Twenty years ago, litigation costs related to asbestos in its joint compound product cost USG Corp. about $12 million a year. Ten years ago, that was still true. This year, however, is a different story. "We'd paid out $114 million this year and, had we not filed for Chapter 11 bankruptcy protection in June, we would have ended up paying out more than $275 million," says USG's CFO, Rick Fleming.
Chicago-based USG, a manufacturer of Sheetrock (gypsum) wallboard, is the eighth company driven into bankruptcy by asbestos liability in the past 18 months. All told, some 29 companies have filed for Chapter 11 bankruptcy court protection since the adverse health effects caused by exposure to asbestos came to light in the early 1980s. Although asbestos, a fire-retardant used in a variety of products, has been effectively eliminated in manufacturing, it continues to burn a hole in the pockets of Corporate America.
In fact, many of those pockets belong to companies that never considered themselves liable to asbestos claims. To date, some 300,000 asbestos-related cases are thought to be pending in state and federal courts. And each time a firm trapped by asbestos litigation declares bankruptcy, plaintiff attorneys smoke out peripheral defendants. These include manufacturers, distributors, and installers such as Ford, Goodyear, and General Electric, which have all been named in litigation.
Little wonder that several defendants are seeking federal legislation that would provide litigation reform and tax relief for the mounting costs of asbestos litigation. Other companies are trying to limit claims to those individuals who truly are impaired. Still others are looking to insurers for a safety net. Yet, observers fear that the wave of bankruptcies may be only beginning and that the list of companies ultimately blamed for asbestos exposure may soon encompass much of Corporate America. "You can't imagine how far the net extends," says William E. Bailey, former senior vice president and senior claims counsel at Boston-based Commercial Union Insurance Co.
Keeps On Ticking
In the 1990s, asbestos seemed to leave the spotlight, overshadowed by other mass torts, such as pollution-liability and sexual-harassment claims. Now it's back with a vengeance, and liability suits are projected to cost more than $200 billion in the United States alone, according to a study by Tillinghast-Towers Perrin. The New York-based consulting firm estimates that defendant corporations will pick up 39 percent of the tab, with their insurers paying the remainder.
Asbestos's reemergence as the tort du jour is somewhat due to the way it affects health. With a latency period of 15 to 40 years, asbestos-related diseases, such as mesothelioma, asbestosis, and lung cancer, often take decades to emerge. And this dormancy helps explain why the number of new asbestos cases is growing by more than 70,000 a year.
More significant, however, is the fact that the U.S. Supreme Court has ruled that asbestos exposure is adequate grounds for a lawsuit. In 1997, the court overturned a district court's class-action settlement that required asbestos plaintiffs to show specific medical conditions before they could receive a settlement. The result, says Robert Hartwig, chief economist at the New York-based Insurance Information Institute, is that more than 95 percent of the plaintiffs in mass torts alleging asbestos-related illnesses have no demonstrable impairment.
Armed with that decree, the plaintiffs' bar has sought to widen the pool. "Trial attorneys are advertising on TV, radio, and the Internet, asking for anyone who ever came in contact with any product that ever had asbestos in it to give them a call," charges Hartwig. "Several law firms even sponsor X-ray screening programs that they conduct in vans outside of firms that have had some connection to asbestos in their products or on their premises."
To compensate these new plaintiffs, the defendant list is also growing. While the first wave of defendants comprised such asbestos manufacturers as Johns-Manville, and the second wave included firms like USG that used asbestos in their products, the latest is a tsunami. "If you are three decades old and you owned a factory, you likely had insulation on the furnace or on pipes that was made of asbestos," warns Fleming. "That makes you potentially a target. Ditto if you distributed a product that contained asbestos." Last year, for example, a $34 million verdict was wrung from Shell Oil Co. by a roofer exposed to asbestos, and, more recently, Sears was hit with a $1.5 million judgment for selling home insulation that allegedly contained asbestos. Meanwhile, Ford Motor Co. reportedly has $1.7 billion in asbestos cases outstanding, which are related to exposing employees to asbestos in brake parts.
A Finite Solution
The main attraction, of course, is the fact that these new defendants "haven't exhausted their insurance limits [on premises and other liabilities]," says Gerard Altonji, senior financial analyst at ratings agency A.M. Best Co. The same cannot be said for such companies as USG, Owens Corning, and W.R. Grace, however.
"We thought we had insurance as far as the eye could see," says Fleming, noting that at one time USG had more than $800 million of coverage to absorb the litigation costs. "But the lawsuits kept on coming and coming." USG now has less than $80 million in insurance left, which, given its pending cases, would have been wiped out in short order.
Indeed, asbestos insurance is fast evaporating for many companies, according to A.M. Best. In addition, insurers' reserves to pay asbestos claims are deficient by some $33.1 billion, says Altonji. And "over the next three to five years," he says, "we expect paid claims to increase, on average, 20 percent annually for asbestos liabilities for the majority of exposed insurers, causing an earnings drag for the entire industry for years to come."
One alternative for companies whose insurance is running out is to simply buy more coverage. Some companies have found a measure of relief in so-called blended finite risk insurance, which can help them spread the loss over several annual periods. For others, however, the sheer volume of cases and the limits of their coverage have left no other alternative than to file for bankruptcy. Such a step, which allows them to separate their existing businesses from their asbestos exposures, immediately halts all pending litigation until a judge sets a date by which remaining claims must be filed. Thereafter, the claims are handled by a separate trust.
But even bankruptcy is only a temporary way out of the morass. As more and more defendants opt for Chapter 11, "attorneys will look for other ways to get money, which means going after the peripheral defendants," says Michael E. Angelina, a consulting actuary at Tillinghast. Ultimately, the weight proves unyielding, and they, too, declare bankruptcy.
Finding a Just Solution
So what's the solution? Companies in bankruptcy proceedings want legislation giving them some tax relief in order to remain financially afloat so their future trusts can continue to pay victims. The companies support the Asbestos Tax Fairness Act (HR 1412 and S. 1048), which would do two things: provide income-tax exemption for current asbestos trusts, and carry back net operating losses created by asbestos payments to years in which the product was sold or distributed.
The latter plan, proponents claim, would allow companies to obtain a refund of federal income taxes paid during this period, which could then be directed to the injured. "Asbestos manufacturers in the 1950s and 1960s made money and reported profits because they were unaware of this existing liability," says Michael Thaman, senior vice president and CFO of Owens Corning. "Here we are now in 2001 with big losses from asbestos litigation. If we carried those losses back to that time in which the product was manufactured, it would result in a refund from the government." Current U.S. tax codes allow such carrybacks for a period of 10 years, which the legislation would extend.
The first provision would permit the trusts created by the bankrupt companies to accrue interest free of tax. Thaman says this, too, is sensible, "because if you put aside assets in a trust and they start making income and the income is taxable, then the trust won't last nearly as long. Why should the government make money on money destined for ill people?"
For companies not in Chapter 11 and staring down a potential fusillade of asbestos claims, they and their insurers propose establishing a national asbestos medical registry. "The idea is to establish clear medical criteria to determine if a person is actually sick, and if not, to put them on the registry and monitor them until such a time as they do become sick," says Hartwig. In Chicago's Cook County Circuit Court, where such a registry exists, all plaintiffs in asbestos cases are activated only when their impairment meets certain medical criteria, which include a total lung capacity below 80 percent and a diffusing capacity for oxygen of less than 70 percent of normal. Says Hartwig, "If every jurisdiction had objective medical criteria like Cook County, the nation's asbestos problem would become tractable."
Meanwhile, one company — Federal-Mogul Corp. — is making its own determination about which cases are viable. Says G. Michael Lynch, executive vice president and CFO, "We recently adopted a trial list strategy where we pay only the sick and avoid mass settlements. We also require valid identification that our subsidiaries' products were actually the cause of the illness."
For USG, however, such solutions are too little, too late. But Fleming notes that once the firm emerges from bankruptcy, it expects to "put asbestos behind us once and for all." And the lasting legacy of the experience, he adds, is that "as an asbestos-free company, we can be extraordinarily valuable to our shareholders. Further, we hope that our experiences will lead to better public policy."
Russ Banham is a contributing editor of CFO.
Feeling the Heat
What property/casualty insurers are paying out in annual asbestos losses.
- 1995: $1.3 billion
- 1996: $1.2 billion
- 1997: $1.0 billion
- 1998: $1.1 billion
- 1999: $1.6 billion
- 2000E: $1.4 billion
Source: A.M. Best
Culpable or Not?
Some lawsuits against peripheral asbestos defendants strain credulity. Take the litigation against Sealed Air Corp. Three years ago, Sealed Air purchased a plastic-packaging company owned by W.R. Grace & Co., a shipbuilding company that, in April, filed for Chapter 11 protection from some 325,000 asbestos claims against it. With Grace's assets protected, plaintiff attorneys sued Sealed Air, arguing that any former Grace subsidiary must share liability for asbestos injuries caused by the parent. "The irony was that the subsidiary had nothing whatsoever to do with asbestos," says Robert Hartwig, chief economist at the New York-based Insurance Information Institute.
Some of the cases against traditional defendants are no less of a stretch. USG, for example, recently lost a case in Beaumont, Texas, that "symbolizes everything that is wrong with the process," says CFO Rick Fleming. The case involved 22 Texaco refinery workers exposed to asbestos but not physically impaired, he contends. "Three of them testified they remembered having seen our joint compound in an office they once walked through 25 years ago.
"Their testimony was allowed by the judge to be attached to the full 22-member group, even though 19 of them were never exposed to our product," he adds. "We figured this was one case we could not lose." The jury disagreed. USG, which had just laid off some 500 workers to help meet legal bills, had to find another $16 million to pay plaintiffs. The case is on appeal. —R.B.