The current swathe of asbestos litigation poses new and incalculable risks
In the mid-1990s, the traditional asbestos litigation problem – labelled a ‘crisis' by the Rehnquist Committee at the beginning of the decade – finally seemed under control. Filings were high but predictable. The decision of the Panel on Multidistrict Litigation to consolidate federal cases in Philadelphia was the first step in bringing a measure of rationality to the federal system. And imaginative lawyering on both sides promised to replace the waste and inefficiency of the tort system with judicially supervised administrative mechanisms that would channel funds to people with cancer or impairing non-malignant diseases.
Perhaps the centrepiece of this new approach was the Georgine class action settlement negotiated by the Center for Claims Resolution (CCR) and leading members of the plaintiffs' bar. At that time, CCR comprised 21 asbestos defendants that had agreed to manage asbestos claims jointly. Georgine established a claims mechanism that ensured prompt payment of people who were injured by asbestos-related disease, while deferring the claims of the unimpaired until they developed a genuine injury. In 1994, the Federal district court determined that the settlement was fair and reasonable. Georgine was followed by the conceptually similar Fibreboard class settlement the following year. A new age seemed to be dawning.
It was, however, a false dawn.
In 1997, the US Supreme Court overturned Georgine, saying that federal class action rules could not be used to resolve a controversy as complex as asbestos litigation. Only Congress could do that. Two years later, the court disapproved the Fibreboard settlement on similar grounds. Legislation introduced in response to the court's call in Georgine went nowhere. At the same time, attempts to establish purely voluntary global settlements, such as Owens Corning's National Settlement Plan, foundered.
In 2000, the crisis deepened when six asbestos defendants – including Owens Corning and CCR member Armstrong World Industries – filed bankruptcy. Earlier this year, former CCR member GAF also filed, and WR Grace has announced that bankruptcy is a real possibility. In January, The Economist reported the collapse of a British insurer, largely under the weight of asbestos claims. The article noted that insurers seem “ill-prepared for the hits to come.”
First, the litigation environment was transformed in the late 1990s. There was an onslaught of new claims. Even adjusting for the effects of Georgine, CCR had received 20,000-30,000 claims per year in early 1990s. Since 1997, however, that rate has increased to over 50,000 cases annually. To put this perspective, when Johns Manville filed for bankruptcy in 1982, it had faced fewer than 20,000 claims in its entire history.
Verdicts have also increased. For example, in 2000, the average reported verdict in lung cancer cases was approximately $5m – a ten-fold increase over five years. Non-malignant cases, which usually involve mild or no symptoms of disease, averaged $1.16m. Not surprisingly, the increase in verdicts was reflected in increased settlement demands.
Second, increased filings and increased settlement demands prompted a rash of bankruptcies, beginning with the Babcock & Wilcox bankruptcy in February 2000. Indeed, by now nearly all of the traditional asbestos defendants from the 1970s and many of the peripheral defendants of the 1980s have been driven into bankruptcy by asbestos litigation. These bankruptcies have had two significant effects:
- the demands on remaining defendants continue to escalate. The mere filing of a bankruptcy halts payments for years, and the amounts paid by the emerging trusts are never more than a fraction of the bankrupt defendants' actual share of the liability. As Fred Baron – one of the deans of the plaintiffs' asbestos bar – remarked last year, “companies want to pay what they paid 15 or 20 years ago, and don't want to take into consideration that there might be fewer companies to pay, which means higher shares of liability”; and
- there is a scramble to find new defendants to keep the litigation going. With the bankruptcy of most traditional asbestos defendants, one plaintiffs' lawyer candidly admits, “[y]ou have to look under every stone” to find potential defendants. Over 2,000 companies have been named in asbestos cases so far. Moreover, within the last year, juries have returned large verdicts against oil refiners (Shell), as well as construction and maintenance contractors (Fluor and Brown & Root). A life insurance company (Metropolitan Life, a traditional but hitherto minor defendant) has been forced to pay a settlement far in excess of what had been common a few years ago. As traditional defendants, which have often exhausted their insurance coverage, continue to exit the scene, asbestos liability will shift to healthy American companies with little previously apparent connection to asbestos but with ample insurance coverage.
- The insurance industry is beginning to realise that the present asbestos litigation poses new and incalculable risks. As plaintiffs' lawyers ‘make the case' against new defendants, insurers report a rise in premises and operations liability. The rise in such liability is deeply troubling for insurers, as premises and operations coverage – unlike product coverage – typically does not carry aggregate limits.
- These trends are occurring at a time when insurers are maintaining, according to experts, substantially underfunded reserves for asbestos losses. Several years ago, insurance analysts estimated that liability for asbestos-related injuries would total about $40bn when the litigation is finally concluded, and these estimates remain the basis for many insurers' reserves. However, the estimates had assumed a decline in asbestos litigation in the late 1990s. They are now being updated to reflect a continued expansion in asbestos litigation. If experience is any guide, even the revised estimates will prove inadequate in the end.
- So, what is to be done?
- The Center for Claims Resolution has responded to these developments by continuing to evolve to serve its members' needs. Historically, CCR's claims management approach has worked well. Following the demise of the Asbestos Claims Facility in 1988, the CCR settled asbestos claims on behalf of its members according to a more flexible, agreed-upon liability share formula, with each member individually responsible only for its own share. CCR has also been at the forefront of efforts to bring rationality to the asbestos litigation system, including the star-crossed Georgine settlement which provided a global resolution of future claims. The CCR will continue to play a leading role in this regard. But, facing radical changes in the litigation environment, CCR has determined that even more flexibility is required. Thus, rather than bundling case against all CCR members together, CCR is working to settle each member's case individually. Its objective is to offer to each member an array of services that can be combined to meet that member's individual needs as the litigation system continues to evolve. And, as always, CCR will continue to work to keep defendants' transaction costs at a minimum.
- However, more flexible claims management cannot address the causes underlying the new asbestos litigation crisis. The flood of claims and huge demands even for non-malignant cases involving no breathing impairment threaten to overwhelm the system. Many companies which never imagined themselves as asbestos defendants are now on the line, and so are their insurers. Meanwhile, asbestos defendants are marching into Chapter 11 in serried ranks, threatening the jobs of their employees and the welfare of the communities in which they operate and raising the serious possibility that individuals who fall victim to asbestos-related cancers in the future will not be compensated. Only Congress can decisively address these problems.
- In recent months a group of defendants, led by US Gypsum, has been meeting with plaintiffs' lawyers to explore ideas for legislation in this session of Congress. While no agreement has been reached, the discussions have been constructive. There is certainly an expanding realisation that an ever-increasing number of asbestos bankruptcies is in no one's interest. A consensus of affected groups on the pathway to reform would greatly increase the likelihood that Congress will act.
- Parties wanting more information about the legislative effort may contact Patrick M. Hanlon, a partner at the law firm of Shea & Gardner in Washington, DC. Shea & Gardner advises many clients facing asbestos litigation issues.
- Mr Hanlon can be reached through e-mail at , email@example.com