Letitia Chambers and Mary Lyman dissect the provisions of the proposed Fairness in Asbestos Resolution Act.

Senate Judiciary Committee Chairman Orrin Hatch (R-UT) has introduced the Fairness in Asbestos Resolution (FAIR) Act of 2003, S.1125. This legislation would take asbestos claims out of the tort system and place them in a new US Court of Asbestos Claims, with compensation made from a $108bn trust fund, the Asbestos Injury Claims Resolution Fund financed by defendants and insurers, and administered by an administrator of the Office of Asbestos Injury Claims Resolution.

Some aspects of the Hatch bill appear to be well crafted, but other sections have major problems and/or holes. While negotiations among insurers, industry and labour have been ongoing for several weeks, the Hatch draft does not reflect many of the areas of negotiation. For instance, the medical criteria and values are not drawn from the negotiation documents. The bill does not include critically important transition issues, nor does it include a reserve fund or back-end guarantee if expenditures exceed estimates, a necessity if Labor is to support a bill. The insurance section has significant problems as well. The one area that does appear to be worked out is the tiering arrangements for payments by defendants and debtors in Chapter 11.

Senator Hatch appears to believe that introduction of the bill, regardless of its flaws, will force negotiations to reach their conclusion. However, some supporters feel that introduction now will set back negotiations to such a degree that they will not recover.

Our view is that after a cooling period of several days, negotiations will be resumed under the auspices of the Judiciary Committee. If a bill is to pass, Labor's support is crucial. One or more Democratic Senators, such as Senator Dodd, may play an important role in brokering a deal. Democratic support is crucial to passage, which will require changes to the bill. There is a shot at resolving all the sticking points to obtain the support of the three primary constituencies - industry, labour and insurance - but the odds at this point remain at 50-50.

US Court of Asbestos Claims
The bill creates a US Court of Asbestos Claims in which all asbestos claims would be filed. It would have five judges, appointed by the President and confirmed by the Senate and serving 15-year terms. All claims would have to be accompanied by a notarised statement of identifying information, a detailed work history, a detailed description of the claimant's asbestos exposure, a detailed history of tobacco use, a description of asbestos-related diseases claimed together with required documentation, and details on any prior or pending civil actions or claims for asbestos-related injury. The Asbestos Court could also require other information through procedural rules.

There would be a two-year statute of limitations (beginning when the claimant is diagnosed) for filing claims. Currently pending claims would have to be filed within two years of date of enactment. Filing a claim for one disease would not preclude or start the statute running for a subsequent disease.

Claims would be decided under a no-fault system, with no need to show that the negligence or fault of another caused the injury. The essential elements of eligibility for compensation would simply be timely filing of the claims and proof by a preponderance of the evidence that the claimant meets:

  • the medical and diagnostic criteria for an eligible disease or condition; and
  • the latency and exposure requirements.
  • Within 20 days after a claim is filed, it would be referred by the Asbestos Court to a magistrate. The magistrate would do an initial review to make sure the information was complete, and notify the claimant if additional information were needed. Within 60 days of receiving all necessary information, the magistrate would transmit findings of fact and a recommendation for compensation to a judge of the Asbestos Court. Within 30 days of receiving the findings, the judge must make a final decision on compensation. If compensation is awarded, the Asbestos Court will notify the administrator of the trust fund to pay the compensation. There will be an expedited review process for claimants with exigent circumstances.

    Decisions of a judge may be appealed to a three-judge en banc panel of the Asbestos Court, which will provide a de novo review of the magistrate's determination and the judge's decision. The panel must enter a decision within 30 days of conclusion of oral arguments or 90 days of the filing of the appeal.

    Final decisions of the Asbestos Court may be appealed to the US Court of Appeals for the District of Columbia. The Court of Appeals must uphold the Asbestos Court unless it determines that its decision was arbitrary and capricious. If it so determines, the case must be remanded to the Asbestos Court.

    The Asbestos Court must establish personnel and audit procedures to evaluate the accuracy of magistrates' determinations. It must also develop medical audit procedures, and if the audit finds that medical evidence submitted by a physician or medical facility does not meet medical or the act's legal standards, it must notify claims examiners and the magistrates that evidence from that source is unacceptable. The provider in question must be notified and can appeal.

    The Asbestos Court must establish a legal assistance program to assist claimants with legal representation, and must maintain a list of qualified attorneys who have agreed to provide pro bono services. Claimants are not required to use the attorneys on the list.

    Some members of the Judiciary Committee are concerned by the creation of a new bureaucracy within the court system that could potentially employ hundreds of magistrates. The costs of the system are also a concern to some, particularly to Senator Nickles, who is the new Senate Budget Committee Chairman. These budgetary costs, however, should be offset from the revenue gain from lower company tax deductions for transaction and indemnity costs.

    Criteria for compensation
    All claims, regardless of disease category must meet the essential elements of an asbestos claim outlined above, i.e., timely filing and meet the diagnostic, medical, exposure and latency criteria.

    To meet the diagnostic criteria, a claim diagnosis must:

  • be made by a treating physician who conducted an in person medical examination of the claimant and is licensed to practice medicine in the state where the diagnosis is made;
  • include a review by the physician of work history, asbestos exposure pattern and smoking history, or other factors deemed relevant by the Asbestos Court;
  • be independently verified with respect to the duration, proximity, regularity and intensity of the asbestos exposure involved; and
  • have excluded other more likely causes of the claimant's injury.
  • In addition, the claimant must submit x-rays, including films and B-reader reports; detailed results of pulmonary function tests; laboratory tests; and the results of medical examination or reviews of other medical evidence. All submissions must meet recognised medical standards. Requiring an attorney retention agreement as a prerequisite to obtaining a medical examination or screening is prohibited.

    The 'latency criteria' section is somewhat confusing in that it states that the claimant must show exposure to asbestos in a manner that meets the medical criteria, within the US, for at least ten years before the diagnosis of any asbestos-related injury. Presumably the drafters did not intend a ten-year exposure requirement for everyone and this is sloppy drafting of a ten-year latency requirement.

    The bill goes on to say the claimants must demonstrate that the latency is consistent with medical criteria for latency periods typically associated with the disease claimed, that latency periods may vary based on the disease or condition involved, and that the Asbestos Court is to prescribe rules based on medical literature or other appropriate medical evidence implementing the criteria of this section.

    The medical criteria and values of the bill do not reflect the negotiations between industry and Labor. When and if a negotiated agreement is reached, these provisions are expected to be replaced with the agreed-upon criteria.

    There are eight eligible disease categories. Two, however, represent asymptomatic and unimpaired non-malignant claimants and receive no compensation other than medical monitoring. Medical monitoring includes costs to the claimant not covered by health insurance for x-rays and pulmonary function tests every three years (the administrator is to issue regulations establishing reasonable reimbursable costs).

    There are problems with the criteria from several perspectives. The values are quite low and will undoubtedly be negotiated up. The Lung Cancer One criteria are extremely broad and would draw in many background lung cancer cases, which could swamp the fund at higher values. A better approach would be more restrictive criteria with higher values.

    All claimants must meet the minimum exposure criteria, and for most categories must also show significant occupational exposure. At a minimum, the claimant has the burden of proof of showing meaningful and credible exposure to asbestos. This may be shown by an affidavit by the claimant, a co-worker or family member, employment records, invoices, construction or other records, or other credible evidence. The Asbestos Court is to issue rules prescribing specific exposure information that must be submitted. It may prescribe rules identifying specific industries, occupations and times for which there is a rebuttable presumption of significant occupational exposure.

    'Significant occupational employment' is defined as employment for a cumulative period of at least five years in an industry and occupation where the claimant handled raw asbestos fibres on a regular basis; fabricated asbestos-containing products so as to be exposed on a regular basis to raw asbestos fibres; altered, repaired or otherwise worked with an asbestos-containing product so as to be exposed on a regular basis to asbestos fibres; or was employed in an industry and occupation such that he was in close proximity to workers engaged in these activities.

    Compensation details
    Compensation will be rendered to qualifying claimants through structured payments paid over three years. The fund administrator will develop guidelines for accelerated payments for living mesothelioma victims and other claimants with exigent circumstances. Claimants may elect to receive payments in the form of an annuity. Compensation amounts will be reduced by any collateral source payments that the claimant has received or is entitled to receive. This does not include workers' compensation and veterans' benefits.

    The fund is to be financed with $45bn contributed by defendants required to participate and $45bn contributed by insurers required to participate over the life of the fund, plus up to $10bn in potential assessments from other defendants, transfers of assets from bankruptcy trusts, and the fund's investment earnings. The defendants' contributions are assessed according to an elaborate system of tiers and subtiers.

    There are seven defendant tiers, based primarily on the defendant's 'prior asbestos expenditures', which are the gross amounts paid up to 31 December 2002 in settlement, judgment, defence or indemnity costs related to asbestos claims. This includes payments made by insurance carriers to or for the benefit of the defendant. Provisions are included to ensure that payments that indemnitors make for indemnifiable asbestos costs are credited to them rather than to the indemnitee. Defendants are assigned to one of seven tiers, depending on level of prior asbestos expenditure. Once a defendant is assigned to a tier, it resides there permanently, regardless of subsequent events.

    Asbestos defendants who are debtors in a pending bankruptcy for which there is not yet a final decree (Chapter 7) or confirmed plan of reorganisation (Chapter 11) are placed in tier I. If a debtor in Chapter 11 bankruptcy certifies that asbestos liability was neither the sole nor precipitating cause of the bankruptcy, and it has not yet confirmed a plan or reorganisation, it may choose to proceed with a reorganisation plan, provided the presiding bankruptcy court determines that confirmation is necessary to permit reorganisation and ensure that all creditors and the debtor are treated equitably and that confirmation is 'clearly favoured by the balance of the equities.' The confirmation order must be entered within nine months of the date of enactment. If the reorganisation includes a ยง524(g) trust that involves payment by insurers, the payment reduces the insurers' required contribution to the fund dollar for dollar; similarly, the debtor's payments to the fund will be counted as a contribution to the fund.

    For other debtors, any plan of reorganisation and any agreement or understanding regarding asbestos claims filed before the date of enactment and subject to confirmation of a plan under Chapter 11 are entirely superseded by the bill. The debtors are brought into the new system as tier I defendant participants.

    The bill amends section 524 of the Bankruptcy Code to provide that an existing asbestos trust must assign a portion of the corpus of the trust to the fund if the trust was formed prior to

    22 October 1994. The funds must be transferred within six months of the date of enactment of the bill. The trust cannot make any payments on asbestos claims that were not liquidated before the date of enactment. The administrator may use the transferred funds for any purpose, including payment of claims for compensation by beneficiaries of the asbestos trust. After the transfer, the trustees of the asbestos trust have no liability to any beneficiary. There are limits on this requirement, however. The administrator may refuse to accept the asbestos trust's assets if he or she determines that they may create liability for the fund that exceeds the value of the assets. Asbestos trusts which also have non-asbestos beneficiaries may not transfer the assets that are allocable to those beneficiaries.

    Contributions to the fund are assessed based on assignment of defendant participants to subtiers within each tier. Assignment is based on the audited consolidated 2002 revenues of the defendant/debtor and all affiliated groups. The gross revenues calculation does not include revenues derived from insurance premiums.

    Affiliated groups may make an irrevocable election to report all the information necessary to determine the contribution level and contribute to the fund on a consolidated basis. If this is done, the group will be treated as if it were a single participant, with assessment of a single annual contribution for the entire group. The ultimate parent of the group is responsible for preparing and submitting the required information.

    Exceptions and adjustments
    Companies which qualify as 'small business concerns' under the federal Small Business Act as of 31 December 2002 are exempted from the contribution requirement.

    Expedited procedures will be established under which a defendant may seek adjustment of the amount of its contribution based on severe financial hardship or demonstrated inequity. A financial hardship panel and an inequity adjustment panel will be established to advise the administrator on adjustments. The panels may have overlapping membership and are to coordinate their deliberations and recommendations.

    Financial hardship adjustments are for three years and may be renewed. Total financial hardship adjustments for all companies cannot exceed 3% of total required annual contributions.

    Inequity adjustments require a showing that the contribution under the statutory allocation is exceptionally inequitable when measured against the amount of the defendant's likely liability in the tort system absent this legislation. If granted, this adjustment is permanent, subject to the fund's financial ability to accommodate such adjustments, annual availability of funds in the orphan share reserve account, and a cap of 2% of total required annual contributions.

    The bill requires that aggregate contributions of defendant participants to the fund equal specified minimums for each calendar year.

    Within 60 days after his or her appointment, the administrator is to notify all defendants, both directly and through a notice in the Federal Register, that they are required to submit the information necessary to calculate their required contribution to the fund. The defendants will then have 30 days to furnish the information, the accuracy of which must be certified by a responsible corporate officer, general partner, proprietor or individual of similar authority. If there is no response or incomplete information, the administrator will determine the defendant's contribution based on the best information available. The administrator is given subpoena power to compel testimony, records and other information relevant to his or her responsibilities.

    Within 60 days of receiving the information, the administrator will send a notice of the initial determination of the defendant's contribution. Procedures will be adopted under which the initial assessment may be revised based on newly received information. The defendant may request a rehearing on the determination. The defendant may pay in instalments as long as the full amount assessed is paid each year.

    Insurer funding
    If the insurers come to full agreement on an allocation process, this section may be replaced in Committee to reflect such an agreement. The bill does not specify the allocation of assessments among insurers. Rather, the bill establishes an Asbestos Insurers Commission composed of five members appointed by the President after consultation with the Congressional leadership of both parties. The task of the Commission is to determine how the $45bn contribution from insurers will be allocated among individual insurer participants. Commission members must have the requisite expertise but may not have a relationship with any insurer participant, nor be a federal officer or employee. The Commission is to be appointed within 60 days of date of enactment and meet within 30 days after all members are appointed.

    Within 30 days after the Commission submits its initial determination, the insurers may submit their own allocation agreement to the Commission and to the House and Senate Judiciary Committees. Once it is determined that the agreement meets the statutory requirements, the Commission will terminate.

    As with the defendant contributions, the annual contributions are expected to decrease over time, with each insurer's proportionate share remaining the same throughout. Each insurer's obligation to the fund is several and is not affected by the future insolvency of any other insurer participant.

    The bill specifies the criteria that are to be used in determining assessments.

    Mandatory participants - insurers that have paid or been assessed by a legal judgment or settlement at least $1m in defence and indemnity costs for claims for asbestos injury are mandatory participants in the fund. All other insurers are exempt from mandatory participation.

    Participant tiers - as with the defendants, insurers must be grouped into tiers. Tiers are to be based on:

  • net written premiums on policies covering asbestos from 1940 through to 1986;
  • net paid losses for asbestos injuries compared to all such losses for the industry;
  • net carried reserve level for asbestos claims on the insurer's most recent financial statement;
  • and

  • future liability.
  • The procedures providing notice, determining and revising assessments are the same as those for defendants, except that the Commission is to notify each insurer of its initial determination assessing a contribution to the fund within 120 days of its initial meeting. The insurer then has 30 days to provide the Commissioner with additional information to support limited adjustments to the assessment to reflect exceptional circumstances.

    Within 60 days of sending the notices of initial determination, the Commission must send notices of final determination. Insurers can obtain judicial review of this determination by appealing to the US District Court for the District of Columbia, which must uphold it unless it finds the determination to be arbitrary and capricious. If it so finds, it must remand the case to the Commission with instructions to modify its determination. Like defendants, insurers may pay in instalments as long as the full payment is received each year.

    The Commission is also mandated to determine the percentage of the total liability of each of the insurer participants identified. Within a year from the date of enactment, the Commission must submit a report to the Asbestos Court and to the Judiciary Committees containing the amount that each insurer is required to contribute to the fund and the payment schedule for the contributions. It will terminate within 60 days after submitting its report.

    Any insurer participant may file a claim in the US District Court for the District of Columbia against any reinsurer that is contractually obligated to reimburse it for a portion of costs incurred as a result of payment of asbestos-related claims. The claims will be subject to expedited procedures, with final judgment no later than 30 days after filing. The plaintiff must prove the right to recover by a preponderance of the evidence. A final judgment may be appealed to the US Court of Appeals for the District of Columbia, which must rule within 30 days after filing.

    Operation of the fund
    The bill establishes an Office of Asbestos Injury Claims Resolution (OAICR), headed by the administrator, to administer the fund and pay out compensation. The administrator is appointed by the President and confirmed by the Senate, and serves a five-year term. The administrator is responsible for administering and investing the amounts in the fund. He or she must invest these amounts in a manner that will enable it to make current and future distributions to claimants. If the administrator receives information concerning conduct occurring after date of enactment which may be a violation of environmental or occupational safety and health requirements for asbestos, he or she may refer the violation to the EPA or OSHA, respectively, or to the US Attorney for civil or criminal prosecution.

    The fund will be available to pay claims for compensation for an eligible disease or condition, claims for reimbursement for medical monitoring, principal and interest on any amounts it may borrow, and administrative expenses. It may borrow any amount that doesn't exceed expected contributions for the following year. Total mandatory contributions to the fund may not exceed $5bn in any calendar year.

    Required contributions
    A guaranteed payment account will be established within the fund to ensure payment of the total amount of required contributions by all participants. A surcharge will be imposed on each participant in addition to its required contribution, in an amount that the administrator determines appropriate to insure against the risk of non-payment. Amounts in the guaranteed payment account will be used as necessary to pay claims to the extent the fund contains insufficient funds due to non-payment by any participant.

    If total participant contributions exceed the minimum aggregate contribution in any year, the excess will be placed in an orphan share reserve account. The money in the account will be used only if:

  • a bankruptcy petition is filed for a participant after the date of enactment and the participant cannot meet its obligations; or
  • the administrator grants a participant relief for severe financial hardship or exigent circumstances.
  • If any participant defaults on payment, a lien in favour of the US for the amount of the delinquent payment, plus interest, will be placed on all the participant's property. If the participant enters bankruptcy, the lien will be treated as a lien for taxes owed to the US. The administrator may bring a civil action in federal district court to enforce payment.

    Any defendant in an asbestos claim that is not a mandatory participant and is likely to avoid future civil liability as a result of this legislation may be assessed for contribution to the fund as an 'additional contributing participant'. Up to $14bn may be assessed over the life of the fund from all additional contributing participants.

    In sum, the $108bn fund is to be financed by $45bn each from defendant and insurer participants and up to $14bn from additional contributing participants. The remainder will come from transfers from bankruptcy trusts and investment income.

    By Letitia Chambers and Mary Lyman

    Letitia Chambers, PhD is a managing director in the Washington DC office of Navigant Consulting Inc and is well-known for her extensive contributions to the development of US public policy over the past 25 years. Dr Chambers has provided expert testimony in Federal Court and before Congress, was the US Representative to the United Nations General Assembly in 1996 and served as staff director of the US Senate Committee on Labor and Human Resources.

    Mary Lyman, JD is a senior engagement manager in the Washington DC office of Navigant Consulting in the products liability practice, including asbestos. A graduate of Harvard Law, Mary has also served as tax counsel for Congressman James Shannon's Ways and Means Committee work.