Asbestos-Related Filings Decline

Corporate litigation departments can breathe a little easier these days: The asbestos-related lawsuits that have flooded courts for years finally seem to be receding.

Following a tumultuous rise in asbestos-related litigation and settlement amounts at the start of the 2000s, filing activity has stabilized below peaks reached around 2003, according to a recent report that details trends in asbestos-related litigation.

The annual report published by NERA Economic Consulting examined more than 150 companies' Form 10-Ks filed with the Securities and Exchange Commission from 2001 through 2010. According to that report, average asbestos-related filings peaked in 2003, and dropped steadily since then. By 2007, average claim filings bottomed out at 20 percent of 2001 levels, and have remained close to that level since then.

As unsexy as it may sound, asbestos has been one of the biggest causes of corporate litigation in the last 20 years. According to consulting firm Briefcase Analytics, 57 percent of all corporate litigation from 2005 through 2009 somehow involved the substance, which was used as insulation for years before it was linked to cancer.

Many attribute the surge in asbestos filings at the start of the 2000s to promotions sponsored by plaintiffs' lawyers around the country at that time. Recognizing the potential for large contingency fees from asbestos claims, plaintiff lawyers would hire doctors and X-ray technicians to identify claimants with possible occupational exposure to asbestos. Not surprisingly, the vast majority of these screenings produced false positives, resulting in litigation chaos for Corporate America.

“Early in the decade, everything was looking quite bad for companies,” says Mary Elizabeth Stern, vice president of NERA Economic Consulting and one of the report's authors. “Filings were increasing. The dollars companies were paying was increasing, and quite a few companies were going into bankruptcy.”

It wasn't until mid-decade that filings began to drop after several states enacted tort reforms aimed at identifying only those who showed physical impairments caused by asbestos or silica exposure. For example, Texas—a favored state among plaintiffs' lawyers—passed a law requiring that all claimants provide a report showing detailed medical evidence of exposure and injury.

Those reforms “created a huge deferred docket of non-malignant claims,” Stern says. “That really changed the filing and settlement pattern.”

In addition, Mississippi—once a magnet for out-of-state asbestos claims—also changed the litigation landscape when it passed a state nexus law, requiring that asbestos claimants either had to live in Mississippi or incurred their injuries there. After that, claims dropped “really dramatically,” says Stern, from thousands of claims every year to fewer than 100 annually.

Stern does not expect filings to drop off much more, due to the number of malignant claims that still exist. Assessing precise numbers is difficult because companies aren't reporting their malignant filings in SEC filings, “but from some of our internal filings, we see that the malignant claims have been fairly stable over the last couple of years,” she says.

Some corporate executives are seeing similar trends. “With respect to our direct asbestos exposures, we experienced higher frequency and severity of mesothelioma and other cancer claims as well as increased defense costs on many of these claims,” Keith Jensen, senior vice president of American Financial Group, said on a Aug. 2 conference call. “These trends were partially offset by a decline in the number of claims without serious injury and fewer new claims that required payment being reported to the company.”

The NERA study also noted increased defense costs. According to the NERA report, total indemnity payments in 2004 spiked to almost three times 2001 levels, before dropping back to 1.5 times 2001 levels by 2006 and were quite volatile during this period, rising or falling on average 34 percent each year.

The enactment of such legislation [as the criteria set by Texas and other states] … “created a huge deferred docket of non-malignant claims. That really changed the filing and settlement pattern.”

—Mary Stern,

Vice President,

NERA Economic Consulting

Because companies are resolving fewer asbestos cases, the average payment for resolved claims has subsequently increased. What is happening is that plaintiffs' lawyers are “trying to get the same value for the injury, spread among fewer defendants,” says Terry.

One especially egregious example occurred in May, when a Mississippi jury awarded a record $322 million—the single largest plaintiff's asbestos verdict in U.S. history—to a former oil-field worker who had developed a debilitating lung disease caused by asbestos exposure over the course of his employment. The plaintiff had inhaled asbestos-containing drilling mud mix sold by Chevron Phillips Chemical and manufactured by Union Carbide. The jury found that Chevron and Union Carbide were liable for defectively designing their product and failure to provide an adequate warning.

Coinciding with tort reform and the slower pace of filings, dismissal rates increased, ending their decade-long rise. Since 2009 dismissal rates have fallen, but still remain, on average, more than double the 2001 rates. “We would expect that dismissal rates may pull back slightly in the future as what we're left with are the malignant diseases,” says Stern.

Rising Reserves

For companies that report asbestos reserve funds, the study also tracked the number of years over which reported reserves are computed and the average amount reserved. To that end, companies in their 10-K filings reported reserves to cover future asbestos liabilities over periods ranging anywhere from five years to 50; some reported liability through a fixed date and others reporting liabilities over a rolling period. The median number of years reported in 2010 filings was 15.

After large increases at the start of the decade, reserve levels have remained fairly consistent for several years now. Since 2004, asbestos reserves have remained stable, wavering around four times 2001 levels.

ASBESTOS CLAIMS STATS

According to the Figure 1 below from NERA, the number of asbestos claims dropped significantly from 2003 to 2007 and then became fairly stable, hovering around 20 percent from 2007 through 2010:

Figure 4 below shows how the average number of pending asbestos claims has been steadily dropping since 2004:

Source: NERA 2011 Asbestos Report.

The recent stability in reserves means that, on average, companies have been raising their estimates of future liabilities. “Depending on how the companies have forecasted their future claims, and what assumptions they've already built in, companies might pull back reserves in the future,” says Stern.

During its Aug. 2 conference call, American Financial Group, for example, announced that its property and casualty group's asbestos reserves were increased by $28 million. “The increase in assumed reinsurance asbestos reserves resulted from an increase in anticipated aggregate exposures in several large settlements involving several insurers in which the company has a small proportional share,” Jensen said.

“The company believes that its current asbestos and environmental reserves are appropriate,” Jensen added. “However, analyses of future developments could cause the company to change its estimates and ranges of its asbestos and environmental reserves.”

In July, the Hartford Financial Services Group also announced a reserve increase of $290 million, resulting from the company's annual review of its legacy asbestos liabilities. “The increase was primarily driven by higher frequency and severity of mesothelioma claims, particularly against certain smaller, more peripheral insureds,” according to a company statement.

A handful of other financial services firms reported reserves in 2010. A review of Travelers 2010 Form 10-K shows that the company increased asbestos reserves by an average of $132 million over the past three years. Additionally, the Hartford Financial Services' Group recorded net reserves in 2010 of $2.14 billion, $1.8 billion of which was for asbestos.

Looking ahead, Stern says companies will want to watch whether the pace of litigation will change as non-malignant claims decline, and what effect—if any—the new asbestos bankruptcy trusts will have on filings and settlements for still-solvent defendants.