Products Liability Tort Climate Improving

Insuring product makers still carries big risks, includingasbestos and medical devices

When federal legislators put limits on gun liability and movedto curb lawsuits against fast-food joints serving up super-sizedportions on the same day last month, insurance experts saw positivesigns ahead for products liability insurers.

Past results for the line have been far from stellar, with a10-year average combined ratio of roughly 198, according to RobertHartwig, chief economist of the New York-based InsuranceInformation Institute.

Last year, it was a mere 170. "So why would anyone want to writethis?" he said.

"It is absolutely the case that the tort environment of the pastdecade has made products liability a difficult place to be. A lotof insurers lost a lot of money," he said. However, he added,"going forward, there are reasons for optimism."

Positive changes in the tort environment, he said, include thepassage of the Class Action Fairness Act in February, designed tohalt abuses like "venue shopping"--making it easier to remove classactions to the federal system.

In addition, "more states seem willing to entertain caps onpunitive damages awards," he said. In the most high-profileproducts liability case this year, involving Merck's arthritisdrug--Vioxx--even though a Texas jury awarded over $200 million, itwas later reduced to $26 million, he noted.

"We're on a positive trajectory," he said. "Rationality, pieceby piece, is being restored to our tort system--particularly in thestate courts, where problems normally occur."

"Very recently, Congress put forth stringent limitations on gunliability, and the so-called 'cheeseburger bill' went through,"added Mr. Hartwig, highlighting two other positive developments. OnOct. 19, the House passed the "Protection of Lawful Commerce inArms Act," which protects gun makers and sellers from suits basedon criminal use of their products, as well as "The PersonalResponsibility in Food Consumption Act," ending obesity suits.

(As this article went to press, the gun bill was awaiting thepresident's signature, while the food bill was on its way to theSenate. A few days after NU interviewed Mr. Hartwig, the Housepassed another reform measure--the Lawsuit Abuse Reduction Act,imposing sanctions against lawyers who file frivolouslawsuits.)

Mark Behrens, a partner for Shook, Hardy and Bacon inWashington, sees rationality impacting the number-one past nemesisfor products liability insurers--asbestos, and its close cousin,silica.

Asbestos and silica medical criteria legislation passed inTexas, Florida and Georgia this year and Ohio in 2004, filteringout claims by people who aren't sick, he said. Some reports showthat 90 percent of cases in recent years were brought by theunimpaired, noted Mr. Behrens, who is also counsel to the Coalitionfor Litigation Justice, a group of defendants and insurers.

He said the latest positive development is a silica decision byTexas Federal Judge Janis Graham Jack, in June. Judge Jack tossedall but one of 10,000 silica cases from her court, finding thatthey were based on fraudulent diagnoses by lawyers, doctors andscreening companies.

Spillover from the decision is already evident, Mr. Behrenssaid, noting that not only will her decision be a road map to statecourts hearing silica cases, but on the asbestos front, claimsmanagers for the Manville Personal Injury Settlement Trust said inSeptember they will no longer accept claims supported by anydoctors or screeners discussed in Judge Jack's opinion.

Still, "the history of asbestos litigation shows that theplaintiffs' bar always adapts," he warned. "The next asbestos isalways asbestos," he added, quoting an unnamed insurance claimsexecutive and predicting that cases will now evolve in a"back-to-the future" fashion.

Litigation increasingly will look like it did in 1985, whenthere were fewer claims but brought for people with seriousillnesses--mesothelioma or asbestos-related lung cancer, hesaid.

Moving Targets

Mr. Behrens said the plaintiffs' bar will also adapt by forumshopping, noting that there is now more asbestos litigation inCalifornia, "probably as a direct result of reforms enacted inMississippi and Texas," and that an unusual forum--Delaware--isbeing targeted by a leading Madison County, Ill.-based law firm."This is interesting since Delaware has been viewed as a favorablelegal climate for defendants."

The law firm, SimonsCooper, announced the launch of a new bloglast month, with one entry that explains the Delaware filings.Incorporation of firms in Delaware means "they cannot wrangle overjurisdiction," the entry said. "Wrangling takes time. The victimsof asbestosis and mesothelioma don't have time," it continued.

The Web address of the blog--www.benzeneasbestos.com--revealsanother strategy that Mr. Behrens identified, that beingdiversification into other mass torts, such as benzene. Benzeneused in solvents that are applied to de-grease tools and machineparts, according to the lawyers, is linked to blood disorders andblood cancers, such as anemia and leukemia.

While Mr. Behrens said benzene litigation is only in the"incubator stage," the phenomenon of reforms in one area fuelingclaims in another is one that Denise Holzka, a partner for Heidell,Pittoni, Murphy & Bach, sees happening in another productarea--medical devices.

The New York-based defense lawyer said caps onpain-and-suffering damages in medical malpractice cases are givingrise to device litigation. In a state where a $250,000 cap is inplace, if a plaintiffs' lawyer believes a case is worth $750,000,and a device was used during a surgery that resulted in injury,then you'll see litigation brought against the device maker, evenif user error is the source of injury, she said.

She reported that her firm has such a case in California, in asituation where the cuff of a heart monitor stopped working and ananesthesiologist began monitoring a woman's pressure manually onthe other arm, leaving the monitor cuff on during the entiretwo-hour surgery.

The alleged damage is significant nerve damage to her arm, Ms.Holzka reported, asserting that while the anesthesiologist shouldhave known that the cuff was still keeping pressure on the woman'sarm, the litigation alleges that the monitor should have had awarning mechanism to alert the doctor that this was happening.

"I can't say with certainty that the cuff manufacturer wouldn'tbe sued" if not for the medical malpractice cap. "But this isn't adifficult med mal case," she said.

Michael Egan, segment director, Medical Technology for St. PaulTravelers, which set up a unit devoted to medical technology eightyears ago, has yet to see an undeniable link between med malreforms and device claims. "It's something we are looking atclosely, but we haven't necessarily seen significant or unexpectedtrends in our loss experience," he said.

"We have seen cases where hospitals and providers have had verylow limits, and it would appear that if they had had more adequatelimits, it would have been unlikely the device manufacturer wouldhave been brought into litigation," he added. "We haven't seen alot of it. We're not alarmed about it. We'll continue to monitorit."

Mr. Egan said one definite trend is an increase in device claimsinvolving allegations other than a design or manufacturing defect.These more novel claims allege either that a manufacturer failed totrain the physician on the proper use of a device, or that thedevice was used on an off-label basis and the manufacturer eitherpromoted it or didn't give enough warning of potential injury thatcould be caused by a known off-label use.

He explained that while a manufacturer needs approval for aspecific use for a device that's regulated by the Food and DrugAdministration, health care providers can use the devices howeverthey want.

"We have seen an increase" in allegations related to off-labelsituations, "but I don't know that we can causally link it to medmal reform," he said.

St. Paul Travelers insures a broad range of device makers (andbiotechnology firms involved in diagnostic testing), ranging fromstartups to large, established firms. While the insurer does notwrite pharmaceuticals, negative publicity for drug makers is stilla concern, according to Mr. Egan.

"There have been articles questioning the FDA's ability toregulate," painting a potentially negative picture not just fordrugs but for devices as well, he said.

Still, he said, agents report no shortage of capacity among thefew insurers writing medical devices. Even in areas that falloutside of St. Paul Travelers' appetite, like permanentlyimplantable devices, "there's probably a market out there," perhapsin the surplus lines arena.

Appetites Expand

Mike Johnston, a wholesale broker for CRC in Birmingham, Ala.,reports softer market conditions for products liability generally.Operating in the surplus lines area, he sees "the tougherproducts"--pharmaceuticals, herbaceuticals, clinical trials ofpharmaceuticals prior to FDA approval, industrial machinery,imported products, football and motorcycle helmets, and autoproducts, among others.

This year, "as the overall commercial market softened, westarted to see a modest outflow of easier types of products risks"to standard markets, he noted.

Among them, he said, "the easier types are foreign-madeproducts," such as hand tools or air conditioners that "aren'toverly complicated in and of themselves. The fact that they're madein a foreign country complicates the situation" for underwriters.Also, they're mechanical and electrical, making them less desirableto standard insurers in a hardening market, he added.

He said favorable financial results in recent years are fuelingcompetition--and rates are falling. "Price decreases are around 25percent on the business we're losing," he said, noting that risksstaying in the E&S market see declines of about 10 percent.

Scott Bayer, a senior vice president for Liberty InternationalUnderwriters in New York, which writes products on an E&Sbasis, had a similar assessment when he spoke to NU during theannual meeting of the National Association of Professional SurplusLines Offices in September. "Unfortunately, the business neverreally hardened. There are a lot of carriers willing to write itvery competitively," he said.

The line has performed well overall in relation to others in thelast five or 10 years, so a lot of companies have tried to expandtheir products liability portfolios, he said.

Noting that LIU's portfolio includes consumer products, medicalproducts, sporting goods and machinery, he said it is diverse bydesign. However, LIU stays away from pharmaceuticals andnutriceuticals, residential building products, firearms and animalfeed, he said, explaining the potential for multiple-plaintiffexposure from the latter. "The cow eats feed, gets sick, thenpeople get sick. It follows down the line."

Mary Foucard, a agent with Cambridge Underwriters in Livonia,Mich., whose retail agency places risks with standard insurers,characterizes the products market as a "healthy, competitive" one."The Midwest is an attractive place to do business," because ofevents in the South and more weather-sensitive regions, shesaid.

Ms. Foucard's product placements, because of her firm'slocation, mainly involve automotive products (such as electronicswitches for windshield wiper wands, or machine parts used to makevehicles). She gave high marks to insurers for their level ofunderwriting sophistication in these areas and beyond."Underwriters are receptive to considering products they might nothave considered three years ago," she said, citing elevator partsas one example.

She also said insurers are competitive on terms as well aspricing. "I've seen policies go from a certain deductible to areduction in that deductible, to even considering writing firstdollar," she said.

Switching Gears

In the automotive products world, two lawyers from CozenO'Connor see a product defect issue impacting first-party propertyinsurers--a dozen of which they are representing in subrogationactions against auto giant, Ford Motor Company.

These product liability claims, which have the property insurersas plaintiffs, relate to damage caused by a switch that is designedto turn off the cruise control in 16 million cars, explained JohnReis, a member of Cozen O'Connor's Charlotte, N.C., office.

The defect, which causes fires when cars are parked in "key-offposition," has destroyed homes and car dealerships, he said. In tworecall actions to date, Ford recalled 3.8 million of the 16 millionvehicles potentially affected, he said, adding that the law firm isonly targeting Ford, (which is largely self-insured and hasn't hadto tap any insurance) in subrogation actions, and not the partmaker, Texas Instruments.

Elliot Feldman, who chairs the law firm's subrogation recoverydepartment in Philadelphia, said that tens of millions of dollarscould be at stake for property insurers, noting that the firm isinvestigating the possibility of consolidating claims throughmulti-district litigation.

Art: Monitoring blood pressure of fat guy downing Big Mac orcheeseburger (perhaps holding gun in other hand, or stuck in hispants)

As insurers continue to monitor the liability potential ofvarious products, some hot topics, like fattening foods andasbestos, appearing to be cooling down, while other areas, likemedical devices, could heat up.

Flag: Worst Line

Head:

Top 10 Products Liability Writers

($000)

With losses from prior-year exposures like asbestos stillimpacting recent calendar-year results, insurers recorded anaverage combined ratio of 198 over the past six years--incurringnearly two dollars in losses and expenses for each dollar they tookin.

Egan, mug coming Tuesday

"We have seen cases where hospitals and providers have had verylow limits, and it would appear that if they had had more adequatelimits, it would have been unlikely the device manufacturer wouldhave been brought into litigation."

Michael Egan,

Segment Director, Medical Technology

St. Paul Travelers

"We're on a positive trajectory. Rationality, piece by piece, isbeing restored to our tort system--particularly in the statecourts, where problems normally occur."

Robert Hartwig, Chief Economist

Insurance Information Institute

"I've seen policies go from a certain deductible to a reductionin that deductible, to even considering writing first dollar."

Mary Foucard, Agent

Cambridge Underwriters