Key stakeholders dig in their heels; political wrangling continues

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

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

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

A battle over the ability of the Senate minority to kill legislation it doesn't like is just the latest setback to the year-long effort to enact legislation creating an alternative claims-handling mechanism for those injured by exposure to asbestos in the workplace.

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

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 of injury.

The issue was resolved May 23, and work on the bill resumed two days later. But it is now unlikely that the bill will be reported out by the Senate Judiciary Committee before early June, which could reduce its chances of being acted on by the full Senate this year. (For updates, check NU's online news service and upfront magazine pages.)

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

To get through the committee, an agreement was made at the last minute upping the ante for defendants and insurers by $7 billion each, to $108 billion, plus allowing the administrator of the fund at the Department of Labor to levy up to $45 billion in additional costs on defendants and insurers through creation of a contingency fund.

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., over the next 15 months lowered the figure to $140 billion, the current amount 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 Senate by the time Congress adjourned for the year, mainly because the primary stakeholders–the defendants, the property-casualty insurance industry and organized labor as represented by the AFL-CIO–all had major problems with the Judiciary Committee's work product.

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 Senate reached agreement on a bill, the House would accept it intact. However, that dynamic now has changed, with some industry and defendant lobbyists privately saying that even if the bill makes it through the Senate, they will still try to kill it in the House.

That's because its cost is too high, and because the bill mandates that defendants and insurers open their books for potential asbestos liability and disclosure of reserves they have internally set aside to cover potential asbestos exposure.

“With respect to the insurers' share of the trust fund, it is…critical to state once again that the $46.025 billion assigned our industry will present a true hardship for the relatively few individual insurance and reinsurance companies required to participate,” three large insurer trade groups wrote in a letter last month. The groups, the American Insurance Association, the Reinsurance Association of America, and the National Association of Mutual Insurance Companies, also stressed concerns about provisions that might allow claims to leak outside the trust fund into the tort system.

Under the latest bill, the worst victims, those suffering from mesothelioma, would receive $1.1 million under an accelerated payments schedule that would mandate payment within two years, at the latest.

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

All existing stakeholders have problems with the current version of the bill.

Insurers remain divided. While some have supported federal reform efforts in the past, in March, a group of some of the largest commercial insurers and reinsurers voiced strong opposition to the trust fund concept in a letter to Senate leadership. Led by Liberty Mutual, the group, which also included Chubb and American International Group, said “the Trust Fund process has gone on long enough,” supporting the idea of litigation-based reform, including medical criteria instead.

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

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

In general, the bill's ability to become operational is also viewed as problematic because of a provision mandating that money in all trust funds previously established by courts to deal with asbestos liability would revert to the new fund.

That provision was added in late July 2003, primarily to ease concerns that the fund would not be able to pay the deluge of claims in the early years, before normal payments yielded enough cash, without creating a hardship for defendants and insurers.

But lawyers for the trust funds have voiced the latest opposition to the reform bill, saying this provision requiring the surrender of assets from judicially created asbestos trusts is unconstitutional. A letter signed by Theodore B. Olson, a lawyer at Washington-based Gibson, Dunn & Crutcher in late April, noted that the national fund would be used “to pay some claimants to whom the [court-created] trusts have no obligation, but would be unavailable to pay some claimants to whom the trusts do have obligations.”

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

Privately, defendants and insurers also say that the Bush administration has rejected their pleas for the administration to back off from supporting the trust fund. The defendants and insurers complain that the administration is not looking into the substance of their problems with the bill and is only concerned with the sound bite it could create by noting that the bill cuts lawyers' compensation to 5 percent of claims handled by the administrator–10 percent if the claim is ruled appropriate by an appeals court.

Other insurers' concerns stem from the fact that the latest bill accelerates their payments into the fund, from equal distribution throughout the fund's 27.5-year existence to front-load their payments.

“We understand the insurance industry is called upon to provide the majority of the upfront funding, as opposed to the defendants who are allowed to stretch their payments over the life of the fund. Further acceleration of the insurer payments would leave the industry in the position of having paid significant upfront funding without obtaining the finality and exclusivity that always have been a prerequisite for our support of a trust fund,” four major p-c insurance groups wrote in a December letter.

The question also has arisen as to whether the $46 billion levy against insurers is now too high, the same as it was in the 2003 bill, even though some large claims, such as those involving Halliburton 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, insurers have paid billions into the tort system,” insurance industry trade associations wrote in a December letter critiquing a draft bill crafted by Sen. Specter.

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

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

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

And, privately, the so-called transparency issue is of deep concern. It mandates that a presidential commission would have the authority to peruse an insurer's books to determine its asbestos liability. Besides of the uncertainty it creates for the companies, it also pits one company against another, and creates the potential that some companies in a better overall financial situation than other companies would wind up paying more than their maximum liability. In other words, flush companies would be bailing out weaker insurers.

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

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

Under the prior bill, a medical criteria level allowed smokers with minimal symptoms of asbestosis to be compensated. That required smokers to show 15 years of workplace exposure to asbestos even if they have indications of exposure in only one lung. But that criterion, the so-called Level VII, has been eliminated. An effort made May 19 by Sen. Edward Kennedy, D-Mass., to call for a study of the issue by qualified medical professionals failed before the effort to finish work on the bill was ended because of Senate rules.

There has been speculation that the bill will be reported out of committee, possibly before the annual Memorial Day congressional recess begins May 27.

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

A factor that may limit the need for the federal bill is movement on state reforms. Over the last year, four states have passed legislation reducing insurer and defendant liability. Ohio passed such legislation last year, and Georgia, Florida and Texas have also passed such legislation in the last few weeks.

Flag: Key Provisions

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

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

o Funds populating the trust would come from three sources–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 to deal with asbestos liability would revert to the new fund.

o Victims would be paid certain sums based on 10 different levels 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 to determine the amount that each insurer participant pays into the fund. In making that determination, the Commission will conduct “a thorough study…of the accuracy of the reserve allocation of each insurer participant,” according to the language of the proposed legislation.

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

Flag: Sticking Points

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

o Insurers say there would be no real finality for funding participants, pointing to provisions like one that would have claims revert to the tort system if the trust fund can't pay a claim within nine months.

o Equitas objects to a provision denying the Lloyd's runoff mechanism a safe harbor on liabilities available to other insurers.

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

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

o Consumer groups argue that defendants' provisions for potential liability far exceed amounts they would pay under the present bill.

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

Special Reports /

Fate Of Asbestos Reform Uncertain

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