Asbestos: Insurance Coverage Issues On A Changing Landscape

The asbestos landscape is changing dramatically. The conventional wisdom is that as more and more asbestos defendants fall victim to bankruptcy, the asbestos plaintiffs bar is having to cast a wider net in its search for replacement defendants. The result - many companies are finding themselves as asbestos defendants for the first time, even if their links to the mineral and the alleged injury are dubious at best. But the changing asbestos landscape is a lot more complicated than just the addition of some new players on the field. Thankfully, however, like so many of the world's complexities, asbestos provides a simple roadmap to its understanding - follow the money.

The New York Times recently reported that American companies and insurers have spent over $30 billion to defend and settle asbestos lawsuits. While that certainly seems like a lot of money, it's nothing when you consider that the Times article cited industry analyst predictions that the total bill for asbestos could exceed $250 billion.1 In other words, if asbestos were a marathon, the runners have only just passed the three-mile marker.

According to actuarial firm Tillinghast-Towers Perrin, U.S. insurers have paid $22 billion in asbestos claims through December 31, 2000 and will eventually pay $60 billion. Additionally, Tillinghast projects that when all is said and done, the total asbestos bill will be $200 billion. What's remarkable about the Tillinghast projections is not that the total asbestos bill will be $200 billion, but that only $122 billion of it will flow into the worldwide insurance industry. Tillinghast projects that the asbestos pie will ultimately have the following three slices: U.S. insurers and reinsurers - $60 billion; overseas insurers and reinsurers - $62 billion; and asbestos defendants themselves - $78 billion.2

Projecting the final asbestos tally is an extremely ambitious undertaking and Tillinghast may or may not be on the mark. However, the real story in Tillinghast's numbers is that there is a large piece of the asbestos pie - and maybe even the largest - for which no insurance dollars are thought to attach.3 With that in mind, consider that there are a couple of things that the plaintiffs bar is loathe to do. First, it has shown no willingness to reduce its expectation of the settlement value of its cases, notwithstanding the elimination of some of the major players in the settlement pool. Second, the plaintiffs bar is typically unmotivated to pursue litigation against uninsured defendants, where the collectabilty of any judgment or settlement is far more time-consuming, legally challenging and, most of all, uncertain.4

As a result of the combination of these factors, the real change that is taking place on the asbestos landscape is an all-out effort by plaintiffs and policyholders to find ways to increase the insurance industry's share of the total asbestos bill. More than any time before in the history of asbestos litigation, the insurance industry's capital is coming under assault. The addition of some new defendants to the world of asbestos litigation is simply a means - and only one at that - to such ends.

While some of those involved in spending the first $30 billion on asbestos defense and indemnity may scratch their heads at projections that exceed a quarter of a trillion dollars, this much seems certain - considering the amount of coverage litigation that the first $30 billion generated, it would be nave to think that the road to $200 billion (or whatever the eventual total is) will not be littered with coverage disputes. And the stakes could not be higher for both sides.5

Whether the policyholder is a large public company, which can have billions of dollars instantly shaved off its market cap by a merciless stock market that so much as hears a whisper of the word asbestos, or a more modest sized company, which has quietly gone about its business in relative obscurity for several generations, the consequences are the same. For both companies, their ability to successfully secure insurance proceeds, or more insurance proceeds, may deter-mine their very survival. For U.S. insurers, the prospect of paying out an additional $40 billion on account of asbestos, with pressure on them to pay a lot more than that, is unlikely to be sitting well, even if it does not pose a threat to their survival. And such a prospect is certainly not sitting well with rating agencies or Wall Street,6 especially these days.

The property/casualty industry saw its 2001 combined ratio - which measures losses and underwriting expenses per dollar of premium - rise to 116%. And U.S. reinsurers had it much worse last year - a combined ratio of a staggering 140%. What's more, the insurance industry is presently facing uncertainty concerning the amount of its eventual September 11th exposure and its role in potential future terrorism losses, exposure for the litigation fall-out that it sure to come from the current crisis in corporate confidence and a depressed investment climate in which to operate.

There are several scenarios that will likely cause increased pressure on the extent of insurers' liability for the total asbestos bill. In no particular order, some of these are likely to be as follows:

Policyholders that have spent the past two decades unscathed by asbestos litigation are now at risk for seeing complaints filed against them, based on various theories that they have some connection to it. And if such companies were "installers" that used asbestos in their work, arguments will likely be made that their claims involve "operations", and not "products." Translation - their policies may not contain aggregate limits for such claims.

Policyholders that have seen some random cases filed against them in the past, but with no real effort mounted against them by the plaintiffs - because the plaintiffs have been using their resources frying bigger fish - may now see their profile raised. In other words, companies that have spent many years calling themselves "peripheral defendants" may no longer be able to stake a claim to that label. And when a peripheral defendant begins to pay more to settle cases, there will be an incentive to keep the heat on it and include it in more cases in the future.

Policyholders that have been "products" defendants in the past may now see cases filed against them for "premises" liability. Here, the allegation will not be that the plaintiff was exposed to the policyholder's asbestos containing product, but that exposure took place while the plaintiff was present on the policyholder's property, such as while working for a contractor in the policyholder's factory. Insureds are expected to argue that even if their "products" coverage has been exhausted, insurers face additional exposure for these "premises" cases on the basis that they constitute a different "occurrence", and one that is not subject to the "products" aggregate.

Policyholders that have exhausted their asbestos "products" coverage or are close to doing so may now say wait a minute and attempt to re-classify their claims as "operations" instead of "products." The argument will be made that if they are successful in doing so, then their policies, which were previously thought to be exhausted, are not.

The bankruptcy of policyholders on account of asbestos liabilities is a burgeoning issue that has enormous potential impact on insurers' exposure. The primary issue here for insurers is that their policy limits may now be due and owing much sooner than originally believed. For an industry that relies so heavily on the timing its payments, herein lies a huge potential worry.

Each of these scenarios raises coverage issues, some of which have elements that have been seen in the past and others that are entirely unique. What follows is an examination of where some of the battlegrounds may lie between insurers and their policyholders on this changing asbestos landscape. "Trigger" was the first big asbestos coverage issue, keeping courts occupied for the past fifteen years, with the vast majority of them reaching decisions that implicate more, rather than less, policies. That horse has now left the barn. What's left are disputes over the amount of insurance dollars for which the triggered policies are obligated. While insurers can expect to feel increased pressure on their share of the funding for asbestos litigation, they are not without some means for stemming the tide.

The First Time Asbestos Defendant And Uninsured Periods

The most often-cited description of the changing asbestos landscape is the addition of new defendants - companies that have gone two decades without ever seeing their name on an asbestos complaint, until now. A recent Reuters report stated that while there are about 2,000 U.S. companies presently involved in asbestos related litigation, that number, according to analysts, could triple as new companies that either handled or installed the material come under scrutiny.7 Unless the suit involves premises liability, discussed in greater detail below, it is likely that any company that is only now being sued for the first time for asbestos is a smaller company - the proverbial "mom and pop."8

While there is a lot for the first time asbestos defendant to learn about its new predicament, it probably won't take long before someone advises it to put all of its potentially implicated liability insurers on notice. This will likely...