Asbestos-related claims appear set to increase. Adrian Leonard outlines the never-ending story.
Asbestos simply isn't going away. Despite the best efforts of the international insurance sector to put paid to the problem – largely through the misguided strategy of paying a few thousand dollars to anyone who pops up with a claim – the sheer number of asbestos claims is swamping the traditional defendants and their insurers, and is now encroaching on new defendants and new policies.
There is something of a consensus among pundits and actuaries as to the ultimate cost of asbestos claims to US insurers and reinsurers. Tillinghast and Milliman, two leading firms of consulting actuaries, have put the cost at $60bn and $70bn respectively. AM Best, through what is more of an educated guess than an actuarial estimate, has put the number safely at $65bn, an amount it reconfirmed in its November 2001 analysis of the problem. However, the consensus breaks down when it comes to predicting how much non-US re/insurers will pay for US asbestos claims. Tillinghast says $62bn, Milliman $30bn. AM Best still doesn't hazard a guess.
There is complete agreement, however, that the cost of asbestos to the insurance industry and its reinsurers is set to continue. There is also a fairly wide consensus that insurers and reinsurers are, with notable exceptions, badly under-reserved for asbestos IBNR. A drag on future earnings is seen as preferable to a hit on the current account, while the option of basing provisions on attorneys' case estimates is simple and hassle free. Only in the long run does it have potential pitfalls – when the cash runs out. AM Best (as, in the words of analyst VJ Dowling of Dowling & Partners, the de facto regulator of the US insurance sector) has been encouraging companies to ante up and meet its asbestos and environmental ultimate survival ratio of 12 years, with mixed results. For the rest of the insurance and reinsurance world, however, no such pressure exists, although many companies appear unnervingly copacetic on the issue.
The advance of US asbestos claims is the result of several phenomena. First, awards have hit a new peak. On 28 August 2001 the largest ever award for a single victim was granted by a jury: $55.5m. The defendant, Kelly-Moore Paint Co, said although it will appeal, it has insurance that will cover the claim. In 2000, Pittsburgh Corning and WR Grace, both of which are traditional asbestos defendants, both declared bankruptcy before a state court jury in Texas made a $52m award against them for a group of asbestos injury claimants.
More insidious, however, is the massive increase in the filing of new asbestos claims. For example, the Manville Trust was set up and capitalised to handle claims against the bankrupt Johns-Manville Corp, a major asbestos defendant. At inception, it expected to tackle about 100,000 asbestos claims, but by mid-year 2001 it had received more than 512,000. During the second quarter of 2001 Manville received 125% more claims than in the first quarter, itself 24% higher than the previous quarter. In Q2 1997, it received 4,500 claims. During Q2 2001 the number was 55,200.
Asbestos defendants and insurers had adopted a strategy of paying, rather than adjusting, asbestos claims. Settlements were generally agreed through institutions such as the Center for Claims Resolution. The choice basically to pay all claims – rather than all valid claims – brought a new tidal wave of spurious claimants urged by plaintiffs' attorneys. The solicitors' preferred outcome is an ‘inventory' settlement which bundles the claims of a few seriously ill victims with thousands suffering low or no impairment, and defendants, preferring settlements to a high-profile court cases, have agreed. One London market reinsurer described the evolution of a ‘dependency culture' in the US legal community. Many experts estimate between 75% and 95% of current claimants are suffering no physical impairment.
It is unlikely an unimpaired claimant would receive compensation in court for an injury that has not manifested, but plaintiffs' attorneys and major asbestos defendants until recently chose settlement, rather than litigation, as the preferred course of action. The defence cost would likely exceed the settlement, and suits can be brought anywhere in the US where a defendant was active, allowing attorneys to ‘venue shop' for courts which are sympathetic to victims (Mississippi is notorious). “Companies find it more cost-effective to settle, rather than go to trial,” stated bankrupt asbestos defendant company USG Corp (formerly US Gypsum). “Knowing this, plaintiffs' lawyers keep filing more of these lawsuits.”
Despite the rise in claims, however, the amount of money being paid out by insurers and reinsurers is actually falling. London, led by Equitas, has made significant recent progress in resisting payments to unimpaired individuals, but the effect of the high profile effort has, so far, been only minimal, Besides, other insurers say that for years they have required such documentation. Of greater impact has been the recent spate of bankruptcies among defendants – at least ten since 2000.
By declaring bankruptcy and reorganising, corporations can shield ongoing business operations from the liabilities of old activity involving asbestos. However, turning off the tap of asbestos injury compensation payment through bankruptcy has had a number of side effects. First, plaintiffs' attorneys have begun to seek damages from non-traditional asbestos defendants. From about 50 asbestos defendants in the 1980s, the number has shot up to as many as 2,000. Many are so-called ‘peripheral defendants', including manufacturers, distributors and installers of certain products that contain asbestos, as well as premises owners. “As the financial resources of traditional asbestos defendants have been depleted, plaintiffs are targeting these peripheral parties with greater frequency and, in many cases, for larger awards,” wrote Chubb Corp in its 2000 statutory filing.
Bankrupt or not, defendant companies often seek to increase their available insurance asset by arguing that more cover is in place for asbestos-related injury claims than was previously agreed. Usually this involves the tapping of non-products liability insurance, primarily premises and operations cover, which were typically written without aggregate limits. After product-related coverage has been depleted, defendants have successfully recovered millions of dollars more in compensation paid to asbestos claimants under their non-products limits. Usually only new claims are brought against the non-products cover, but some insureds have successfully obtained new non-products limits through the so-called ‘reclassification' of settlements already recovered under products liability insurance policies, ‘restoring' previously exhausted limits under those policies and putting the claims against virtually unlimited non-products cover.
In late 1997 and early 1998 US appellate courts, after earlier divergent decisions, opened non-products coverage to asbestos defendants, ending the coverage limitation that the insurance sector had theretofore enjoyed. In Commercial Union Ins Co v Porter Hayden Co, the Maryland Court of Appeals rejected the arguments presented in a friendly intervention by the American Insurance Association, which had hoped that the case would resolve the issue in insurers' favour once and for all.
Shortly after, in a unanimous decision, the New York Court of Appeals, in Frontier Insulation Contractors v Merchants Mutual Ins Co, confirmed the decision, stating: “The focus in determining whether a products-hazard exclusion applies is not simply whether an insured's product caused the loss at issue, but rather is dependent on the location of the accident and the possession of the product. Defendants' argument fails to appreciate that an exclusion for products hazards governs only one subset of products liability claims.” More litigation is expected.
One reinsurer tells of the significant impact of such no-products claims. “We have seen the introduction of operations and premises losses from new insureds, and also from products insureds who may have exhausted their coverage, but have subsidiaries, such as installers and distributors, with non-products cover which is not subject to aggregate limits... A significant proportion of our case reserves and paids is going to these newer claims.” With the flow of claims under non-products insurances increasing, it is almost impossible to say how much cover remains for US asbestos exposures.
Another major factor contributing to the upsurge in claims has been the defeat in the US Supreme Court of the class action settlements proposed under Georgine v Amchem and Fibreboard v Ortiz. The settlements were intended to put an end to uncertainty over asbestos claims against certain defendants once and for all. The result of their failure, however, has been a spiral in claims, as filings which had awaited the outcome of the settlements were at last brought into action, including dozens of ‘inventory' claims brought by plaintiffs' attorneys.
Insurers, meanwhile, have been shocked into new worry about the adequacy of asbestos reserves, primarily by the 2001 reports from AM Best and Tillinghast. However, according to statutory disclosures, asbestos reserves are increasing and claims payments by insurers are falling. At year end 2000, all US insurance and reinsurance groups disclosing an asbestos reserves had, in total, $13,787m in asbestos provisions.
That compares to $13,200m in 1996. In the interim, companies incurred claims of $13,725m and paid claims of $12,849m. Over the last five years, however, the trend of increased claim filings has not been discernable: incurred claims fell by almost 50% between 1996 and 1997, returned to their 1996 level in 1998, increased again in 1999, and fell to below their 1996 level in 2000.
Unfortunately several factors make the data somewhat meaningless, at least in terms of trending. The CNA Fibreboard payment softens the figures. Excluding CNA's incurred asbestos claims emphasises the year-on-year changes. In addition, almost all figures presented divide the insurance sector into the US, including insurers and reinsurers, and non-US re/insurers. A claim may be seen one year in a US insurer's paids, the next year in that of a US reinsurer, and later still against a foreign excess of loss reinsurer.
A division between captive insurers, insurers, excess insurers and reinsurers would yield a more useful trend. Finally, bankruptcies have played a large part in reducing the number of settlements, which has in turn reduced indemnities.
As the litigation mounts in the coming years, it may lead US legislators to take another look at legislation surrounding asbestos claims following the death in Congress of the promising HR 1283, The Asbestos Compensation Act of 2000. There is a possibility that the US public will demand it. As PricewaterhouseCoopers actuary Bryan Joseph points out: “There is public pressure. More and more people are thinking that the current situation, based on substantial volumes of low value claims, is ridiculous. They are concluding that the current process and the surge of low value claims may have killed the golden, asbestos-covered goose.”
That would only deal with US asbestos claims, of course. As for exposures elsewhere in the world, they are rarely a topic of conversation among insurers, but perhaps that should change. The failure of Chester Street, the run-off vehicle of the old-year Iron Trades business, has at least sparked some awareness in the UK, and resulted in a bail-out funded by the Association of British Insurers that could cost billions. The UK's Health and Safety Executive predicts that asbestos-related deaths in the UK, currently running at about 3,000 per year, are likely to escalate to a peak of 10,000 per year in 2020.
Elsewhere, more are falling victim to old asbestos exposures. Up to 20,000 asbestos-related lung cancers and 10,000 mesotheliomas occur annually in the developed world. In most countries, including the UK, occupational exposures continue. In the future European Union countries of Eastern Europe, and in other former Soviet states and some Asian countries, the ongoing active use of asbestos is shocking. Ultimately, companies, insurers or states themselves will be called upon to compensate those who fall victim to the terrible ailments arising from the inhalation of asbestos fibres. The problem is not going to go away.