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					Measurement of US Tobacco Liabilities:
A Burning Issue or Just Smoke?
New Classes of Claims / Megatort Update
CAS Annual Meeting

Philip D. Miller

November 13, 2000




This document was designed for discussion purposes only. It is incomplete, and not intended to be used,
without the accompanying oral presentation and discussion.
Background - Usage

   Usage in America dates back to 1 BC
     introduced in Europe during the 17th century

   Usage grew despite early concerns about potential health risks
     King James: “Smoking is a custom loathsome to the eye, hateful to the nose,
       harmful to the brain, dangerous to the lungs…”
     Economic importance also grew – along with government tax revenues

   Following the invention of the cigarette, usage increased rapidly and became more
    socially acceptable during the 19th century




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Background - Usage

   Fueled by 2 world wars, cigarette consumption grew from 2.5 billion/year in 1900
    to 524 billion in 1963, or from 54 to 4,345 per year per capita


                                       Total and Per Capita Consumption of Manufactured Cigarettes for Selected
                                                                Years from 1900-1998

                                        4500                                                                                            700


                                        4000
                                                                                                                                        600

                                        3500




                                                                                                                                              Total Consumed (Billions)
              Per Captia Consumption




                                                                                                                                        500
                                        3000


                                        2500                                                                                            400


                                        2000                                                                                            300

                                        1500
                                                                                                                                        200
                                        1000

                                                                                                                                        100
                                         500


                                          0                                                                                             0
                                               1900 1910 1920 1930 1940 1950 1960 1965 1970 1975 1980 1985 1990 1994 1998


                                                   Per Capita Consumption                    Total Cigarettes Consumed (Billions)

                               Source: CDC‟s Mortality and Morbidity Weekly Report (MMWR), Vol. 43/No. SS-3




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Tobacco-Related Diseases

   1964 Surgeon General‟s report confirmed long term suspicions about cigarette
    smoking and its impact on health
     Associated with a 70% increase in death rates of men
     “Causally” related to lung cancer in men
     Relationships exist with other diseases and illnesses

   1989 report summarized subsequent findings including
     “Causes” lung cancer in women
     It is a “cause” of stroke
     It is a major “cause” of coronary heart disease
     There is a dose-response relationship with # smoked per day, degree of
       inhalation, and age at initiation
   Definition of Cause as used by the Surgeon General
     “The notion of a significant, effectual relationship between agent and an
        associated disease in the host”
     Does not exclude other agents as causes
     Significant to litigation: no “signature disease”



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Tobacco-Related Diseases

   Association between lung cancer and smoking is one of the strongest: over 90%
    of men with lung cancer are smokers



                                                    Per Capita Cigarette Consumption and Male Lung Cancer Death
                                                                Rates for Selected Years from 1900-1997
                                                    80                                                                                                                 4500


                                                    70                                                                                                                 4000
       Male Lung Cancer Death Rates (per 100,000)




                                                                                                                                                                       3500




                                                                                                                                                                                Per Capita Cigarette Consumption
                                                    60

                                                                                                                                                                       3000
                                                    50

                                                                                                                                                                       2500
                                                    40
                                                                                                                                                                       2000

                                                    30
                                                                                                                                                                       1500

                                                    20
                                                                                                                                                                       1000


                                                    10                                                                                                                 500


                                                    0                                                                                                                  0
                                                         1900 1910 1920 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1991 1992 1993 1994 1997


                                                                     Male Lung Canc er Death Rates (per 100,000)               Per Capi ta Cigarette Consumption


       Source: National Center for Health Statistics


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Tobacco-Related Diseases

   Despite statistical association between lung cancer and smoking, it is not easy to
    prove that an individual‟s lung cancer was due solely to smoking
     Certain types of cancer (e.g., large cell) are not associated with smoking as
       strongly as others (e.g., small cell)
     Other factors can increase risk including
        family history
        other lung diseases
        occupational exposure
        air pollution
        diet
   Difficulty of making the case increases for other diseases due to
     Lower degree of association
     More potential intervening factors, e.g., lack of exercise




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Litigation History - Issues

   Key manufacturer defenses
     Preemption under the Federal Cigarette Labeling and Advertising Act
     Assumption of risks
     Lack of proximate cause
     Lack of defect
     Statute of limitations

   Manufacturers have generally mounted strong defenses, refusing to pay any
    settlements and pursued all possible appeals
     Motions and court rulings litigated until satisfactory result or no further
        recourse
     Frequently won the war of attrition

   Early pattern established was that even when plaintiff successfully convinced
    jurors that smoking causes lung cancer, they could not get past the assumption of
    risk argument




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Litigation History - Cases

   First suit filed in 1954
     Began the first wave
     Mostly standard product liability
         negligence, failure to warn, design                               Number of Cases Filed Against Tobacco Companies 1951-1989
         defect
                                                                            90
     < 10 suits per year
     As manufacturers win, suits filed                                     80


         trickles                                                           70




                                               Numbe r o f Case s File d
   Second wave triggered by 1964 SG                                        60

    report                                                                  50

     17 suits in „64, average of 10 per
                                                                            40
        year
                                                                            30
     Ended by 1972 as manufacturers
        won all verdicts and key rulings                                    20


   Third wave triggered in 1983 by                                         10

    adverse rulings in Cipollone case                                        0

                                                                                 1951

                                                                                        1953

                                                                                               1955

                                                                                                      1957

                                                                                                             1959

                                                                                                                    1961

                                                                                                                           1963

                                                                                                                                  1965

                                                                                                                                         1967

                                                                                                                                                1969

                                                                                                                                                       1971

                                                                                                                                                              1973

                                                                                                                                                                     1975

                                                                                                                                                                            1977

                                                                                                                                                                                   1979

                                                                                                                                                                                          1981

                                                                                                                                                                                                 1983

                                                                                                                                                                                                        1985

                                                                                                                                                                                                               1987

                                                                                                                                                                                                                      1989
     Eighty five cases at the peak
     Appealed
     Eventually won by manufacturer
   Score - 300 filed cases, no sustained
    verdicts or paid indemnity
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Litigation History - Cases

   Fourth wave began in 1994
     Plaintiff verdict in Kent filter case
     Momentum grew in AG health care
        recovery suits                                Lawsuits Pending Against the Tobacco Industry 1993-1999
     First settlements occurred
         in the Broin case $349M for
            research
         and with AGs for $246B                   1400


   More than 1,500 suits were filed in the        1200

    1990s with 1,225 still pending as of           1000
    12/31/99
                                                   800
   Will the next wave be a tidal wave?
                                                   600
     There have been several plaintiff
         verdicts, but most cases continue to      400

         be won by the defendants                  200
     No individual smoker case with a
                                                     0
         plaintiff verdict has been sustained on          1993   1994      1995      1996       1997       1998      1999
         appeal – yet
     AG cases somewhat unique, due to
         special legislation taking away
         assumption of risk and weakening
         causation defenses
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Litigation History - Cases

   Engle case
     Florida smoker class action
     Phase I concluded in July 1999 that cigarettes
        cause 20 diseases
        are addictive
        manufacturers conduct rose to a level that would permit punitive damages
     Phase II concluded in April 2000 with compensatory damages of $6.9M
       awarded to 2 of the 3 named plaintiffs (the 3rd was barred by statute of
       limitations) and determined that punitive damages for the entire class should
       be $144B
     Phase III requires individual trials for each class member to determine liability.
       Punitive damages can‟t be determined for any individual until all cases are
       tried
     The manufacturers are appealing
     Most other class actions won by manufacturers because of “diversity”
   Main takeaway
     It ain‟t over until it‟s over



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Insurer Involvement

   Limited to date
     Prior to 1996 no reported lawsuits by manufacturers seeking coverage
     1/96 Imperial Tobacco filed in Quebec against 2 insurers
        still pending
     3/97 Louisiana AG attempted to include more than 100 insurers
        Only 3 states have direct action statutes
        Included foreign insurers
        Jurisdiction removed to London and dismissed prior to significant litigation
     3/98 individual smoker case in Louisiana
        dismissed in August 1999
     A limited number of public reports of claims filed reported by AM Best

   1999 report by Schroder Securities on BAT stock
     Identifies what they consider to be substantial evidence of coverage
     Reviewed policies in La. AG suit CGL and explicit tobacco health liability
     Claims exclusions are of dubious value, some have no exclusions, poor
       definitions and ambiguous terms



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Insurer Involvement

   1999 report by Schroder Securities on BAT stock (continued)
     Claims that senior policyholder attorneys are keen to litigate
     Says that it is clearly in the best interest of shareholders for manufacturers to
       sue for coverage
   Insurers identified in Schroder report vehemently deny coverage exists
     Explicit health liability policies are claims made
         allowable reporting period has lapsed without a claim
     CGL policies have
         explicit tobacco exclusions
         numerous other provisions that bar such claims
   February 2000 Liggett Group filed suit
     Against 33 insurers
     Seeking DJ of coverage for defense costs and payments from primary, excess
       and umbrella, and advertising liability policies 1970 - 1999




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Insurer Involvement

   Potential coverage issues identified by insurers or other observers include
     Specific tobacco exclusions
        started to include in late 1950s
        prevalence of use and strength of wording increased over time
        not likely to be in policies of potential secondary defendants such as
            suppliers, distributors, advertisers, and law firms
     Pollution exclusions in ETS cases
        introduced in early 1970s, strengthened in 1986
        is smoke discharged into enclosed interior spaces discharged into the
            atmosphere? Was it sudden and accidental? Is this exclusion applicable to
            product liability?
     Occurrence definition
        do the liabilities result from “an accident…which results in bodily
            injury…that was neither expected nor intended”
        what did the manufacturers know and when
        covered damages
             is health care reimbursement bodily injury or equitable relief

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Insurer Involvement

   Potential coverage issues (continued)
     Late notice
        was notice provided “as soon as practicable”
        if not, was failure to do so prejudicial
     Coverage trigger
        exposure
        manifestation
        continuous
   Extensive issues must be resolved by the courts, most likely state-by-state
   Potential future involvement
     Except for Liggett no propensity to file claim notices or initiate DJ actions
     May be affected by
        shareholder pressure ala Schroder report
        Liggett suit outcome
        significant plaintiff verdicts sustained on appeal


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Quantifying the Potential Liability

   Categories of potential liability include
     Individual smoker injuries
     Class actions involving groups of individual smoker injuries
     Addiction only suits, individual and class
     Secondhand smoke suits, individual and class
     Health care reimbursement – federal government, native american
       governments among other public and private providers
     Other tobacco products (e.g., pipes, cigars, and smokeless)
   Quantification techniques are described briefly in my paper published in the CAS
    Forum, Fall 2000.
   The paper describes a seven step exposure-based simulation model and includes
    references to potential data sources for various parameter estimates
   FAS 5 & 60 provide the principle accounting rules that govern whether disclosure,
    reserves or neither is required




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Quantifying the Potential Liability

   Issues of materiality, probability of incurral and reasonable estimability
     May differ by component of reserve
         DJ, defense,adjusting, indemnity, etc.
     Status may change over time
     Facts and circumstances of each insurer will govern

   Liggett DJ action
     Could trigger an accounting obligation for an involved insurer, if material
        litigation expenses are involved
     But, prior to determining that there is a coverage obligation as a result of a DJ
        action there may not be a reserving obligation for indemnity amounts
   Quantification at this time may simply be a useful tool for internal contingency
    planning purposes




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