Finance 431 Property-Liability Insurance

1. Finance 431Property-Liability Insurance Topic: Asbestos Guest Lecturer: Gerry Molidor Presentation Created by Gail Ross March 16, 2006

2. Discussion Outline • What is Asbestos? • Where is Asbestos Found? • Health Issues Related to Asbestos • Asbestos and P/C Insurance • Magnitude of the Asbestos Problem • Ways to Quantify Asbestos Liabilities • Potential Solution to Insurance Issue

3. Asbestos

4. What Is Asbestos? • Fibrous minerals that exist in nature • The fibers are strong durable and resistant to heat and fire • They are also long, thin and flexible • The material has been used in thousands of consumer, industrial, maritime, automotive, scientific and building products

5. Where is Asbestos Found? • During the 20th century about 33 million tons of asbestos were used in industrial sites, homes, schools, shipyards and buildings in US. • Peak use was in the 1970s • Insulation, fireproofing spray, floor and ceiling tiles, roofing products, packing materials, insulated wire and panels, adhesives and brakes.

6. Asbestos Roof

7. Health Issues Related to Asbestos • When the long, thin fibers of asbestos are inhaled they get into the lungs and are unable to be filtered out. • The lungs form tiny scars that lead to asbestosis evidenced by: • Shortness of breath and reduced lung capacity • Persistent cough • Chest pain • In its worst form it can lead to lung cancer and mesothelioma (a type of cancer)

8. Health Issues Related to Asbestos

9. Health Issues Related to Asbestos • Manifestation rarely occurs less than 10 years following first exposure – more common after 20 years. Some of the diseases have latency periods as long as 40 years.

10. Asbestos and P/C Insurance • Claims brought under three coverages: • Products Liability – per occurrence limit and an aggregate limit • Premises/Operations Liability – per occurrence limit only • Workers Compensation – statutes that define limits

11. Asbestos and P/C Insurance • Five “Tiers” of defendants: • Tier 1: Primary manufacturers and suppliers of asbestos in North America (fewer than 20 companies) • Tier 2: Similar to Tier 1 but with lower-use products or lower market shares (approximately 50 companies) • Tier 3:Manufacturers of products with encapsulated asbestos or local/regional distributors of asbestos • Tier 4: Owners or operators of property where asbestos products were used • Tier 5: Railroads facing liabilities from exposed workers

12. Asbestos and P/C Insurance • Coverage Issue • From 1962 - 1971, an insured manufactured and distributed an insulation product that contained asbestos. • Over this time a group of insulation installers started coughing and feeling shortness of breath and in 1971 many were deemed to have asbestosis. • In 1971,1,000 installers filed suit against the manufacturer for asbestos related injuries. • Question: WHAT IS THE DATE OF LOSS????

13. Asbestos and P/C Insurance • Continuous Trigger Theory • A loss is charged against any liability insurance policy in effect for any period from the time a covered person was first exposed to a harmful substance to the time the injury is finally manifested (i.e., when symptoms of an illness, such as asbestosis, are discovered).

14. Asbestos and P/C Insurance • Exposure Theory • Liability is based on the time of the exposure to the cause of an illness or other loss. In cases of continuous exposure (e.g., a worker's exposure to silica dust, asbestos, etc.), all insurers with a liability policy in effect during the exposure period are liable; however, the liability may be allocated among insurers according to the length of time that their policies applied.

15. Asbestos and P/C Insurance • Manifestation Theory • Coverage for an injury or illness is invoked or triggered at the time the loss becomes apparent (i.e., when the symptoms of an illness are manifested or when a loss is or should have been discovered). In cases of a long period of exposure to a hazardous condition during which several policies successively covered the risk, only the policy in force at the time a disease is detected is liable.

16. Asbestos and P/C Insurance • Example - Continuous Trigger Spread • Suppose it cost $100m in indemnity payments and $150m in defense costs to settle the claim. • Spread loss over 10 years that insured manufactured the product. • Each policy is responsible for $10m in indemnity and $15m in legal expense. • But if the insured only bought coverage with annual policy limits of $5m per occurrence/$5m aggregate with expenses in addition, the insurance would pay a total of $50m indemnity and $150m expense and insured would have to pay the remaining $50m out-of-pocket.

17. Magnitude of the Problem

18. Magnitude of the Problem $60B $78B $62B

19. Magnitude of the Problem • Until the late 1990s asbestos claims seemed to have stabilized. • Reasons for new wave of claims: • Most Tiers 1 and many Tier 2 asbestos manufacturers are bankrupt so attorneys are looking for other sources of compensation for claimants • They’ve turned to Tier 3 and 4 defendants that have less direct connection with asbestos but have available insurance limits and assets. • Lawyers “sign up” plaintiffs that are not ill, on the premise that they were exposed to asbestos and may become ill.

20. Ways to Quantify Liabilities • Survival Ratio Method • Insurance Company determines the average asbestos payments made in the last 3 years, assumes that the same level of payments will occur in the future, and estimates how many years in the future payments will be made. Reserve = Avg 3 Yr Payment x Number of Years

21. Ways to Quantify Liabilities • Market Share Method • Insurance Company determines what percentage of asbestos payments they have made relative to the industry, determines what the projected ultimate liability is for the industry and takes their share of that liability. Reserve = Mkt Share x Est. Industry Liability

22. Ways to Quantify Liabilities • Ground-Up Exposure Analysis • Working through the claim and legal departments, Insurance Company reviews every policy they wrote to determine if they think the insured will have liability, determine the total limits written and estimates what share they might have on each policy.

23. Potential Solution • Federal Legislation – FAIR Act of 2003 • Was to have been a no-fault compensation approach where anyone with an eligible disease could file claim • Awards would be scheduled based on level of illness • $52B of funding would come from insurers and $52B would come from defendants • If needed, a contingent funding call could be made for $45B over 27 years • Bill fell through – another proposal is in the works.

24. Conclusion Asbestos has been called the “Energizer Bunny” of Toxic Torts because it keeps going and going and going……