$2.7 Billion PPG Asbestos Settlement Puts New Pressure on Insurers

A year ago insurance consultants Tillinghast-Towers Perrin published a report that global claims settlements and jury verdicts in asbestos related cases could reach $200 billion from over a million claims “before litigation ends.” Several recent developments seem to support that conclusion.

A New York jury awarded $53.5 million to the family of Stephen A. Brown, who died of an asbestos related illness, contracted while working at Bendix. The verdict against Honeywell Corp, as a successor in interest to Allied Signal, and ultimately Bendix, will be appealed, but the amount of the award—the highest ever assessed in an individual asbestos case—is a warning that the insurance industry faces more and higher claims, many involving companies that never made or used the deadly dust. According to a Reuters report, a Honeywell spokesman said, “Regardless, it’s not a liability to us. We’re 100 percent covered by insurance.”

Perhaps with the Brown case in mind, PPG Industries agreed to a $2.7 billion settlement, which will take a year or so to finalize, of outstanding asbestos claims against Pittsburgh Corning, in which it has a 50 percent stake. It eventually expects to pay around $500 million, reflecting the current value of the cash payments over a 21-year period and the value of 1.4 million shares of PPG stock. More than 30 insurance companies will eventually pick up the tab for the remaining $2.2 billion.

The settlement, announced May 14, is one of the largest ever reached involving asbestos litigation. Pittsburgh Corning manufactured pipe insulation in the ’60’s and 70’s. It has filed for bankruptcy, listing over 435,000 asbestos-related claims. The settlement would end lawsuits against it and further its reorganization, assuming it is approved by the bankruptcy court.

Some insurers have given estimates of their exposure. Hartford Financial Services commented that its participation in the plan would eventually cost between $120 and $150 million with no impact on its earnings, as it’s already covered by reserves. Travelers’ contribution to the proposed settlement is about $240 million after tax and is also covered by reserves. Chubb Corp acknowledged that it expects to pay around $34 million for its portion of the $2.7 billion, but does not expect that the settlement will “have a material impact on its future earnings.” Bermuda’s ACE issued a brief statement indicating only that the settlement would have only a minimal effect.

These companies seemed to have actually welcomed the news. One which hasn’t, however is Lloyd’s Equitas—the runoff vehicle set up in 1992 to handle asbestos and environmental claims. “We’re basically opposing the settlement,” said James Burcke, Equitas’ head of communications.

“The first question we have is why is PPG paying? They’ve never paid an asbestos claim, and here they’re paying, not Pittsburgh. Secondly, we haven’t seen how all of this is going to be handled by the bankruptcy trustee. We’re essentially worried about who’s going to receive the money.” Burcke’s second point reflects Equitas’ concern that the sheer volume of claims, many by people who aren’t physically ill, works against persons who actually suffer or die from asbestos related diseases.

A year ago it issued a bulletin indicating that it would require documentation on each claim and would “reimburse only those asbestos injury claims that are supported by adequate medical evidence of a claimant’s injury and the identification of a defendant’s product responsible for that injury.” As Burcke explained, “One party paying [a claims settlement] affects all the other parties. We want to manage the claims and make sure that the money is paid to people with legitimate claims.”

He also stated that the settlement raised a number of technical issues, but did not elaborate. Other industry experts, however, have noted that not only are the claims increasing, but also some worrisome trends are emerging. Creative attorneys are seeking ways to avoid provisions of the bankruptcy code, which halt legal actions against a company during reorganization, by looking to place legal liability beyond those that manufactured or used products containing asbestos. They are also seeking ways to obtain recoveries that exceed policy limits, which may often be exhausted.

Michael Murray, a vice-president and economist with the Insurance Services Office, echoed Burcke’s concern that the number of people who have been paid for asbestos related claims, but aren’t actually ill, “is detracting [recoveries] from the people who are.”

He also noted the growing tendency to name insurance companies directly under state “Unfair Claims Settlement Statutes.” Citing the Weiss case as an example, Murray explained that lawyers are “now seeking to open [asbestos] claims that have already been settled. They are charging that the initial settlement was ‘unfair’ within the meaning of the statutes, and are suing companies directly for this violation.” This opens up the possibility of juries awarding “additional compensatory and punitive damages for violating the act,” Murray said, and “puts the potential liability on the insurance company without any reference to the actual liability of its insured for asbestos related illness.”

The U.S. isn’t the only country whose insurers face rising asbestos claims. Three days after the PPG settlement was announced, a unanimous decision by Britain’s Law Lords, the U.K.’s highest court, reversed a Court of Appeal ruling that claimants in asbestos related cases had to be able to show by whom they were employed when they contracted the condition.

As the majority of the workers affected had usually worked for a number of different employers over the years when they were being exposed to asbestos dust, the requirement effectively barred them from filing claims. The decision would permit them to name several past employers in the same claim, even though they cannot prove with certainty, where they may have been exposed.

A number of persons in the U.K. were awaiting the decision in the hopes of being able to pursue legal remedies, and, as the conditions, primarily lung cancer and mesothelioma, can take as long as 30 years to develop, more will be filed in the future. It’s estimated that around 1500 persons in the U.K. develop mesothelioma each year, but that is expected to increase, perhaps even to double over, the next 10 to 20 years.

Analysts put the potential overall cost to the insurance industry at between £6 billion ($8.76 billion) and £8 billion ($11.7 billion) spread over the next 20 years. The average recovery in such cases has been around £100,000 ($146,000).

The cost of the decision for U.S. companies is expected to be minimal. AIG responded to news reports that it could have substantial claims, by issuing a statement a day before the decision was released indicating that “AIG has virtually no substantial long tail asbestos exposures in the United Kingdom.” It went on to explain that its, “overall asbestos-related liabilities are relatively small. The vast majority of asbestos and environmental claims emanate from policies written in 1984 and prior years, at a time when AIG’s commercial insurance business was not as significant as it is today. Since 1985, standard policies have contained the absolute exclusion for pollution related damage. AIG’s reserves for asbestos-related claims continue to be appropriate.”

Burcke indicated that the decision would have little impact on Lloyd’s and Equitas. “Everyone pretty much knew that it [the lower court decision] would be overturned; I don’t think anybody changed their reserves.” He added that the Lloyd’s market actually has little exposure to this type of loss, as local brokers wrote most of coverage through local branches of national insurers.

The PPG settlement, and to a lesser extent the Law Lords’ decision, underscore the basic problem the insurance industry faces in relation to asbestos claims. The whole lawsuit/settlement process has become so convoluted by the numerous bankruptcy proceedings and the massive number of claims filed, that it is becoming increasingly difficult to sort out legitimate and deserving claimants from the rest, and to make provisions for those who become ill in the future. This has made it nearly impossible to estimate what any given company’s total claims’ costs will be with any accuracy.

Topics Carriers Claims Market Pollution AIG