Not over yet: despite positive developments affecting asbestos claims, insurers should still expect significant liabilities.

Key Points

* Litigation reforms, limits by trusts on amounts available for payment and other factors contributed to a decrease in filings of asbestos nonmalignant claims during 2004-2006.

* A significant reduction in total asbestos claim liabilities is not likely because the increase in payments made to malignant claimants largely will offset the reductions expected from the nonmalignant claimants.

* Availability of significant funds from bankruptcy trusts will not reduce the burden on solvent defendants.

A crisis for asbestos defendants and the insurance companies that covered them occurred during the years 2000 through 2003. Defendant asbestos companies witnessed their annual claim filings and expenditures increase significantly. An overwhelming number of filings were made by unimpaired plaintiffs, raising concerns regarding the availability of resources necessary to fairly compensate the impaired plaintiffs then and in the future.

The asbestos defendant population grew to more than 8,000 companies, with virtually every type of industry touched by litigation. More than 70 companies declared bankruptcy in an attempt to obtain finality on the amount of their asbestos liabilities. RAND Corp. has estimated that there were approximately 730,000 asbestos claims filed against defendant companies and $70 billion worth of expenditures by the end of 2002. The total tab of the asbestos liabilities was estimated by experts to be in the range of $200 billion to $300 billion, with 1 million to 3 million total claim filings expected. All the major stakeholders, including plaintiffs, defendant companies, insurance companies, legislative bodies and the judicial system, agreed that reform was needed, although there was disagreement on the nature and scope of such reform.

A period of reckoning followed in 2004, which led to many positive developments in the asbestos litigation and claim environment. While it may be too early to study the full impact of these developments, it is instructive to understand how they may affect asbestos liabilities.

Seeing a Change

Some of the noteworthy developments in the asbestos litigation and claim environment include the following:

[1.] During 2004, 2005 and 2006, defendant companies experienced a significant drop in claim filings for nonmalignant injuries.

[2.] Many asbestos trusts became operational in 2004-2006, with more than $30 billion in assets and investment income from those assets available to make payments.

[3.] The average malignant claim settlement amount rose as defendants moved away from settling claims in groups, which had depressed average claim payments for malignant injuries.

Key Observations

[1.] In spite of these positive developments, we do not expect a significant reduction in total asbestos claim liabilities because we expect the increase in payments made to malignant claimants to largely offset the reductions expected from the nonmalignant claimants. While the number of claims that close with payment is likely to be at the low end of past projections of 1 million to 2 million, we expect the total cost to be in the middle of past projections of $200 billion to $300 billion. Eighty-five percent of the expected loss payments made during 2003 and subsequent years likely will be spent on malignant claims, with nonmalignant claims receiving only 15%. For claims that close with payment, we expect the division between the number of malignant and nonmalignant claims to be 20%/80% respectively in 2003 and subsequent years.

[2.] With the availability of significant funds from bankruptcy trusts, some parties believe that the burden on solvent defendants will be reduced. It may be unrealistic to expect a reduction of liabilities for solvent defendants.

Decrease in Filings

The Manville Trust is relied on to provide a reasonable representation of the filings for asbestos defendants in general. Its filing history by disease type is shown below in "Manville Asbestos Claim Filings."

As may be observed from the table, there has been a dramatic decrease in the number of nonmalignant claims against Manville in 2004-2006 from the annual filing level in the preceding years. The table also shows a less dramatic decrease in malignant claims; however, this is chiefly due to the acceleration in claim filings that occurred in 2003 prior to the adoption of a new trust distribution process by Manville. In general there has been a drop in claim filings in 2006 for all disease types as compared with filings in 2005. We investigated the reasons for the drop in mesothelioma claims in 2006 and have concluded that the drop is temporary and that claim filings will return to prior (or even higher) levels in subsequent years.

Mesothelioma filings in 2006 are dramatically lower than in prior years chiefly because most plaintiff law firms are reluctant to file mesothelioma claims with the Manville Trust (or any other trust) before the mesothelioma claim is settled or tried in the tort system. This happens because, almost without exception, courts will setoff from the judgment against a defendant the amount of compensation the plaintiff has received from other joint defendants. At least one asbestos defendant, trying to take strategic advantage of the setoff rules, petitioned a state court in Ohio to leave all mesothelioma cases as pending on the trial docket until they were resolved by the asbestos trusts. As noted below, this could save a mesothelioma defendant as much as half a million dollars. While it's true that the overwhelming majority of asbestos cases settle, the existence of potential setoffs affects settlement negotiations.

In addition, asbestos trusts have increasingly been served with subpoenas by defendants in the hope that a plaintiff who already has filed his or her asbestos claim with a trust alleged different facts in that claim as compared with the complaint filed in court.

Many different factors contributed to the decrease in filings of nonmalignant claims during 2004-2006.

[1.] Several states, including Florida, Georgia, Kansas, Ohio, South Carolina and Texas, have enacted litigation reforms that require the production of defined medical criteria in order for a plaintiff to be eligible for compensation. These criteria primarily address nonmalignant conditions. Challenges to these reforms have taken the form of questioning their applicability to pending claims rather than questioning the reforms themselves. (Some legal scholars argue that legislative enactments cannot affect pending cases and can be applied only to future cases.) As a result, it is likely that the decrease in the unimpaired claim filings will continue.

[2.] Many of the unimpaired filings that were made in the past came as a result of such claims being consolidated for trial with cancer claims, and then settled with the cancer claims. Asbestos defendants, the insurance industry and the judicial system often prefer to determine the value of each claim based on the merits of that claim, rather than following the former practice of determining value based on the value of the consolidated cases. Some state statutes, such as the one in Michigan, prohibit consolidation of claims for trial and settlement. As a consequence, unimpaired claim filings are reduced, since it is no longer worth pursuing such claims.

[3.] A recent survey, albeit informal, by the Manville Trust revealed that practically no asbestos plaintiffs' law firms are screening cases. "Screening" refers to the former practice of sending mobile X-ray facilities to known areas of an asbestos-exposed population, and inviting people to have an X-ray taken. In prior years, the screening practice produced tens of thousands of mostly nonmalignant claim filings.

[4.] Many asbestos trusts have placed limits on amounts that axe available for payment to nonmalignant claimants during any year, or cumulatively over many years. The scheduled payments set by the trusts also show a larger differential between malignant and nonmalignant claim payments than the relationship that existed in the past. Both of these factors provide less of an incentive to file nonmalignant claims.

Also contributing to the lower claim volume is the fact that many asbestos trusts, including Manville, now (but only recently) have trust distribution processes that significantly increase the requirements for a nonmalignant claimant to be paid at all, while simultaneously reducing the amount of compensation available for such a nonmalignant claimant, regardless of the quantum of proof presented. These factors multiplicatively present substantial disincentives to file nonmalignant claims.

[5.] There has been a general restriction of asbestos case filings in several states, which limit venues to state residents and only where asbestos exposure occurred in the state.

[6.] In addition to the reforms cited above, there are several significant events, although not asbestos-specific, that have led to a reduction in asbestos claim filings:

* The ruling by United States District Judge Janis Graham Jack of the Southern District of Texas in Corpus Christi, Texas, that the more than 8,000 silica claims filed in her court were fraudulent has increased the scrutiny of all unimpaired claim filings, both silica and asbestos.

* The case against Milberg Weiss, a well-known class-action law firm, which questioned how plaintiffs were assembled, has caused increased scrutiny of many class-action filings.

* Sentiment is growing that joint and several liability is inappropriate, with some states (such as New York, Texas, Ohio, Mississippi and Florida) imposing rules that introduce the concept of proportionality among joint defendants.

Impact of Asbestos Trusts

As a result of the increased filings during 2000-2003, many defendant companies viewed bankruptcy as the only business strategy to assure certainty with respect to the extent of their asbestos liabilities. More than 70 companies have declared bankruptcy, citing asbestos as the main reason, with more than 30 companies doing so after 2000. A company that has filed for bankruptcy establishes a dedicated pool of assets to fund asbestos claim payments in the future and then emerges from bankruptcy free of asbestos liabilities and demands for future contributions. Many trusts have become operational since 2003.

The medical criteria and product identification requirements needed to qualify for payment from a trust are typically less stringent than those required to be successful in a trial. Trust claim filings are confidential, and unless an attempt is made to make the claim filings and payments received by claimants transparent (such as through a subpoena in a civil case), a claimant can qualify and recover from multiple trusts. From the trusts that are currently operational, as much as $50 billion may be available to pay claimants (from the current trust assets of $30 billion plus potential investment income of $20 billion during the life of the trusts). For example, a claimant suffering from mesothelioma can recover close to $445,000 if he or she files a claim against the currently operational trusts. (See table "Trust Payments for Mesothelioma" above.)

These payments raise the question of whether or not there would be any appetite to seek any amounts from the solvent companies in the current environment, where the proof of claim in a trial is becoming more difficult. Our view is that there will continue to be pressure on solvent companies to bear the majority of the future payments. We believe that the mesothelioma and cancer claimants will make up a major portion of the future payments, and the amounts received from the trusts will not be sufficient to satisfy, the average claim payments that likely will be demanded by cancer claimants in the future. For example, we believe for 2003 and subsequent years, it is not unreasonable to expect a mesothelioma claimant to receive an average amount in excess of $2 million, which is considerably higher than the $445,000 that is available from the trusts.

Looking to the Future

When forecasting future claim filings for a mass toxic tort, whether asbestos or some other defective product, medical models are sometimes employed, as are actuarial principles. Both methods have been useful in predicting future asbestos claim filings. However, in the asbestos environment some principles of economic modeling (that is, behavior modeling) may be necessary in order to predict future asbestos claims. Where disincentives to file claims exist or have evolved, some believe it may be useful to survey plaintiff law firms that file asbestos claims to determine the law firms' future behavior. Judge Jack B. Weinstein of the United States District Court in Brooklyn, N.Y., has described the asbestos plaintiffs' bar as a "highly efficient market," apparently referencing the fact that a relatively small number of law firms, approximately 50 in number, file almost 75% of all asbestos claims.

Also, there is a disincentive for law firms to accept nonmalignant claims, given the limitation on funds available to pay nonmalignant claims in the asbestos trusts and the reluctance of many courts to consolidate nonmalignant claims with malignant claims.

The factors listed above, however, do not appear to affect the filing of mesothelioma or other asbestos cancer claims. Pathology reports can establish the presence of mesothelioma or lung cancer, and in the case of the former, asbestos is recognized, almost without exception, as the exclusive cause. In the case of lung cancer, while there are multiple causes, asbestos is a known carcinogen and undoubtedly causes many lung cancers.

For the foreseeable future, therefore, asbestos cancer claims will continue to be filed in large numbers, and asbestos liabilities will be concentrated in the compensation of such claims. Because these claims frequently involve wrongful death or the presence of a life-threatening disease, there is unlikely to be any significant diminution in asbestos liability, dollars.

Manville Asbestos Claim Filings

Year     Mesothelioma   Lung Cancer   Other Cancer

2000            1,577         2,718            591
2001            1,735         2,957            722
2002            2,001         2,627            772
2003 *          2,800         4,892          1,262
2004            1,817         1,068            342
2005            2,033         1,837            608
2006            1,497         1,621            424

Year     Total Cancer   Nonmalignant   Other    Total

2000            4,886         49,684     171   54,741
2001            5,414         76,024     512   81,950
2002            5,400         47,678     316   53,394
2003 *          8,954         77,625   2,368   88,947
2004            3,227          9,580     538   13,345
2005            4,478         10,982   1,099   16,559
2006            3,542          5,219     402    9,163

                                      Percentage by
                                      Disease Type

Year     Mesothelioma   Lung Cancer   Other Cancer

2000            2.88%         4.97%          1.08%
2001            2.12%         3.61%          0.88%
2002            3.75%         4.92%          1.45%
2003 *          3.15%         5.50%          1.42%
2004           13.62%         8.00%          2.56%
2005           12.28%        11.09%          3.67%
2006           16.34%        17.69%          4.63%

         Percentage
         by Disease
         Type

Year     Total Cancer   Nonmalignant   Other     Total

2000            8.93%         90.76%   0.31%   100.00%
2001            6.61%         92.77%   0.62%   100.00%
2002           10.11%         89.29%   0.59%   100.00%
2003 *         10.07%         87.27%   2.66%   100.00%
2004           24.18%         71.79%   4.03%   100.00%
2005           27.04%         66.32%   6.64%   100.00%
2006           38.66%         56.96%   4.39%   100.00%

* 2003 was an unusual year for the filings against the Manville
Trust because plaintiff filings were accelerated to take advantage
of the trust distribution process that was due to expire in 2003.

Source: Manville Trust

Trust Payments for Mesothelioma

The scheduled value is determined during the bankruptcy process and
is intended to reflect the fair value of what the debtor should pay
claimants for the asbestos diseases. Following the confirmation of
the bankruptcy, the trustees determine the payment percentage of the
scheduled value of the claims based on the amount of money in the
trust and the number of pending claims and anticipated future claims
with an aim to treat present and future claims as similarly as
possible.

                                            Scheduled Value/
Trust                        Payment %    Pro Rata Payment *

Armstrong World Industries     20.00        $110,000/$22,000
Babcock & Wilcox               34.00         $90,000/$30,600
Combustion Engineering         48.33         $75,000/$36,248
Celotex                        14.10        $100,000/$14,100
DII                           100.00         $21,500/$21,500
DII (Harbison)                100.00         $51,300/$51,300
JM                              5.00        $350,000/$17,500
JTT                            18.50        $100,000/$18,500
Owens Corning                  40.00        $215,000/$86,000
FIB                            25.00        $135,000/$54,000
Kaiser **                      35.00         $70,000/$24,500
USG Corp.                      45.00        $155,000/$69,750
                                         $1,472,800/$445,998

* These payments do not include trusts that are still in formation
in bankruptcy courts. including W.R. Grace and Pittsburgh Corning.

** Payment percentage is estimated.

Source: Asbestos Litigation in the 21st Century - Presentation by
Joseph Rice of MotleyRice.

Contributors: David Austern is the general counsel for the Manville Personal Injury Settlement Trust and president of Claims Resolution Management Corp. He can be reached at [e-mail]. Raji Bhagavatula is a principal and consulting actuary at Milliman Inc. She can be reached at [e-mail].