A bid to bypass the lawyers

FINANCE & ECONOMICS

Asbestos in America

Jan 27th 2005
From The Economist print edition

Can the new Congress cut through America's asbestos-litigation mess?

SOCIAL SECURITY may be the third rail of American politics, but asbestos liability is surely the Gordian knot. For three decades, Congress has pondered how to deal with the masses of lawsuits brought against companies by workers exposed to asbestos, a cancer-causing fibre. Hundreds of thousands of claims are pending in America's courts, with total costs forecast to reach $200 billion. Dozens of firms have been bankrupted by lawsuits, many of which were brought by people who were not ill. But the problem is so complex that lawmakers have got nowhere.

Now Congress is redoubling its efforts to cut through the knot. Arlen Specter, the new chairman of the Senate Judiciary Committee, plans to introduce a bill next week that would create a $140 billion trust fund to compensate victims. Companies that are the target of lawsuits would stump up the bulk of the money, $90 billion. Insurers would pay $46 billion. The last few billion dollars would come from trust funds set up by firms already bankrupted by asbestos claims. Victims would give up their right to sue for damages. The idea is to cut out the lawyers and to relieve the overloaded courts.

The awfulness of asbestos is not in dispute. More than 100,000 American workers (300,000, say trial lawyers) have died after being exposed to it. Until the 1970s asbestos was widely used to insulate buildings. But breathing it can cause mesothelioma, a cancer, or other lung problems. Mesothelioma can take decades to develop, so new cases keep flooding in.

Some liability is absorbed by insurance companies. If the dispute is left to the courts, American insurers could end up paying as much as $65 billion, according to a 2001 projection by Tillinghast, an actuarial firm. By comparison, the industry paid out less, about $40 billion, after the attacks of September 11th 2001. Other companies have to pay too, because they either are self-insured or have exhausted their insurance limits. Claimants' first targets were asbestos manufacturers, which were accused of failing to disclose the dangers early. Most of these went bust long ago. Lawyers now go after companies that used asbestos or distributed products containing it, or that bought companies that had done these things. Often a claimant will sue 60 entities at once, including bankrupt manufacturers' trusts.

The problem is that much of the money is going to the wrong people. About two-thirds of the total is awarded to those who do not have cancer (though they might later develop it), according to a 2002 study by RAND, a think-tank. Essentially, many people are being compensated for their fear of getting sick. Lester Brickman, a law professor at Yeshiva University, in New York, told President George Bush recently that “out of approximately 850,000 claimants since asbestos litigation began, perhaps 600,000 of these are largely baseless claims”. Worse, more than half of the cost of litigation is paid to lawyers or spent on administration. All this means that there is less money to pay for future claims by the truly ill, especially from companies toppling into bankruptcy.

The dreaded details

Will Mr Specter be able to deliver reform? Luckily, he is not starting from scratch. A year ago Bill Frist, leader of the Republican majority in the Senate, tried and failed to bring a bill to the Senate floor. He subsequently entered negotiations with Tom Daschle, then the Democrats' leader. These talks produced the $140 billion figure. Labour and trial lawyers, who generally back Democrats, had wanted more; business and insurers had lobbied for less. The two leaders also agreed on standards to determine who is sick and should be paid quickly, and that claims should be processed by the Department of Labour.

Still, because the devil is in the details, Mr Specter can expect as much trouble as Mr Frist encountered last year. He should find out how tough it is next week, when his bill, whose introduction was delayed this week, is due finally to be unveiled. One controversy swirls around how much people with different grades of illness will get: should smokers who develop lung cancer but show no asbestos-related symptoms despite exposure get $150,000, $500,000, or something in between?

Trickier still is the question of how much different companies will be required to pay into the fund. The bill is expected to create a formula under which companies with big past liabilities will contribute more. Larger companies may also have to pay more than smaller ones with similar liabilities. Every firm is convinced that it will be asked for more than its fair share. Small companies fear that the scheme will bankrupt them. Big companies worry about paying disproportionately. This month Exxon Mobil, DuPont and others wrote to Mr Specter to complain that their payments to the trust fund would “substantially exceed” the costs they expect to incur through the courts. The fund, they argue, would also render perfectly good insurance useless. Firms, such as Halliburton, that have already settled with claimants will not take part in the fund.

Insurers are also concerned about paying too much, especially because they will have to fork out a lot early in order to get the fund going. One thorny matter concerns Equitas, a reinsurer set up to deal with the pre-1993 liabilities of Lloyd's, the London insurance market. About 55% of its claims are for asbestos, the vast majority of them in America. It would be one of the fund's biggest contributors, though paying less than 5% of the insurers' total.

Equitas fears that the bill will discriminate against it, by allowing other companies—but not Equitas—the chance to ask for relief if they believe their payments to the fund to be too onerous. American insurers retort that it is fair to treat Equitas differently because of the peculiar structure of Lloyd's. Scott Moser, Equitas's chief executive, says that his firm has adequate reserves and is prepared to pay its share, but that “somebody will have to come to England” if the fund demands more than Equitas has available.

And what if the trust fund cannot pay all legitimate claims? To insurers and business, this may be the most worrying question of all. Mr Specter's drafts indicate that he will allow victims to return to the courts if the fund goes bust. Executives are horrified, because they will not know for certain if they can really close the books on asbestos. There are, however, expected to be restrictions designed to prevent claimants from jumping around the country to find the friendliest state courts.

With so many special interests—and dollars—at stake, some observers put the bill's chances of passing at less than 50-50. Still, Mr Specter is determined to get it through committee and on to the Senate floor next month. He may be helped by the fact that the Republicans have a larger majority in Congress than last year. More important, the cause of tort reform has the president's strong support; Mr Bush toured the country earlier this month to call for curbs on asbestos, class-action and medical-malpractice lawsuits. If Mr Bush can help Congress fix America's asbestos mess, more power to him.

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