The Dimensions of Asbestos Litigation

1. The Dimensions ofAsbestos Litigation Stephen Carroll September 2002 RAND INSTITUTE FOR CIVIL JUSTICE

2. Trends in Asbestos Litigation Are Raising Policy Concerns • Asbestos litigation began to attract policy attention in early 1980s • Settlement agreements in late 1980s led many to believe litigation was “manageable” • But rapid increases in the number of claims and costs have reawakened interest • Growth in litigation appears likely to continue • Is there a better way of compensating asbestos victims?

3. To Address These Concerns, Policymakers Must Know Dimensions of the Litigation • How many claims and of what type? • Who are the defendants? • How much is being spent on litigation? • How much of that goes to claimants? • What is the extent of asbestos bankruptcies? • What are their broad economic effects? • Where is this all headed? Claims Costs Economic effects Future outlook The RAND study addressed these questions

4. Over 600,000 Claimants to Date • Number of claims filed annually has risen sharply • Average severity of claimed injuries is declining • Little change in frequency of seriously ill claimants • Increasing proportion of claims for less serious injuries • Typical claimant files against several dozen defendants

5. Annual Claims Filings Have RisenSharply Since 1990 90,000 Asbestos Claims Against Five Major Defendants 80,000 70,000 Number of 60,000 claims 50,000 40,000 30,000 20,000 10,000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

6. “Other” Nonmalignant ClaimsAccount for the Growth in Claims 5 Mesothelioma Other Cancer Asbestosis 4 Other Ratio of the number of claims in each year to the number of claims in 1990 3 2 1 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

7. Various sources Suggest Increasing Numbers of Claimants Are Unimpaired • 1982 4% of claims showed no manifest asbestos-related injury (RAND) • 1993 Up to one-half of all asbestos claims have little or no physical impairment (Harvard Journal of Legislation) • 1998 No evidence of disease in 57% of asbestos claims (Manville Trust) • 200174% of pending claims are unimpaired (confidential report prepared for a defendant) • Two-thirds of claims show no evidence of impairment (Babcock & Wilcox) • Vast majority of claims provide no evidence of impairment (Rourke)

8. The Number and Range ofDefendants Have Also Increased Sharply • Our list of defendants includes over 6,000 firms • Increasing number of defendants outside the asbestos and building products industry • Both large and small businesses • At least one company in nearly every U.S. industry (at the 2-digit SIC level) now involved in litigation • By 1998, non-traditional defendants account for over 60% of expenditures (confidential study)

9. Estimated Total Costs of Resolving Asbestos Claims Through 2000: $54 B • Publicly available data are very limited • We estimate total outlays of $54 B through 2000 • U.S. insurers $22 B • Insurers outside U.S. $8 to 12B • Defendants $20-24 B • At least 5 major companies have spent more than $1B each on asbestos litigation

10. Transaction Costs Have Consumed More Than Half of Total Spending 100 Plaintiff Compensation Plaintiff Expenses Defense Expenses 80 60 40 20 0 1990s Litigation 1980s Litigation And they are likely to go back up in next decade

11. But Transaction Costs of BankruptcyTrusts May Be Low 100 Plaintiff Compensation Plaintiff Expenses Defense Expenses 80 60 40 20 0 1980s Litigation Manville Trust

12. It Is Difficult To Determine What An Individual Claimant Receives • Only plaintiffs and their attorneys know how much claimants receive (net) • Claimants receive money from multiple sources over long time periods • Defendants pay different amounts for same injuries • There are wide variations by jurisdiction • Most of the data are not public • But some aggregate distributional data are available

13. Mesothelioma 17% Other cancer 20% Nonmalignant 63% Most Dollars Are Paid to Nonmalignant Claimants Estimated Allocation of Compensation 1991-2000

14. Bankruptcies Are Becoming More Frequent • 3 bankruptcies in 1982--the first ones • 13 more in the rest of the 1980s • 9 in the first half of the the 1990s • 9 in the second half • 22 since January 1, 2000 • 4 dates to be determined

15. Costs of Bankruptcy CanBe Substantial • Transaction costs of bankruptcy reorganization are generally about 3% of firm value • Bankruptcy imposes other costs • Disrupts relationships with suppliers and customers • Impairs (or eliminates) access to credit • Distracts managers’ attention • After reorganization, the bankruptcy trust may hold all or most of the firm’s equity

16. And Bankruptcy Is OnlyPart of the Story • Defendants’ net payments to asbestos claimants weaken their financial position, cost jobs • Reduce retained earnings • Increase the cost of capital • Reduce investment • Reduce creation of new jobs • However, other firms’ reactions may offset these losses

17. The Future Course of Litigation Is Uncertain • Experts’ future projections also vary dramatically • Total claims: 1.1 to 3.1 million • Total costs: $200 to 265 billion • Whether there will be money left to pay future claimants—and who will pay —remain open questions

18. Will There Be Enough Money for Future Claimants? Compensation as percent of liquidated value • 1988Trust payments began • 1990 Payments suspended • 1995Payments resumed • 2001Payment plan revised Example of Johns-Manville raises doubts 100% (Only exigent cases paid) 10% 5%

19. Policy Implications • How to resolve asbestos claims fairly and efficiently is still a significant policy question • We may have seen less thanhalf of all claims that will ultimately come forward • Current bankruptcies provide a window of opportunity for reviewing and rethinking our strategy