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September 1, 2005 The FAIR Act o

VIEWS: 12 PAGES: 5

									                                                                                                                                             September 1, 2005

                                                    The FAIR Act of 2005: Into the Fall

                                                                      Patrick M. Hanlon1



I            S. 852: Structure........................................................................................................................................ - 2 -
             A.      Administration ............................................................................................................................. - 2 -
             B.      Eligibility and Award Values....................................................................................................... - 3 -
                     1.        The Basic Rules ............................................................................................................. - 3 -
                     2.        Adjustments and Special Provisions.............................................................................. - 6 -
                               a.            Libby, Montana ............................................................................................... - 6 -
                               b.            Naturally Occurring Asbestos ......................................................................... - 8 -
                               c.            FELA Adjustment ........................................................................................... - 8 -
             C.      Funding ........................................................................................................................................ - 8 -
                     1.        Defendants ..................................................................................................................... - 9 -
                               a.            General Summary............................................................................................ - 9 -
                               b.            The Guaranteed Payment Mechanism ........................................................... - 12 -
                               c.            Hardship and Fairness Issues......................................................................... - 13 -
                     2.        Insurers ........................................................................................................................ - 15 -
                               a.            The Asbestos Insurers Commission .............................................................. - 15 -
                               b.            Interim Payment ............................................................................................ - 15 -
                               c.            Allocation Methodology................................................................................ - 16 -
                               d.            The Insurer Orphan Share Problem ............................................................... - 16 -
                     3.        Trusts ........................................................................................................................... - 17 -
             D.      Relationship to Other Compensation Programs ......................................................................... - 18 -
                     1.        The Transition............................................................................................................. - 18 -
                               a.            Pending Cases and Settlements. .................................................................... - 18 -
                               b.            “Feinstein Start-Up” ...................................................................................... - 19 -
                     2.        The Problem of Workers’ Compensation Liens (Subrogation) ................................... - 21 -
                     3.        The Silica Issue............................................................................................................ - 21 -
             E.      What If the Money Isn’t Enough?.............................................................................................. - 22 -
             F.      Regulatory and Other Add-Ons ................................................................................................. - 23 -

II      Key Issues ................................................................................................................................................ - 23 -
        A.          Funding and Allocation.............................................................................................................. - 24 -
        B.          Libby, Montana.......................................................................................................................... - 25 -
        C.          The Transition............................................................................................................................ - 25 -
        D.          Sunset......................................................................................................................................... - 26 -
        E.          Relationship to Workers’ Compensation and Equivalent Programs .......................................... - 26 -
                    1.            Subrogation (Workers’ Compensation Liens). ............................................................ - 26 -
                    2.            FELA ........................................................................................................................... - 26 -
        F.          Silica .......................................................................................................................................... - 27 -
        G.          Medical Screening...................................................................................................................... - 27 -
Conclusion.............................................................................................................................................................. - 27 -



1
  Patrick M. Hanlon is a partner in Goodwin Procter, LLP in Washington, DC. This paper sets forth the author’s
personal views, which are not necessarily those of his law firm or its clients. This paper was prepared for and will be
included in the Study Materials for ALI-ABA’s Course of Study on Asbestos Litigation in the 21st Century, to be
presented October 5-6,, 2005, in Chicago, Illinois. Rights reserved.
       On May 26, 2005, the Judiciary Committee approved the Specter-Leahy Fairness in
Asbestos Injury Resolution Act (FAIR Act) of 2005, S. 852. The bill would create an
administrative claims mechanism, financed by insurers, defendants, and asbestos trusts, for the
payment of asbestos claims. In principle, the new administrative claims mechanism would be
exclusive, although as we shall see, exclusivity has important, and controversial, limits.

         S. 852 is a complex piece of legislation. The bill as reported is nearly 400 pages long,
with issues on almost every page. S. 852 is also an important piece of legislation. The
administrative compensation program envisioned by the Act could cost as much as $140 billion.
It will affect the legal rights of hundreds of thousands, if not millions, of people. And by
staunching the flow of asbestos bankruptcies, the bill can protect the jobs and savings of workers
throughout American industry, help companies marshal the resources to create new jobs, and
protect the interests of creditors and owners of asbestos “tainted” companies.

        The majority leader, Sen. Bill Frist (R-TN) has said that he will bring S. 852 to the floor
in the fall of 2005. As might be expected of a bill this complex and this important, floor debate
will be heated. This paper briefly summarizes the provisions of S. 852 as enacted, with a special
emphasis on financing. It then reviews some of the major issues to be anticipated when the bill
reaches the floor.

I      S. 852: Structure

       A.      Administration

        S. 852 puts the new asbestos compensation program in the Department of Labor. The
program would be run by an Administrator immediately subordinate to the Assistant Secretary of
Labor for the Employment Standards Administration. § 101(b). The Administrator would be
responsible for the entire program – both the claims processing and the fund administration side
– in order to ensure that decisions under the act will be taken with the overall health of the
program in mind. § 101(c). He would be assisted by deputy administrators for claims
administration and fund management. § 101(c)(3).

        The bill confers broad authority on the Administrator to contract with other governmental
entities and with the private sector in carrying out his responsibilities, both in claims processing
and in financial management. See § 101(c)(1).

        S. 852 attempts to balance efficiency and accuracy in claims processing. Most claims
will be processed by administrative personnel applying objective eligibility standards. §§ 113-
114. Difficult medical questions, however, are addressed by neutral and disinterested doctors on
“Physicians Panels.” § 105. The bill gives the Administrator broad authority to audit information
and protect the Fund from the fraud and abuse that typifies the tort system. § 115. The bill also
gives the Administrator broad outreach powers and limits the fees of claimants’ attorneys to 5%
of the award received by the claimant. § 104.




                                                 2
         B.       Eligibility and Award Values

                  1.       The Basic Rules

       S. 852 is a “medical criteria” bill – a claimant needs to show physical impairment from
an asbestos-related disease to qualify for a monetary award. Those who have a diagnosis of
asbestosis or asbestos-related pleural reactions but who are not impaired – the so-called “Level I
claimants” - qualify only for medical monitoring. §§ 121(d)(1), 131(b)(1).

        Leaving to one side the Level I claims, there are eight disease levels eligible for
compensation under the bill: 4 for non-malignant conditions and 4 for cancer. All levels require
varying minimum amounts of occupational exposure (except for Level IX – Mesothelioma,
where non-occupational exposure will do), a 10-year latency period, and a diagnosis of asbestos-
related disease with the appropriate level of impairment.

        The core of the non-malignant disease criteria are non-malignant Levels III, IV, and V.
All of these disease levels require a chest x-ray showing asbestosis or asbestos-related pleural
changes and pulmonary function tests demonstrating restrictive impairment. § 121(d)(3)-(5).
The key problem in designing medical criteria for non-malignant conditions is distinguishing
impairments caused by asbestos from those caused by other factors, especially smoking.
Asbestos-related breathing impairment is “restrictive” – it involves an actual reduction in lung
volume, or capacity. In contrast, respiratory problems due to smoking are “obstructive.” They
generally are caused not by a reduction in lung volume but by obstruction of the air passageways
in the lung.2

       Non-malignant Level III involves minimal to moderately significant impairment; Level V
involves very severe impairment; and Level IV lies in between. The award values for these
categories (§ 131(b)(1)) reflects these relative degrees of impairment:

                Nonmalignant Level III                        $100,000

                Nonmalignant Level IV                         $400,000

                Nonmalignant Level V                          $850,000



        Nonmalignant Level II is a compromise category. It is at least theoretically possible that
a person will have a breathing impairment caused by both smoking and asbestos. In that
situation, pulmonary function tests will show the presence of obstructive disease, which can
mask the contribution made by asbestos-related restriction. One way of addressing this problem
is to provide reduced compensation (because of the uncertainty as to causation) for people who
have obstructive disease but relatively strong x-ray evidence of asbestosis. That is the road S.
852 takes in Nonmalignant Level II, although the x-ray evidence required to qualify for that level


2
 By trapping air in the lung, obstructive disease can actually lead to an increase in lung capacity, as measured by the
volume of air the lungs hold. This increase in capacity is consistent with functional impairment.



                                                          3
has perhaps been unduly watered down.3 § 121(d)(2). The compensation provided for
Nonmalignant Level II claims is $25,000. § 131(b).

      The 4 cancer categories include “other cancers” – i.e., cancers of the colon, rectum,
stomach, esophagus, larynx, or pharynx -- (Level VI), lung cancer (Levels VII and VIII), and
mesothelioma (Level IX).

        There is considerable doubt as to whether any of the “other cancers” are actually caused
by exposure to asbestos. Thus, these cancers are not assigned to claims processing personnel but
to Physicians’ Panels for a determination of causation. § 121(d)(6) Moreover, the bill requires
the Institute of Medicine to complete a study of the causation issue by April 2006, and the
program must accept the IOM’s conclusions. § 121(e). Thus, if the IOM determines that, say,
colorectal cancer is not caused by asbestos, the program will cease making awards for that
disease.

        There are two lung cancer “levels” both of which require the claimant to show physical
markers of asbestos exposure.4 Level VII includes lung cancer claims where the claimant has
pleural changes, 12 weighted years of exposure, and a diagnosis attributing his lung cancer to
asbestos. § 121(d)(7).5 Level VIII includes lung cancer claims where the claimant has
asbestosis. Because causation is much more likely here, the amount of exposure required to
establish a claim is reduced to only 10 weighted years (when the claimant had chest x-ray rated
1/0 on the ILO scale) and only 8 weighted years (when the claimant had a chest x-ray rated 1/1
on the ILO scale). § 121(d)(8). For Level VIII, the claimant may substitute a CT scan for x-ray
evidence of asbestosis (in which case he must show 10 weighted years of occupational
exposure). § 121(d)(8). CT scans are not admissible for Level VII for the time being (§

3
 The American Bar Association recommended in 2003 that a chest x-ray showing of at least 2/1 on the ILO scale
should be required to demonstrate an asbestos contribution to respiratory disease where obstruction is present.
Resolution Adopted By the House of Delegates of the American Bar Ass’n (February 2003) at 3. S. 852 requires
only a 1/1 ILO rating, which is much less stringent. Moreover, S. 852 allows people to qualify for Level II
compensation even with a normal ILO rating for interstitial fibrosis (potentially asbestosis) if they have x-ray
evidence of substantial pleural plaques or bilateral pleural thickening. § 121(d)(2). It is very hard to justify
allowing people with pleural changes to qualify for Level II compensation.
4
  Calling the two lung cancer categories disease “levels” is a misnomer. There is no difference between Level VII
and Level VIII so far as the severity of disease is concerned. Lung cancer is lung cancer. The difference lies in the
strength of the evidence of that a person’s lung cancer is really due to asbestos as opposed to (say) smoking.
5
  S. 852 weights occupational exposure in two different ways. First, the bill takes into consideration the type of
exposure as a proxy for intensity. Thus, each year in which a claimant’s “primary occupation, during a substantial
portion of a normal work year for that occupation, involved working in areas immediate to where asbestos-
containing products were being installed, repaired, or removed under circumstances that involved regular airborne
emissions of asbestos fibers” counts as one year. § 121(a)(16)(B). If, however, the claimant directly worked with
asbestos products, each actual year of exposure counts as 2 years; and if the claimant worked in very high exposure
occupations (shipbuilding during World War II, asbestos manufacturing, and asbestos insulation work), each year
counts as 4. § 121(a)(16)(C)&(D). Second, the bill takes into consideration the fact that exposures have declined
over time. So, exposures from 1976 to 1986 are weighted 0.5 and exposures after 1986 are weighted 0.1. §
121(a)(16)(E). As a result of the weighting system, a person could qualify for a Level VIII lung cancer award with
as little as 2 years of actual exposure. As time goes by, of course, the discount for late exposures will make it harder
to qualify.



                                                           4
121(d)(7)); instead, the bill requires an IOM study on the appropriateness of using CT scans to
diagnose pleural conditions and requires the Administrator to abide by the results of that study (§
121(f)). The IOM study on the use of CT scans to diagnose pleural conditions is to be completed
by April 2006. Id.

         Unlike earlier versions of the FAIR Act in the 108th Congress, S. 852 does not allow
claimants to recover for lung cancer on the basis of exposure only, and without any asbestos
markers. Such claims are also barred in the tort system (as are the asbestos claims of others who
fail to meet the eligibility requirements of the bill). Elimination of previous provisions allowing
recovery for “exposure-only” lung cancers is a major new development. It will greatly reduce
uncertainties based on the unpredictability of exposure-only lung cancer claims (which are not
brought in the tort system in any great quantity today). At the same time this change is highly
controversial because (as is true of all of the medical criteria in the bill) it means that some who
have claims that could survive summary judgment in the tort system will not be allowed either to
recover from the program or maintain an action in court.

       The final cancer level (Level IX) includes mesothelioma claims. The eligibility criteria
for mesothelioma are simple and have not engendered much controversy. The claimant must
show identifiable exposure to asbestos, but that exposure does not have to be occupational and
does not have to be prolonged. § 121(d)(9). The existence of mesothelioma must be established
by pathological evidence. § 121(d)(9)(A). In genuine mesothelioma cases, claimants have a very
high certainty of a prompt award.

        The award values in the cancer categories are complex. See § 131(b)(1). The only
relatively simple category is “other cancer” (Level VI), where the award value is $200,000. The
lung cancer categories have different award values depending on the claimant’s smoking status,
as follows:

            Level VII             Smokers                  $ 300,000
                                  Ex-Smokers               $ 725,000
                                  Non-Smokers              $ 800,000
            Level VIII            Smokers                  $ 600,000
                                  Ex-Smokers               $ 975,000
                                  Non-Smokers              $1,100,000


        The award value for mesothelioma is $1,100,000, although the Administrator is
authorized to adopt rules for increasing payments to younger people and those with dependents,
as long as everyone gets at least $1,000,000 and the effect of the rule is cost-neutral (§
131(b)(3)).

       As was true of earlier bills, S. 852 provides for “exceptional medical claims” – where,
through no fault of his own, the claimant is unable to meet the strict medical criteria of the bill
but can provide comparable evidence of asbestos disease. § 121(g). Exceptional medical claims
may only be allowed following an individualized look by a Physicians Panel. Id.



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