Indeed, asbestos insurance is fast evaporating for many companies, according to A.M. Best. In addition, insurers' reserves to pay asbestos claims are deficient by some $33.1 billion, says Altonji. And "over the next three to five years," he says, "we expect paid claims to increase, on average, 20 percent annually for asbestos liabilities for the majority of exposed insurers, causing an earnings drag for the entire industry for years to come."
One alternative for companies whose insurance is running out is to simply buy more coverage. Some companies have found a measure of relief in so-called blended finite risk insurance, which can help them spread the loss over several annual periods. For others, however, the sheer volume of cases and the limits of their coverage have left no other alternative than to file for bankruptcy. Such a step, which allows them to separate their existing businesses from their asbestos exposures, immediately halts all pending litigation until a judge sets a date by which remaining claims must be filed. Thereafter, the claims are handled by a separate trust.
But even bankruptcy is only a temporary way out of the morass. As more and more defendants opt for Chapter 11, "attorneys will look for other ways to get money, which means going after the peripheral defendants," says Michael E. Angelina, a consulting actuary at Tillinghast. Ultimately, the weight proves unyielding, and they, too, declare bankruptcy.
Finding a Just Solution
So what's the solution? Companies in bankruptcy proceedings want legislation giving them some tax relief in order to remain financially afloat so their future trusts can continue to pay victims. The companies support the Asbestos Tax Fairness Act (HR 1412 and S. 1048), which would do two things: provide income-tax exemption for current asbestos trusts, and carry back net operating losses created by asbestos payments to years in which the product was sold or distributed.
The latter plan, proponents claim, would allow companies to obtain a refund of federal income taxes paid during this period, which could then be directed to the injured. "Asbestos manufacturers in the 1950s and 1960s made money and reported profits because they were unaware of this existing liability," says Michael Thaman, senior vice president and CFO of Owens Corning. "Here we are now in 2001 with big losses from asbestos litigation. If we carried those losses back to that time in which the product was manufactured, it would result in a refund from the government." Current U.S. tax codes allow such carrybacks for a period of 10 years, which the legislation would extend.
The first provision would permit the trusts created by the bankrupt companies to accrue interest free of tax. Thaman says this, too, is sensible, "because if you put aside assets in a trust and they start making income and the income is taxable, then the trust won't last nearly as long. Why should the government make money on money destined for ill people?"
For companies not in Chapter 11 and staring down a potential fusillade of asbestos claims, they and their insurers propose establishing a national asbestos medical registry. "The idea is to establish clear medical criteria to determine if a person is actually sick, and if not, to put them on the registry and monitor them until such a time as they do become sick," says Hartwig. In Chicago's Cook County Circuit Court, where such a registry exists, all plaintiffs in asbestos cases are activated only when their impairment meets certain medical criteria, which include a total lung capacity below 80 percent and a diffusing capacity for oxygen of less than 70 percent of normal. Says Hartwig, "If every jurisdiction had objective medical criteria like Cook County, the nation's asbestos problem would become tractable."
Meanwhile, one company — Federal-Mogul Corp. — is making its own determination about which cases are viable. Says G. Michael Lynch, executive vice president and CFO, "We recently adopted a trial list strategy where we pay only the sick and avoid mass settlements. We also require valid identification that our subsidiaries' products were actually the cause of the illness."
For USG, however, such solutions are too little, too late. But Fleming notes that once the firm emerges from bankruptcy, it expects to "put asbestos behind us once and for all." And the lasting legacy of the experience, he adds, is that "as an asbestos-free company, we can be extraordinarily valuable to our shareholders. Further, we hope that our experiences will lead to better public policy."
Russ Banham is a contributing editor of CFO.
Feeling the Heat
What property/casualty insurers are paying out in annual asbestos losses.
- 1995: $1.3 billion
- 1996: $1.2 billion
- 1997: $1.0 billion
- 1998: $1.1 billion
- 1999: $1.6 billion
- 2000E: $1.4 billion
Source: A.M. Best
Culpable or Not?
Some lawsuits against peripheral asbestos defendants strain credulity. Take the litigation against Sealed Air Corp. Three years ago, Sealed Air purchased a plastic-packaging company owned by W.R. Grace & Co., a shipbuilding company that, in April, filed for Chapter 11 protection from some 325,000 asbestos claims against it. With Grace's assets protected, plaintiff attorneys sued Sealed Air, arguing that any former Grace subsidiary must share liability for asbestos injuries caused by the parent. "The irony was that the subsidiary had nothing whatsoever to do with asbestos," says Robert Hartwig, chief economist at the New York-based Insurance Information Institute.
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