), a gasoline additive that was originally perceived as an important tool in the fight against air pollution but is now developing a pariah-like status for its fouling of water courses and lakes. Two years ago, the Californian governor, Gray Davis, ordered MTBEs to be removed from Californian gasoline before the end of next year. Clean-up costs for environmental contamination have generally been met by gas station operators or owners, for the removal of MTBEs which leaked from holding tanks and gas lines. However, at the beginning of August Exxon Corp negotiated a $12m settlement with the South Lake Tahoe Public Utility District for groundwater pollution. Not only was this the largest settlement to date, but the first with an oil company, according to the plaintiff's attorney.
Implants continue as a regular source of liability claims, with the most recent settlement offering from Sulzer Medica Ltd for faulty hip or knee implants of $750m in cash and Sulzer stock showing that alternative forms of reparation are being sought to keep organisations financially viable. This arrangement still needs to be approved by a judge and Sulzer shareholders, though a number plaintiffs' attorneys immediately rejected the offer, enabling their clients to continue with litigation.
Tobacco has been a very dark cloud for several years, and the $3bn award earlier this year against tobacco manufacturer Philip Morris caused more than a ripple of concern. On appeal, the award was reduced to $100m – and is being further appealed. Nevertheless, it is significantly larger than any previous awards; the highest before was $80.3m awarded in 1999 and sharply reduced on appeal. In a twist on the litigation front, asbestos products companies recently have been bringing lawsuits against tobacco companies for payments made to asbestos-related disease sufferers who also smoked. These have, however, not met with much success so far, and a recent ruling by Jefferson County Circuit Judge Lamar Pickard in Mississippi stated that Owens Corning had no legal basis to claim against tobacco companies because of the remoteness of the claim. This may be a disappointment to Owens Corning's insurers, particularly because currently it appears the re/insurance industry has little exposure to tobacco litigation.
It is asbestos that remains the biggest thorn in the side of the re/insurance sector, with ever-increasing claims inflation, larger awards and new defendants being identified all the time. According to RAND, non-traditional defendants are now accounting for more than 60% of asbestos-related expenditures. With one of the latest contaminations found to be a Raoul Dufy painting, La Fee Electricite, which has asbestos on the back of the wood panels making up the 600 square metre work and clean-up estimated at FrF7m, future sources of claims are likely to be from unexpected quarters.