Key stakeholders dig in their heels; political wranglingcontinues

For decades, the threat of asbestos lawsuits has hung over muchof industrial America, in some cases raising the specter ofbankruptcy for many companies.

Finally, in the spring of 2003, Congress became concerned enoughto enter the fray with a sweeping proposal to create a nationaltrust to eviscerate that threat.

But that path has been anything but smooth as the events of thepast few weeks have proved that nothing on Capitol Hill is assimple as it seems.

A battle over the ability of the Senate minority to killlegislation it doesn't like is just the latest setback to theyear-long effort to enact legislation creating an alternativeclaims-handling mechanism for those injured by exposure to asbestosin the workplace.

The latest setback involved a decision of Senate Republicans toforce an up or down vote on President Bush's judicial nominees.Retaliating, in mid-May, Senate Democrats enforced a rule that barscommittees from meeting two hours after the Senate convenes whilethe debate over their ability to filibuster judicial nomineescontinued.

One of the bills affected is legislation that would create a$140 billion trust fund to handle asbestos claims. Under the bill,victims would be paid certain sums based on 10 different levels ofinjury.

The issue was resolved May 23, and work on the bill resumed twodays later. But it is now unlikely that the bill will be reportedout by the Senate Judiciary Committee before early June, whichcould reduce its chances of being acted on by the full Senate thisyear. (For updates, check NU's online news service and upfrontmagazine pages.)

Work on the bill within the committee marks the second time thepanel has sought to deal with the issue. The panel spent the betterpart of two months in June-July 2003 crafting legislation similarin principle to the latest legislation. The bill passed thecommittee with only one Democratic vote–that of Sen. DianneFeinstein, D-Calif.

To get through the committee, an agreement was made at the lastminute upping the ante for defendants and insurers by $7 billioneach, to $108 billion, plus allowing the administrator of the fundat the Department of Labor to levy up to $45 billion in additionalcosts on defendants and insurers through creation of a contingencyfund.

That raised the potential cost to $153 billion.

Negotiations between Senate Majority Leader Sen. William Frist,R-Tenn., and then Minority Leader Sen. Tom Daschle, D-S.D., overthe next 15 months lowered the figure to $140 billion, the currentamount established in legislation drafted by Sen. Arlen Specter,R-Pa., current chair of the committee.

But the bill still failed to make it to the floor of the Senateby the time Congress adjourned for the year, mainly because theprimary stakeholders–the defendants, the property-casualtyinsurance industry and organized labor as represented by theAFL-CIO–all had major problems with the Judiciary Committee's workproduct.

And major efforts by the staffs of both Sen. Frist and Sen.Daschle failed to break the deadlock.

In general, the consensus last year was that if the Senatereached agreement on a bill, the House would accept it intact.However, that dynamic now has changed, with some industry anddefendant lobbyists privately saying that even if the bill makes itthrough the Senate, they will still try to kill it in theHouse.

That's because its cost is too high, and because the billmandates that defendants and insurers open their books forpotential asbestos liability and disclosure of reserves they haveinternally set aside to cover potential asbestos exposure.

“With respect to the insurers' share of the trust fund, itis…critical to state once again that the $46.025 billion assignedour industry will present a true hardship for the relatively fewindividual insurance and reinsurance companies required toparticipate,” three large insurer trade groups wrote in a letterlast month. The groups, the American Insurance Association, theReinsurance Association of America, and the National Association ofMutual Insurance Companies, also stressed concerns about provisionsthat might allow claims to leak outside the trust fund into thetort system.

Under the latest bill, the worst victims, those suffering frommesothelioma, would receive $1.1 million under an acceleratedpayments schedule that would mandate payment within two years, atthe latest.

The funds populating the trust would come from threesources–defendant companies, existing trust funds and insurers. Theinsurers' payment would be $46 billion over 27.5 years.

All existing stakeholders have problems with the current versionof the bill.

Insurers remain divided. While some have supported federalreform efforts in the past, in March, a group of some of thelargest commercial insurers and reinsurers voiced strong oppositionto the trust fund concept in a letter to Senate leadership. Led byLiberty Mutual, the group, which also included Chubb and AmericanInternational Group, said “the Trust Fund process has gone on longenough,” supporting the idea of litigation-based reform, includingmedical criteria instead.

In addition, Equitas, the runoff vehicle established by Lloyd'sto deal with asbestos and environmental exposures prior to theearly 1990s, is outraged by a provision in the current bill thatmandates a safe harbor for all defendants and insurers involved incases where payments mandated by the trust fund legislation wouldforce them into bankruptcy.

“What we object to is the idea that this should be done forliterally every other insurance company in the world exceptEquitas, Scott Moser, chief executive officer, said in January. InApril, Equitas' lawyers and lobbyists said they will continue towork with the committee and the Senate to resolve the issue,however.

In general, the bill's ability to become operational is alsoviewed as problematic because of a provision mandating that moneyin all trust funds previously established by courts to deal withasbestos liability would revert to the new fund.

That provision was added in late July 2003, primarily to easeconcerns that the fund would not be able to pay the deluge ofclaims in the early years, before normal payments yielded enoughcash, without creating a hardship for defendants and insurers.

But lawyers for the trust funds have voiced the latestopposition to the reform bill, saying this provision requiring thesurrender of assets from judicially created asbestos trusts isunconstitutional. A letter signed by Theodore B. Olson, a lawyer atWashington-based Gibson, Dunn & Crutcher in late April, notedthat the national fund would be used “to pay some claimants to whomthe [court-created] trusts have no obligation, but would beunavailable to pay some claimants to whom the trusts do haveobligations.”

The lawyers added that they would seek to bar removal of thefunds from the trusts pending litigation, which would take a yearor more.

Privately, defendants and insurers also say that the Bushadministration has rejected their pleas for the administration toback off from supporting the trust fund. The defendants andinsurers complain that the administration is not looking into thesubstance of their problems with the bill and is only concernedwith the sound bite it could create by noting that the bill cutslawyers' compensation to 5 percent of claims handled by theadministrator–10 percent if the claim is ruled appropriate by anappeals court.

Other insurers' concerns stem from the fact that the latest billaccelerates their payments into the fund, from equal distributionthroughout the fund's 27.5-year existence to front-load theirpayments.

“We understand the insurance industry is called upon to providethe majority of the upfront funding, as opposed to the defendantswho are allowed to stretch their payments over the life of thefund. Further acceleration of the insurer payments would leave theindustry in the position of having paid significant upfront fundingwithout obtaining the finality and exclusivity that always havebeen a prerequisite for our support of a trust fund,” four majorp-c insurance groups wrote in a December letter.

The question also has arisen as to whether the $46 billion levyagainst insurers is now too high, the same as it was in the 2003bill, even though some large claims, such as those involvingHalliburton and U.S. Gypsum, have since been paid.

“The $46 billion does not reflect the full cost to the industry.While negotiations have continued over the last two year, insurershave paid billions into the tort system,” insurance industry tradeassociations wrote in a December letter critiquing a draft billcrafted by Sen. Specter.

Another critical issue is that the legislation doesn't providethe industry with certainty that all its asbestos liability wouldend with the payments. The legislature says that if the trust fundis unable to pay a claim within nine months of its finaladjudication, all claims revert to the tort system. This isunacceptable to the insurers who would make the bulk of payments,although some limitations on reversion, for example, a limitationon where suits could be filed, have been added to the bill.

Craig Berrington, senior vice president and general counsel ofthe AIA, said, “A national trust fund must provide an exclusiveremedy for resolution of all asbestos claims,” when he testified ata committee hearing on April 26.

Another provision that upsets the industry is one that deniesthem subrogation authority, that is, the ability to reduce finalpayments by the amount a successful claimant gets through workers'compensation payments.

And, privately, the so-called transparency issue is of deepconcern. It mandates that a presidential commission would have theauthority to peruse an insurer's books to determine its asbestosliability. Besides of the uncertainty it creates for the companies,it also pits one company against another, and creates the potentialthat some companies in a better overall financial situation thanother companies would wind up paying more than their maximumliability. In other words, flush companies would be bailing outweaker insurers.

Organized labor, for its part, believes the size of the trustfund is inadequate. AFL-CIO officials involved in the talks alsoare concerned that the pace of payments would be too slow becauseof inadequate funding of the trust fund.

A new concern for labor is the decision of the JudiciaryCommittee, in a trade-off to win conservative votes, to delete aclaims category for smokers with lung cancer who can't definitivelyprove their disease is asbestos-related.

Under the prior bill, a medical criteria level allowed smokerswith minimal symptoms of asbestosis to be compensated. Thatrequired smokers to show 15 years of workplace exposure to asbestoseven if they have indications of exposure in only one lung. Butthat criterion, the so-called Level VII, has been eliminated. Aneffort made May 19 by Sen. Edward Kennedy, D-Mass., to call for astudy of the issue by qualified medical professionals failed beforethe effort to finish work on the bill was ended because of Senaterules.

There has been speculation that the bill will be reported out ofcommittee, possibly before the annual Memorial Day congressionalrecess begins May 27.

A buy-side analysts' group in Washington, Washington Analysis,said in a note to investors May 18 that it expects another seriesof markups to take place on asbestos next week, and very possiblyafter the Memorial Day recess. “Our bottom line hasn't changedthough–while a bill might make it through the committee, we don'tbelieve the legislation will become law,” said analyst and formercongressional aide Joe Lieber.

A factor that may limit the need for the federal bill ismovement on state reforms. Over the last year, four states havepassed legislation reducing insurer and defendant liability. Ohiopassed such legislation last year, and Georgia, Florida and Texashave also passed such legislation in the last few weeks.

Flag: Key Provisions

Under S. 852, the latest legislation proposed to create analternative claims-handling mechanism for those injured by exposureto asbestos in the workplace:

o A $140 billion trust fund to handle asbestos and silica claimswould be created.

o Funds populating the trust would come from threesources–defendant companies, existing trust funds and insurers,with insurers paying $46 billion over 27.5 years.

o Money in all trust funds previously established by courts todeal with asbestos liability would revert to the new fund.

o Victims would be paid certain sums based on 10 differentlevels of injury.

o Victims suffering from mesothelioma, the severest injury,would receive $1.1 million within two years, at the latest.

o A five-member Asbestos Insurers Commission would be created todetermine the amount that each insurer participant pays into thefund. In making that determination, the Commission will conduct “athorough study…of the accuracy of the reserve allocation of eachinsurer participant,” according to the language of the proposedlegislation.

o If the $140 billion trust fund is unable to pay a claim withinnine months of its final adjudication, all claims revert to thetort system.

Flag: Sticking Points

o Insurers say the $46 billion cost to a small group of insurersand reinsurers is too high.

o Insurers say there would be no real finality for fundingparticipants, pointing to provisions like one that would haveclaims revert to the tort system if the trust fund can't pay aclaim within nine months.

o Equitas objects to a provision denying the Lloyd's runoffmechanism a safe harbor on liabilities available to otherinsurers.

o Lawyers for trust funds previously set up by courts say aprovision requiring the surrender of assets from those funds to thenew fund is unconstitutional.

o Insurers object to a provision giving a presidentialcommission authority to assess the accuracy of their reserves.

o Consumer groups argue that defendants' provisions forpotential liability far exceed amounts they would pay under thepresent bill.

o Labor groups believe the trust fund is inadequate, the pace ofpayments would be too slow, and object to the deletion of a claimscategory for smokers who can't definitively prove their diseasesare asbestos-related.