Financing Asbestos Claims: Coverage Issues, Manville’s Bankruptcy, and the Claims Facility

Dan R Anderson. Journal of Risk and Insurance. Volume 54, Issue 3. September 1987.

Asbestos claims have produced unprecedented liability, litigation, and compensation problems. Since the first lawsuit brought against the Manville Corporation in 1968, in excess of 35,000 bodily injury claims have been made. Through 1982, $1 billion has been spent for asbestos compensation and litigation expenses. Estimates of future cost range from $4 billion to $87 billion [21, p. v.j]

The impact of asbestos litigation has been enormous. Precedent setting court cases have expanded coverages under traditional liability insurance policies. Manville Corporation and five other manufacturers of asbestos have been forced into bankruptcy. Proposed bankruptcy settlements may adversely affect the financial condition of these companies for years to come. A unique Asbestos Claim Facility established through the Wellington Agreement will attempt to deal more efficiently with the thousands of unsettled claims.

Many of the recent ISO proposed changes in the Comprehensive General Liability (CGL) policy were to a substantial degree influenced by developments in the asbestos area. Other tort cases involving large numbers of claimants like DES, the Dalkon Shield, and hazardous waste will be impacted by precedents set in asbestos litigation. The calls today for tort reform are being caused at least in part by the asbestos situation.

The purpose of this article is to examine the principal developments that have affected the financing of asbestos product liability claims.’ The developments include insurance coverage issues decided by precedent setting court cases, the proposed settlement to the Manville Corporation bankruptcy, and the Asbestos Claim Facility established by the Wellington Agreement. In addition the impact of asbestos litigation on proposed changes in the CGL policy and other mass toxic tort areas will be examined.

Insurance Coverage Issues

Considerable disagreement exists between asbestos manufacturers and their insurers as to the extent of coverage provided by liability insurance contracts for asbestos claims. The two key insurance coverage issues are (1) what is the appropriate trigger of coverage? and (2) what is the insurer’s duty to defend after the policy limits have been exhausted? These two coverage issues along with key court cases will be analyzed below.

Trigger of Coverage

The trigger of coverage refers to the concept of determining which insurance policies, if any, cover a particular loss situation. The trigger will normally be expected to fix a specific point in time. For instance, assume a fire occurred at 5 p.m. on August 6, 1980. The fire insurance company whose policy period encompasses this specific time will respond to the fire loss.

The trigger of coverage deals with the obligations of insurers to policyholders, in this case asbestos manufacturers. The trigger of coverage does not deal with the liabilities of asbestos manufacturers to injured parties. Establishing the liability of asbestos manufacturers to injured parties does not necessarily mean that insurers become obligated, through their insurance policies, to provide coverage for these liabilities. While it is in the interest of the asbestos manufacturers to maximize the insurers’ obligations, triggers of coverages must be determined to establish the extent of these obligations.

In the asbestos controversy, disagreements exist over what should determine the trigger of coverage and whether asbestos injuries can be fixed at a point in time. Four different trigger theories have arisen through discussions and litigation. They are termed exposure, manifestation, triple-trigger, and injury-in-fact. Before examining these four trigger theories, it is critical to understand the concept of occurrence.

Occurrence: A central factor in the various trigger theories is the appropriate interpretation to be given to the concept of occurrence. Besides being possibly the most misspelled word (according to this author’s experiences in the classroom) in insurance technology, the term “occurrence,” and the specific words in the definition of occurrence have been responsible for much of the asbestos litigation between manufacturers and their insurers.

The pre-1966 general liability policies normally do not present problems, because they were written on an accident rather than on an occurrence basis. Accident has typically been construed as a “sudden” event. Thus the accident, e.g., car crash, and the resulting injuries happen virtually simultaneously. The pre-1966 policies required that the injuries be caused by an accident, and that the accident occur during the policy period. This requirement was virtually identical to requiring that the injuries occur in the policy period. The introduction of occurrence policies with the removal of the “suddenness” requirement, necessitated that insurers add additional wording to deal with non-sudden injury situations.

In 1966, the insurance industry decided to change standard liability policies from an accident to an occurrence basis. Before 1966 policyholders had frequently been adding the occurrence endorsement to standard policies. Policyholders wanted coverage for injuries that resulted from gradual exposure to harmful conditions rather than coverage just for injuries caused by a sudden event, i.e., accident. Due to policyholders’ demand and the industry’s desire to offer expanded coverage, new standard policies, written on an occurrence basis, were introduced in 1966.

When policies are written to cover injuries that result from gradual exposure to harmful conditions, problems are created in determining which insurer(s) must respond with coverage, i,e., which insurance policy(ies) is(are) triggered? A number of insurers may have provided coverage from the time of initial exposure through the actual manifestation of the disease. Insurers attempted to determine who should respond through policy language.

For post-1966 standard liability policies and for pre-1966 policies with occurrence endorsements, the insuring agreement required that bodily injuries and property damages be caused by an occurrence. Occurrence in the 1966 policies was defined as:

An accident, including continuous or repeated exposure to conditions, which results during the policy period in bodily injury or property damage neither expected nor intended from the standpoint of the insured.

The occurrence, which may be a sudden or continuous event, must result in or cause a bodily injury or property damage. The language indicates that the injury or damage must occur during the policy period in order for the policy to be triggered. It is not the exposure to conditions, but the result, the injury or damage, which must necessarily occur during the policy period. If the injury or damage can be pinpointed to a specific point in time, it is a rather straight forward process of determining which insurers must respond to any subsequent claim. Unfortunately, this has not been the case. Debate over just exactly when an asbestos related injury occurs has been a primary reason for the evolution of the different trigger theories.

Exposure: The exposure theory holds that the insurers on the risk when the claimant was exposed to asbestos are the insurers whose policies will provide coverage. For instance, if an individual was exposed to asbestos from 1940 to 1945, but did not develop asbestosis until the 1970s, the insurers which provided coverage in 1940-45 would provide coverage.

The seminal case that introduced the exposure theory was Insurance Company of North America v. Forty-Eight Insulations [23]. The court held that coverage would be apportioned according to the years on the risk during the claimant’s exposure to asbestos. Coverage was individual and proportionate and not joint and several. In years where Forty-Eight Insulations, an asbestos manufacturer, had no coverage, it had to share proportionately in the losses.

The assumption made by the court was that the term bodily injury would be construed to include injuries which presumably take place upon inhalation of i.e., exposure to, asbestos. The court cited medical testimony that “each tiny deposit of scar-like tissue causes injury to a lung … thus, each such insult-causing injury is an occurrence for the purpose of determining which coverage applies.” [23, p. 1217] The court also considered the manifestation theory, but rejected it. The rejection was not based so much on lack of bodily injuries at manifestation, but on the administrative inconvenience of determining a manifestation date.

A number of insurers were involved in the case. They all advocated the manifestation theory except one. Travelers, who argued for exposure. Travelers was supported by numerous amici curiae briefs filed by excess insurers. Insurers with older policies have most if not all the liability under the exposure theory. Newer more current insurers would generally have little potential liability. Excess carriers tended to support the exposure theory because it works to their advantage as it brings in more primary carriers, hence, reducing the possibility that excess liability layers will be pierced.

Manifestation: Under the manifestation theory, the insurer on the risk when the asbestos related disease manifests itself is the insurer subject to potential liability. Manifestation generally has been construed to mean when outward debilitating signs or medically diagnosabie symptoms from exposure to asbestos become apparent. The date of diagnosis is often used as a proxy for the manifestation date.

The key court case for the manifestation theory is Eagle-Picher Industries v. Liberty Mutual Insurance Company [15].

The following quote succinctly summarizes the finding of the court:

In respect to asbestos products manufacturer’s liability insurance policies, asbestosis “results” when it becomes clinically evident or manifest, rather than upon exposure to asbestos; the insurance policies clearly distinguish between the event which causes injury, namely, the accident or exposure, and the resulting injury or disease, and it is the resulting injury, not the exposure, which is required to take place “during the policy period” in order to trigger coverage. [15, p. 14]

Insurers with newer or current policies face the greatest exposures under the manifestation theory. Those insurers with older policies when workers were being exposed to asbestos will escape liability. Interestingly, Eagle-Picher was uninsured for asbestos related liabilities prior to 1968. Although named in the suit. Liberty Mutual actually supported Eagle-Picher in arguing for manifestation. Those insurers opposing manifestation and supporting the exposure theory were excess carriers.

Triple–Trigger. The triple-trigger theory, as its name implies, is the most expansive of the theories. It states that all insurers who wrote policies from exposure (first trigger), through exposure in residence or the latency period (second trigger) to manifestation (third trigger) have to provide coverage.

The case that created the triple-trigger theory was Keene Corporation v. Insurance Company of North America [27]. The court argued that asbestos related injuries were progressive and continuing. Injuries to a single individual occurred continually, hence triggering several policies over the period from exposure to manifestation. When triggered, the carrier was liable to the full extent of its limits. Keene would be allowed to select which policy limits would apply to any given injury. The insured could not stack coverages from different periods for a given injury, but of course the insured could tap the excess coverage when the primary limits were exhausted. Allocation of indemnity payments among insurers is governed by other insurance provisions in the policies. Interestingly, the court stated that, “the primary duty of the insurers whose coverage is triggered by exposure or manifestation is to ensure that Keene is indemnified in full.” [27, p. 1050]

The Keene decision represents the worst of all worlds for primary insurers. As long as asbestos manufacturers can produce products liability insurance policies or evidence thereof, the insurer can be liable to its full limits. For primary insurers newer or older policies have no inherent advantage. While older policies may have lower per occurrence limits, they may not contain aggregate limits and may be more vulnerable for unlimited defense costs. Newer policies would have aggregate limits and better protection against unlimited defense costs, but per occurrence limits would tend to be much higher.

On the other hand, the triple-trigger theory works to the advantage of the excess insurers. The more primary policies/limits that are available, the less chance that excess coverages will be needed. Even if excess layers are used, the triple-trigger theory will act to delay the time when funds actually must be paid out, thus giving the excess insurers additional time to invest these funds.

Injury-in-Fact: The most recent trigger theory was introduced in the American Home Products Corporation vs. Liberty Mutual Insurance Company case [3]. The theory was termed the injury-in-fact trigger. Disagreement exists as to whether the theory is just another form of the triple-trigger theory or whether it is something new.

The case involved a coverage dispute between American Home and Liberty Mutual involving DES. The District Court held that coverage was established if an injury in fact occured during the policy period. The court stated further that coverage is triggered when injury is diagnosable or compensable. This ruling generally supported the manifestation theory for which Liberty Mutual argued rather than the exposure or triple-trigger theories sought by American Home.

The Appeals Court supported the District Court’s finding that injury must occur during the policy period, but rejected the lower court’s requirement that the injury be diagnosable or compensable during the policy period. Regarding compensability, the court reasoned that it is a legal concept that is not material to the determination of whether an injury has occurred. On the issue of diagnosability the court argued that a person may suffer injury that does not become diagnosable until a latter date. But it may become possible to infer that injuries actually occurred prior to diagnosability.

Drug and asbestos manufacturers publicly interpreted the decision as essentially reaffirming the triple-trigger theory. Triple-trigger has contended that injury occurs all during the period from exposure to asbestos to the outward manifestation of disease. As long as some form of injury can be determined, the injury-in-fact theory, like the triple-trigger, will trigger those policies in whose periods the injury occurred.

Primary insurers maintained that the injury-in-fact trigger was not as broad as the triple-trigger. Mere exposure to asbestos can no longer be offered as a basis to trigger a policy. It will be necessary to show that injury from the exposure occurred during the policy period.

Future: Baring a United States Supreme Court Decision on the trigger issue, which seems unlikely, disagreement will continue to exist as to the appropriate trigger of coverage. Decisions will be made on a jurisdiction by jurisdiction basis. The trigger issue is a main point of contention in the largest asbestos case to date. In re Asbestos Insurance Coverages Cases [22], which is currently being argued in a San Francisco court room. The decision in this case if upheld on appeal will be extremely influential in determining the appropriate trigger of coverage.

Duty to Defend

Liability policies have traditionally been written to cover defense costs as well as bodily injuries and property damages. Defense cost coverage is important to the policyholder especially when faced with groundless, frivolous suits. On the other hand insurers must have some control and limits on defense costs in order to estimate future outlays and price insurance policies.

Defense cost coverage usually has been provided in addition to the liability limits on standard policies issued by primary insurers. That is, defense costs are not included with payments for bodily injuries and property damages in determining when the limits have been reached. As long as the insured carries adequate liability limits, defense costs should be picked up by the insurer. In excess policies, defense costs are usually within the policy limits. Defense cost payments are added to payments for injuries and damages in determining when limits are exhausted.

One of the key issues in the asbestos litigation is what is the primary insurer’s duty to defend when the liability limits have been exhausted. The asbestos manufacturers contend that defense costs should be paid indefinitely without limit even when the liability limits have been reached. Primary insurers argue that defense cost coverage should cease once the limits are exhausted.

Excess insurers actually support the asbestos manufacturers in their arguments. If it is established that primary insurers have an unlimited duty to defend, excess insurers will not be required to pay defense costs. Even if excess insurers are required to pay defense costs, their exposure is considerably reduced by having defense costs included within the policy limits.

Policy Language: A key element in this debate is the meaning of the policy language. In examining policy language, one needs to look at policies before and after the 1966 changes.

Pre-1966 standard liability policies typically included the following agreement:

As respects the insurance afforded by the other terms of this policy the company shall; defend any suit against the insured alleging such injury, sickness, disease or destruction and seeking damages on account thereof, even if such suit is groundless, false or fraudulent; but the company may make such investigation, negotiation, and settlement of any claim or suit as it deems expedient; … the amounts incurred under this insuring agreement, except settlements of claims and suits are payable by the company in addition to the applicable limit of liability of this policy.

Primary insurers contend that the phrase “as respects the insurance afforded by the other terms of this policy” acts to limit defense costs once the applicable liability limits have been exhausted. That is, once limits are exhausted, insurance is no longer afforded by the policy, hence defense cost coverage ceases.

Primary insurers also cite the frequently used introductory sentence in liability policies which states that parties enter into the insurance contract:

Subject to the limits of liability, exclusions, conditions and other terms of the policy.

They argue that once the limits of liability are exhausted, the insurer ceases to enter into the insurance contract. The asbestos manufacturers argue that these phrases are ambiguous and do not clearly state that defense cost coverage ceases when liability limits have been reached.

In 1966, the bodily injury and property damage insuring agreement was changed to read as follows:

The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of:

1. bodily injury or
2. property damage

to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the company shall not be obligated to pay, any claim or judgment or to defend any suit after the applicable limit of the company’s liability has been exhausted by payment of judgments or settlements.

This change was made because some courts had ruled that under pre-1966 policies defense coverage may continue after the exhaustion of policy limits. The courts’ reasoning was that pre-1966 terminology was ambiguous. The insurance industry felt that the new language was needed to reaffirm their long standing intention that defense cost coverage ceases once the applicable liability limits are exhausted.

Even under post-1966 policies, considerable disagreement exists regarding defense cost coverage. The main point of dispute centers around the claims pending when the limits are exhausted. The question is, does the insurer have an obligation to continue defending suits that commenced prior to the exhaustion of the limits, but were still unsettled at the point of exhaustion. As regards this situation Donaldson makes the following point,

The insurer can withdraw from cases only if the withdrawal can be accomplished without material prejudice to the insured. The insurer cannot merely refuse to defend, and do nothing. It must give the insured an opportunity to engage counsel and to arrange for a substitution of attorneys. [14, p. 557]

While there may be a slight transition period, the insured would normally arrange to cover its own defense. With no financial interest in the case, when the limits are exhausted it makes little sense for the insurer to keep defending. Indeed it is not in the interest of the insured to have the insurer keep defending. Yet because of the tremendous costs involved in asbestos cases, the issue of continued defense for pending cases after exhaustion of limits will be argued until a definite court case is decided.

The triple-trigger theory has aggravated the defense situation for those primary insurers that wrote policies for the same asbestos manufacturer for a number of years. Since an injured party’s claim can be placed under one of several policy periods, the limits in all policy years would have to be exhausted before the insurer can cease defense cost coverage. When numerous insurers are involved, no definite rules have been established for sharing defense costs. Many insurers and asbestos manufacturers have worked out interim agreements for defending claims until a definitive court case settles the duty to defend issue.

Court Cases: While the courts have given varied opinions, Donaldson notes that:

The majority of the decided cases hold that the duty to defend ends when the policy limits are paid and that the insurance carrier had no duty to defend lawsuits then Temaining. [14, p. 556]

Two of the most frequently cited cases are Lumberman’s Mutual Casualty Co. V. McCarthy [30] and Liberty Mutual Insurance Company v. Mead Corporation [29]. In the McCarthy case, the court stated,

… The policy obligates the insurer to pay the liability of the insured up to the policy limits, and, in addition thereto to pay those items of expense which it has definitely assumed. Until these duties of payment are fully performed, it also has the duty either to settle or to conduct the defense of actions against the insured. But, upon performance of its duties of payment, its duty to defend ceases to exist. [14, p. 556]

In the Mead, the court said:

These allegations show that the insurer fulfilled its obligations under the policy. With the insured’s consent and contribution, the insurer paid the full policy limit of liability in compromise and settlement of two of the claims and suits against its insured, thus defending with reference to “such insurance” as was afforded by the policy. Under our construction of the insurance contract nothing further was required, [14, p, 557]

Recent court decisions in asbestos cases seem to be solidifying a judicial position on the issue of defense cost coverage. This issue was argued in AC&S Inc. V. Aetna Casualty & Surety Company, Commercial Union Insurance Company v. Pittsburgh Corning Corporation [11] and Keene v. Insurance Company of North America [27],'” Three different federal courts held in these cases that an unlimited duty to defend did not exist following exhaustion of policy limits.

All the decisions were consistent in holding that duty to defend does not exist for future claims once limits are exhausted. On the issue of continuing defense for pending claims, the decisions leave some uncertainty. In Commercial Union, the District Court held that insurers must continue to defend in all cases that were pending at the time limits were exhausted, but this ruling was reversed by the Appellate Court, In AC&S Inc., and Keene, the courts did not specifically address the issue of the duty to defend pending claims. The most recent case, Zurich Insurance Company v, Raymark Industries, Inc. [39], concurred with the Appellate Court in Commercial Union, namely that defense cost coverage in pending claims ceases upon exhaustion of policy limits. Finally no decision has yet been reached on the duty to defend issue in In re Asbestos Insurance Coverage Cases [22].

Insurance Principles: Based on sound insurance principles, it seems that insurers would have intended to place a limit on defense costs, that limit being determined by when liability limits were exhausted. It makes no sense to limit one part of the contract, awards for liability judgments, but stipulate unlimited payments for such a closely related coverage under the contract.

The above point is particularly salient as regards products liability insurance. Since the early days of products liability insurance, aggregate limits have been used to cap an insurer’s financial responsibility when multiple claims may eminate from a single product. Again is it logical that insurers would protect themselves against a run on claims with aggregate limits, but then leave themselves vulnerable to paying for defense costs without limit?

Kulp indicates that it certainly was industry intent to limit defense costs once limits were exhausted.

It has always been the intent of insurers not to be obligated to defend any suit after the applicable limits of the insurer’s liability has been exhausted by the payment of judgment or settlements, [28, p, 85]

In all likelihood the insurance industry was probably not concerned with including an iron clad statement in their policies, and policyholders did not expect such generous coverage. Traditionally the typical case was a single claim against the policy limit. When limits were exhausted in this situation, the insurer often continued defending the case until the insurer could assist the insured in arranging for the transfer of defense counsel (see [14]).

But when thousands of claims are pending once limits are exhausted, does it make any logical sense that defense costs should be paid without limit? Defense costs could exceed the liability limits by many fold. This situation is particularly true of older policies with low limits, which would be required to provide unlimited defense at current compensation rates. Is it conceivable that insurers meant to provide such coverage? Is it reasonable that policyholders expected they were purchasing such coverage?

Manville’s Bankruptcy

On August 27, 1982, Manville Corporation filed for reorganization under Chapter 11 of the Federal Bankruptcy Act.” At that time Manville faced 16,500 outstanding asbestos related claims for $12.5 billion in damages and had paid out $50 million in claims. New suits were being filed at a rate of 500 per month. Manville estimated the present value of all future claims at approximately $2 billion’^ which exceeded its net worth of $1.1 billion [16].

A corporation filing for bankruptcy is not that unusual. Manville’s filing was unusual in that its business at the time was generally sound: it had earned profits of $60 million on $2.2 billion of sales in 1981. Manville was attempting an unusual approach to controlling its liability claims. Manville’s basic premise was that it could consolidate and settle all its asbestos claims and emerge from bankruptcy in a healthier financial condition than it could by continuing to pay for claims in perpetuity.

The principal effect of bankruptcy on asbestos claimants is to shift available funds from current claimants to future claimants. Prior to bankruptcy, claims were paid on a first come first serve basis. If current claimants exhausted available funds, future claimants would not be guaranteed compensation. Bankruptcy proceedings would create a class for claimants and attempt to pay all the claimants, both present and future, on an equitable basis. The plaintiff lawyers for present claimants would probably lose the most from bankruptcy. Not only would contingency fees be reduced due to lower available funds for awards, but the collectivizing of all claims should reduce the overall workload of plaintiffs’ lawyers.

Manville’s apparent strategy was to use bankruptcy to reduce the financial burden of present and future claims. It was anticipated that total claims and legal fees would be reduced. Bankruptcy could result in smaller average claim payments and lower legal costs. Finally if bankruptcy could shield Manville from additional future claims, by including all future claimants in the settlement plan, Manville could face a business future free of the asbestos albatross.

Proposed Settlement

Discussions were held for nearly three years in a New York court under Bankruptcy Judge Burton R. Lifland. In August of 1985, a plan was announced that tentatively provides for the establishment of at least a $2.5 billion fund to compensate present and future claimants. The plan must be considered unique, if not for the terms, certainly for its size and significance [13,33].

The plan was developed and negotiated by Leon Silverman, a New York attorney appointed by the bankruptcy court to represent the interests of future claimants. The $2.5 billion trust fund will be financed from a variety of sources. An initial payment of $846.5 million will be made consisting of:

1. $200 million in cash or short-term receivables paid by Manville.
2. $346.5 million in insurance proceeds from a previously approved settlement with Travelers, Home, and Lloyd’s of London.
3. $300 million in anticipated proceeds from insurance coverage which are currently the subject of litigation in San Francisco Federal Court.

The remainder of the $2.5 billion trust fund will be financed by a noninterest bearing bond in the amount of $1.65 billion. The bond will be payable by Manville in annual payments of $75 million over 22 years from the fourth through the 25th year after the plan is finalized. Finally the trust will receive Manville’s common stock equaling 50 percent of the company’s outstanding shares, plus preferred stock that could be converted to the equivalent of another 30 percent of common stock shares if needed to pay claims. Conceivably the trust could end up owing 80 percent of Manville’s common stock over time. [13, p. 3]

In addition, Manville will pledge 20 percent of its annual profit indefinitely in the event that the above financing is not adequate to pay future claims. Thus depending on Manville’s future profits, it is estimated that Manville’s total cost could be in excess of $3.0 billion. [13, p. 3] Finally, the trust would have voting power to liquidate the concern if still additional funds were required to pay injured parties.

Before the above plan is put into operation, Manville is arguing for a number of pre-conditions. One, property damage claims for the costs of asbestos removal will be limited to a total of $125 million, plus any excess insurance proceeds and any of the 20 percent profits not needed for the victim’s trust. To date, $80 billion of property damage claims have been filed. Two, punitive damage claims will be limited to $5 million. Three, the trust fund will join and coordinate with the Asbestos Claims Facility (described later). Four, Manville wants an injunction against any future asbestos claims. [33, p. 72]

Evaluation of the Settlement

The plan must still be approved by creditors,’* asbestos claimants and their attorneys, and Judge Lifland. Initial indications from claimants, particularly their attorneys, are favorable. Robert Rosenberg, an attorney for a committee for asbestos claimants, stated “If there’s enough money for the victims, what difference does it make who pays it?” [13, p. 3]. Another plaintiff’s attorney, Robert Steinberg claimed, “It almost sounds too good to be true … This is really as much as we could have expected.” [13, p. 3] If claimants are not satisfied with the compensation they receive from the plan, they will have the right to appeal to court.

The party most apt to object to the proposed plan is the existing shareholders. They could suffer a dilution of their holdings of as much as 80 percent, plus they may have to share a portion of Manville’s future profits with the claimants. Under bankruptcy law, approval of the plan by existing stockholders is not required.

The sagacity of Manville’s bankruptcy strategy is still open to debate. Early reports indicate Manville may have miscalculated. One survey reported that “legal and financial experts uniformity said it was a landmark blunder and was bound to discourage other pre-emptive bankruptcies by companies expecting large health claims.” [34, p. 2] Bankruptcy expert, Vern Countryman of the Harvard Law School, stated that “Manville management made a grave miscalculation when it put the company in Chapter 11.” [19, p. 23]

Manville will most likely receive considerable tax advantages from the plan. It should be able to deduct all the payments made into the fund. Previous tax rulings have ruled that payments made into an independent trust to pay certain liabilities are deductible.

Since it filed for bankruptcy in August, 1982 until August, 1985, 4,865 suits have been filed against Manville, to bring total claims to over 21,000. At this point it would be mere speculation to say that Manville would be better or worse off settling claims as they originate rather than attempting to consolidate all existing and future claims under the proposed plan. Under the plan, Manville may well end up paying out more and putting the stockholders in a worse position, but at least Manville may be able to emerge from bankruptcy with some certainty as to its financial future. In 1985, Manville had sales of $1.9 billion from 100 plants producing principally fiberglass, forest and specialty products. Divestiture of the asbestos business in 1985 forced a $180 million write-off resulting in a $45 million loss, but in 1986 the firm has produced profits ($12 million on revenues of S455.5 million in the first quarter). [35, p. 77]

Asbestos Claim Facility

Asbestos product liability claims can be characterized by two factors. The first factor is the large number of claims-some 7,000 settled, over 30,000 pending, and thousands more likely in the future. The second factor is the high cost of litigation to settle each claim. An Institute for Civil Justice — Rand Corporation study estimates that for every dollar paid to injured claimants, nearly two dollars are spent on litigation expenses. More specifically, of the total amount paid by producers and insurers, 37 percent was received by plaintiffs, 26 percent was received by plaintiff’s attorneys, and 37 percent was spent by producers and insurers on defense costs. [25, p. 40] To combat the substantial litigation costs, the Wellington Agreement was negotiated to establish an Asbestos Claim Facility.

The Wellington Agreement was named after Harry H. Wellington, Dean of the Yale Law School [37]. Dean Wellington, working through the Center for Public Resources, proposed that asbestos producers and their insurance companies get together and work out a system for streamlining claims payments. From this initial invitation, a committee of asbestos producers and insurers was established and began work in late 1982.

Plaintiffs vs. Producers/Insurers

In an effort to curtail the time consuming and costly litigation between claimants and producers/insurers and also between asbestos producers and insurers over coverage issues, the Wellington Committee proposed the creation of an Asbestos Claims Facility. Regarding litigation between plaintiffs with bodily injury claims and producers/insurers, the Facility will encourage the use of out of court settlements, non-binding and binding arbitration, and other dispute resolution procedures. The Facility will provide a central place where asbestos claimants can file a claim without filing a lawsuit and going to court. When a claimant(s) is suing multiple producers/insurers, as is usually the case, the Facility will act as the sole agent for participating producers and insurers and have “exclusive authority and discretion to administer, evaluate, settle, pay or defend all asbestos-related claims.” [2, p. 3]

The Facility in no way attempts to change tort law and legal theories on which claimants base their case. In addition, plaintiffs would not give up their right to file a lawsuit if they chose to file with the Facility. That is, plaintiffs could refuse the Facility’s offer and subsequently file a lawsuit.

Producers vs. Insurers

Regarding producers and insurers a set of rules dealing with coverage issues have been worked out. The producers and insurers that sign the agreement to join the Facility, would be required as a condition to follow the rules. The negotiated rules represent a series of compromises, including the concession that producers would drop punitive damage claims against the insurers. While these compromises are more than either the producers or insurers would generally be willing to accept in court, it is anticipated that the savings in litigation costs will make up for their concessions.

These rules effectively follow the triple-trigger theory in determining which insurers must respond to particular claims. An “exposure period” is defined as “the period from a person’s first exposure to any asbestos or asbestos containing products until first diagnosis of such injury.” [2, p. 6] Any policies “covering a part of the exposure period for a particular claim may be used to make liability payments and to pay allocated expenses” [2, p. 6] i.e., defense costs, up to exhaustion of policy limits. Liability payments and defense costs are pro-rated among applicable insurers, based on the portion of the “exposure period” for which each insurer wrote coverage. [2, p. 6]

For defense costs, the rules state that an insurer’s duty to defend ends upon exhaustion of policy limits. If a producer exhausts all its other defense coverage, including excess coverage, lifetime defense cost coverage would be provided by a defense fund. This defense fund will be financed by contributions from participating insurers based on an allocation formula.

The facility rules call for caps to be put on policies with deductibles to limit producers’ payments when facing thousands of claims. For smaller deductibles, a factor is multiplied by the deductible to arrive at a maximum cap (e.g., deductible of $5,000x 10 = $150,000, the maximum cap). For large deductibles (greater than $25,000), the maximum cap is equal to the aggregate limit of the applicable liability policy. [2, p. 9]

For insurance policies without aggregate policy limits or where the existence of aggregate limits is unclear, a formula for instituting an aggregate limit is set forth. The formula is shown below.

Evaluation of the Facility

The Asbestos Claims Facility has been hailed as an innovative solution to an almost unmanageable tort litigation situation. The encouragement of out-of-court settlements, the use of innovative mediation and arbitration techniques, the coordination of multiple defendants under a single agent, and the resolution of coverage issues could all significantly reduce costs in asbestos litigation. The Facility is being touted as a blue print for dealing with other complex tort liability issues involving multiple defendants such as hazardous wastes, chemicals like Agent Orange, and Pharmaceuticals like DES.

As of July 1985, 36 asbestos manufacturers and 14 insurers have signed up for the Facility. Some notable non-joiners include Manville Corporation, which is hampered by its bankruptcy proceedings, and a number of major insurers including Travelers Insurance, Home Insurance, CNA, and AIG.

Other interested parties have also expressed reservations. The AFL-CIO is concerned that the Facility may reduce the amounts collected by injured workers. Plaintiff’s attorneys are concerned that their clients’ compensations and their fees may be adversely impaired.

Reinsurance companies have expressed reservations. Reinsurers were not formally involved in the negotiations and have not been asked to join the Facility, Under the Facility agreement, primary insurers agreed to certain policy contractual interpretations to which reinsurers may not necessarily agree. Reinsurers may resist following underlying forms if they disagree with the extent of coverage being provided under these forms.

Finally, it is important to note that the agreement and the Facility do not deal with property damage claims involving asbestos. Thus even if all asbestos producers and insurers joined, a substantial area of litigation would remain outside the Facility.

The Asbestos Claim Facility has settled 4,000 claims since it became operational in February, 1986. Operational costs of approximately $15 million a year will be paid by insurers. At a minimum the Facility will need the support of plaintiffs’ attorneys; otherwise they will merely ignore the Facility and take their cases to court. Lack of cooperation by reinsurers could impede financing and result in costly disputes. Finally the absence of Manville Corporation, which is included as a (co) defendant in a significant portion of all asbestos litigation, would create massive and costly duplication of effort between the Facility and traditional legal channels.

Changes in the CGL Policy

The insurance industry, through the Insurance Services Office, Inc. (ISO) is currently in the process of proposing/implementing substantial changes in the Comprehensive General Liability (CGL) policies and other related standard liability policies. The original effective date of these changes of January 1, 1986 was moved back in some states due to resistance by insurance buyers and insurance commissioners.

Arguably, developments in asbestos litigation have played a significant role in bringing about these changes. At this writing, the process is in a transition period, but it appears that three key changes are being (will be) made:

1. Coverage will be switched from an occurrence to a claims-made basis;
2. The entire policy will be subject to an annual aggregate limit; and
3. All pollution liability will be excluded.

A fourth key change has been proposed by ISO, namely that defense cost coverage will be included within the policy limits. The NAIC recently (November 1986) rejected this idea, which would indicate that its chances of being implemented in the near future are slim.

Occurrence to Claims-Made

Regarding the switch from occurrence to claims-made policies, insurers are attempting to fix a point in time for the determination of which insurer covers a particular claim. Court decisions involving asbestos, particularly Keene, has produced great uncertainty for insurers through the application of the triple-trigger doctrine. Injuries are considered to have occurred over an infinite number of points in time. Thus injuries to a single person can potentially come within a number of different policy periods. Such unpredictability makes proper rating and reserving virtually impossible and violates a key desired tenet of insurability, namely that losses are definite as to time, place and amount.

The new claims-made form stilt requires that injuries be caused by an occurrence which is defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” [24, p. 10] But rather than using the resulting bodily injury to determine policy periods, the new form requires that the claim be made during the policy period in order to trigger coverage. Insurers anticipate that the result should be more consistency in determining when a claim is made than when an injury has occurred. Under the new form a claim is made when “notice of such claim is received and recorded by any insured or by us (the insurer), whichever comes first.” [24, p. 1] If a number of claims emanate from the same person, the claim “will be deemed to have been made at the time the first of those claims is made against any insured.” [24, p. 1] Under the claims-made form, an injured party’s claim should fall within only one policy period and hence trigger one policy (or possibly policies if excess coverages exist). There should be no stacking of coverages for insurers writing different policy periods, such as resulted under occurrence forms and the triple-trigger theory.

Insurers are also attempting with claims-made forms to put some type of closure on a book of business. Insurers who wrote occurrence policies years ago are being asked to respond to asbestos claims being made today. The strategy is that if one can find an old policy, or evidence thereof, the insurer will be asked to respond, and may be forced to respond through the application of the Keene triple trigger doctrine. When a claims-made policy terminates, an insurer hopes to have more control over the development of future losses. If the policyholder purchases a claims-made form from a subsequent insurer, and does not buy the extended discovery period or tail coverage, any potential liability of the terminating insurer should end. If the policyholder does purchase the extended discovery period coverage, the terminating insurer limits its risk by a) charging an additional premium up to 200 percent of the annual premium of the terminating policy; b) making the coverage excess to any subsequent insurance; and c) including all claims within one annual aggregate liability limit.

Defense Costs Within the Limit

While it has been the intention of insurers that defense cost coverage ceases upon exhaustion of liability policy limits, they have had a very difficult time enforcing this intention in asbestos litigation. By putting defense costs within the policy limits, the insurers would be putting a dollar limit on these costs, rather than relying on court interpretations of their contractual intentions. When the sum of bodily injury payments, property damage payments and defense costs exceeds the applicable limit, coverage would cease and the insurer’s obligations would terminate.

Again the insurers are attempting to reinstate a basic tenet of insurability namely that coverages must be bound by some type of limit. Without limits insurers cannot develop an orderly system of rating and reserving, and protect themselves from financial catastrophe. In the asbestos cases, insurers are being asked and often forced to pay defense costs without limit. By including defense costs within the policy limit, an effective limit would be created and insurers should be able to function and provide appropriate coverages.

Annual Aggregate Limits

Annual aggregate limits have traditionally been used in product liability insurance for bodily injury claims. Insurers were trying to guard against a flood of claims from a single defective product. If per person/occurrence limits were applied to each injured party without an annual aggregate limit, the insured losses could be enormous. In the asbestos litigation, lack of aggregate limits has only caused problems for insurers with very old policies, where aggregate limits were not in force or when policy forms cannot be found to prove the existence of such limits.

Insurers traditionally have not subjected premises and operations coverages to annual aggregate limits. In some of the asbestos litigation, manufacturers are claiming that certain asbestos claims could be interpreted as premises and operations claims. Examples include failure to properly supervise employees or a subsidiary that participated in asbestos production, or failure to protect families of asbestos workers who carried asbestos home on their clothes. If exposure can be established on a premises and operations basis, then insurers do not have the protection of annual aggregate limits.

To guard against similar situations in the future, insurers are putting all CGL coverages on an annual aggregate basis. One annual aggregate limit will apply to products liability and another annual aggregate limit will apply to all other coverages under the CGL. When extended discovery period coverage is elected under the claims-made form, one aggregate limit will apply to the entire period. Again the insurers are attempting to protect themselves by writing policies with controllable, ratable, reservable limits. It is anticipated that uniform annual aggregate limits on the new CGL forms will provide such protection.

Pollution Exclusion

The connection between asbestos and pollution claims may not be apparent, but many similarities exist. Before 1973, no mention was made of pollution in standard liability policies. Presumably pollution liability would fall under premises and operations coverage. In 1973 insurers attempted to exclude non-sudden pollution liability by using a new exclusion. A series of unfavorable court rulings has often resulted in non-sudden pollution being covered under standard forms written after 1973 despite the exclusion [4]. These rulings along with the increasing risk potential of pollution liability claims led to the exclusion of all pollution liability under the new CGL forms being introduced in 1986.

Thus, in effect, all standard liability forms written up to 1986 could be held to cover pollution claims. If the triple-trigger theory developed in Keene was applied to pollution liability, claims being brought today and in the future could end up being covered by old liability forms. If plaintiffs can make a connection between present injuries and past exposure to some form of pollution (e.g., hazardous waste), they could proceed against parties and their insurers who may have been associated with the pollution.

Even without getting into the fine details of the above scenario, the potential significance of the exposure is apparent. In addition, pollution claims under the premises and operations coverages would not be subject to annual aggregate limits like asbestos products liability claims. Per person occurrence limits could be applied over and over along with additional defense cost coverage. While limits may be exhausted on an individual plaintiff, they could be reapplied virtually without limit.

Evaluation

The changes in the CGL policy, described above, do not have any effect on policies written before 1986. The insurance industry is trying to protect itself against another asbestos-like situation that may develop in the future.

The asbestos situation demonstrates how difficult it is for the insurance industry to provide coverage for long term liability risks. As unforeseen injuries emerge from past exposure to some harmful substance condition, claims can be brought against old liability insurance policies. When these policies were written, the potential risks may have been totally unanticipated; hence rates were not charged and reserves were not established. In addition insurers may have been operating under the intention, as in the asbestos cases, that even if future injuries developed, no coverage would be provided.

As the emerging injuries become apparent, the insurance industry may have an inventory of old policies dating back 20, 30, 40 even 50 years. And to [their] the underwriters’ surprise and consternation, they discover that these old policies are interpreted as providing coverage for present injuries. Even if changes are made in present liability forms, insurers can face a tremendous volume of claims against the old policies, which cannot be altered.

Mass Toxic Torts

Asbestos products liability litigation has produced a legal and insurance morass without precedent. Over 30,000 claims are still pending. Through the end of the century, estimates of the number of excess deaths due to asbestos exposure range from between 200,000 and 450,000. [21, p. 1] The estimated number of new asbestos injury lawsuits to be filed in the next 30 years range from 32,000 to 200,000. [21, p. 32] Estimates of future compensation and litigation costs range between $4 billion and $87 billion. [21, p. 1] These costs do not include the costs of litigation between asbestos manufacturers and their insurers nor the costs of asbestos property damage claims (e.g., removal of asbestos from buildings such as schools).

Asbestos liability and compensation may be considered the most dramatic example of a relatively new risk area entitled mass toxic torts. Other massive toxic torts would include Agent Orange, DES, Dalkon Shield, and hazardous wastes (pollution). Lessons being learned in the asbestos area can be applied to other present and future mass toxic torts.

One lesson is the terrible difficulty that traditional insurance contracts encounter in dealing with long term liability risks which may produce large numbers of future claims. Long term insurance contracts can work well in areas like life insurance where losses are highly predictable, trends (mortality rates) change slowly over time, and claims are activated by a single defined contingency (death). In the asbestos liability area these conditions do not exist. In writing liability policies, insurers rarely rated and reserved for future long term losses, because they were unknown and/or it was the insurers’ contractual intention to not cover these losses. The various changes now being made in CGL forms are an attempt to alter policies so they can handle long term liability risks.

Another lesson is that the litigating mass toxic torts through the tort liability system is very expensive and inefficient. While the tort liability system has distinct benefits, it also has considerable costs. As more mass toxic torts are litigated, these costs will become more apparent. An answer will be needed to the question: can we afford to continue dealing with mass toxic torts under the present tort system?

Finding an answer to the above question will involve consideration of innovative private and government solutions. The Asbestos Claims Facility, discussed earlier, is an example of a private solution. The performance of the Facility will be watched closely and measured on such criteria as efficiency, equitability, and cost. A government compensation scheme has been proposed in legislation introduced by Congressman Austin Murphy. A pool, financed by taxes on manufacturers would become the exclusive remedy for workers’ injuries from asbestos.

The Manville bankruptcy proceedings will be examined as to effectiveness of using this device as a financing method for managing large number of liability claims. The recent bankruptcy of the Robins Corporation, because of thousands of Dalkon Shield claims, was certainly influenced by the bankruptcies of Manville and five other asbestos producers. Bankruptcy should be considered a last resort risk financing scheme, but in cases like Manville and Robins it may appear to be the only feasible choice.

The problems of mass toxic torts may very well become more complicated in the future. Given the tremendous number of new chemicals, Pharmaceuticals, and other synthetic substances that have been produced since World War II and are still being produced today, the probability that some of these substances may produce future injuries seems high. Large numbers of individuals may currently be within the latency periods between exposures to various harmful substances and their eventual injurious effects.

Finally the asbestos situation and other mass toxic torts raise a fundamental societal question; namely how to balance the costs and benefits of a particular product/activity. Each of the products involved in mass toxic torts have produced societal benefits, asbestos (fire retardation), DES (prevention of miscarriages), Daikon Shield (birth control). Agent Orange (military weapon), and chemical/hazardous wastes (various uses). While it would be ideal to have the benefits of a product or activity without its resulting costs, this of course is not possible.

This paper has focused on the risk financing costs of a particular product, namely asbestos. With asbestos it has been determined that costs exceed the benefits as many producers have ceased manufacturing asbestos and the EPA has proposed banning its use in all products within 10 years. Hopefully, the many lessons slowly and expensively being learned in determining the costs and benefits of asbestos can be applied more effectively to other mass toxic torts.

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