Asbestos Litigation: Costs and Compensation

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					                The Dimensions of
                Asbestos Litigation


                       Stephen Carroll
                        September 2002


                RAND INSTITUTE FOR CIVIL JUSTICE

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      Trends in Asbestos Litigation
       Are Raising Policy Concerns
 Asbestos litigation began to attract policy attention in
 early 1980s

 Settlement agreements in late 1980s led many to
 believe litigation was “manageable”

 But rapid increases in the number of claims and costs
 have reawakened interest

 Growth in litigation appears likely to continue

 Is there a better way of compensating asbestos
 victims?
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     To Address These Concerns, Policymakers
      Must Know Dimensions of the Litigation
                  How many claims and of what type?
Claims
                  Who are the defendants?
                  How much is being spent on litigation?
Costs
                  How much of that goes to claimants?

Economic          What is the extent of asbestos bankruptcies?
effects
                  What are their broad economic effects?

Future            Where is this all headed?
outlook
          The RAND study addressed these questions
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     Over 600,000 Claimants to Date

 Number of claims filed annually has risen sharply

 Average severity of claimed injuries is declining
   Little change in frequency of seriously ill claimants
   Increasing proportion of claims for less serious
    injuries

 Typical claimant files against several dozen
 defendants



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            Annual Claims Filings Have Risen
                  Sharply Since 1990
            90,000
                       Asbestos Claims Against Five Major Defendants
            80,000

            70,000

Number of   60,000
 claims
            50,000

            40,000

            30,000

            20,000

            10,000

                 0
                      1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

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           “Other” Nonmalignant Claims
          Account for the Growth in Claims
               5
                       Mesothelioma
                       Other Cancer
               4       Asbestosis
                       Other
Ratio of the
 number of     3
 claims in
each year to
the number
of claims in   2
    1990


               1



               0
               1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

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      Various sources Suggest Increasing
     Numbers of Claimants Are Unimpaired
 1982 4% of claims showed no manifest asbestos-related
           injury (RAND)
 1993 Up to one-half of all asbestos claims have little or
           no physical impairment (Harvard Journal of
           Legislation)
 1998 No evidence of disease in 57% of asbestos claims
           (Manville Trust)
 2001 74% of pending claims are unimpaired (confidential
           report prepared for a defendant)
           Two-thirds of claims show no evidence of
           impairment (Babcock & Wilcox)
           Vast majority of claims provide no evidence of
           impairment (Rourke)
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      The Number and Range of
Defendants Have Also Increased Sharply

 Our list of defendants includes over 6,000 firms
   Increasing number of defendants outside the
    asbestos and building products industry
   Both large and small businesses

 At least one company in nearly every U.S. industry (at
 the 2-digit SIC level) now involved in litigation

 By 1998, non-traditional defendants account for over
 60% of expenditures (confidential study)

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    Estimated Total Costs of Resolving
   Asbestos Claims Through 2000: $54 B

     Publicly available data are very limited

     We estimate total outlays of $54 B through 2000
         U.S. insurers             $22 B
         Insurers outside U.S.     $8 to 12B
         Defendants                $20-24 B

     At least 5 major companies have spent more than
       $1B each on asbestos litigation


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         Transaction Costs Have Consumed
          More Than Half of Total Spending

          100

                                              Plaintiff
           80
                                              Compensation

           60
                                              Plaintiff
           40                                 Expenses


           20                                 Defense
                                              Expenses
            0
                      1980s        1990s
                    Litigation   Litigation

      And they are likely to go back up in next decade
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      But Transaction Costs of Bankruptcy
              Trusts May Be Low

100

                                     Plaintiff
 80
                                     Compensation
                                     Plaintiff
 60
                                     Expenses
                                     Defense
 40                                  Expenses

 20

  0
               1980s      Manville
             Litigation    Trust

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           It Is Difficult To Determine What
           An Individual Claimant Receives

 Only plaintiffs and their attorneys know how much
 claimants receive (net)
   Claimants receive money from multiple sources over
    long time periods
   Defendants pay different amounts for same injuries
   There are wide variations by jurisdiction
   Most of the data are not public

 But some aggregate distributional data are available

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                Most Dollars Are Paid
             to Nonmalignant Claimants
    Estimated Allocation of Compensation 1991-2000

                            Mesothelioma
                                17%




                                    Other cancer
                                       20%
   Nonmalignant
      63%

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        Bankruptcies Are Becoming
              More Frequent
             3 bankruptcies in 1982--the first ones
             13 more in the rest of the 1980s

             9 in the first half of the the 1990s
             9 in the second half

             22 since January 1, 2000

             4 dates to be determined
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             Costs of Bankruptcy Can
                  Be Substantial
 Transaction costs of bankruptcy reorganization are
 generally about 3% of firm value

 Bankruptcy imposes other costs
   Disrupts relationships with suppliers and customers
   Impairs (or eliminates) access to credit
   Distracts managers’ attention

 After reorganization, the bankruptcy trust may hold all or
 most of the firm’s equity

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             And Bankruptcy Is Only
                Part of the Story
  Defendants’ net payments to asbestos claimants
   weaken their financial position, cost jobs
     Reduce retained earnings
     Increase the cost of capital
     Reduce investment
     Reduce creation of new jobs

  However, other firms’ reactions may offset these
   losses

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       The Future Course of Litigation
                Is Uncertain


 Experts’ future projections also vary dramatically
   Total claims: 1.1 to 3.1 million
   Total costs: $200 to 265 billion

 Whether there will be money left to pay future claimants—
 and who will pay —remain open questions




  Draft/Do Not Cite                                    A3822-17 07/02
         Will There Be Enough Money
             for Future Claimants?
                                        Compensation as
Example of Johns-Manville raises doubts     percent of
                                         liquidated value
     1988             Trust payments began     100%

     1990             Payments suspended     (Only exigent
                                              cases paid)

     1995             Payments resumed          10%

     2001             Payment plan revised       5%


  Draft/Do Not Cite                                     A3822-18 07/02
                    Policy Implications

  How to resolve asbestos claims fairly and efficiently
    is still a significant policy question

  We may have seen less than half of all claims that
    will ultimately come forward

  Current bankruptcies provide a window of
    opportunity for reviewing and rethinking our
    strategy



Draft/Do Not Cite                                  A3822-19 07/02
Draft/Do Not Cite   A3822-20 07/02

				
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