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    WORKING DRAFT

    March 24, 2004

    ABA/TIPS Task Force on Asbestos Litigation

    By Leo J. Jordan, Esq.

    Co-Chair of Task Force

This paper represents the continuing work of this task force. It is intended as a

    working and reference document. It is not intended to represent the view of the

    American Bar Association, The Tort Trial and Insurance Practice Section, or any

    other ABA entity. Comments on the draft are welcome. Write to

    leojordan@comcast.net

     thFair in Asbestos Injury Resolution Act of 2003 S. 1125, 108 Congress

    Funding Proposal Role of Federal Government

I. Introduction

    S. 1125 was reported favorably (10-8) out of the Senate Judiciary Committee on July

    30, 2003. This legislation takes asbestos claims out of the existing tort system and

    administers them through a federally administered trust fund. This plan will

    compensate present and future claims on a non-fault basis according to

    standardized medical criteria and designated claim awards. Claimants need only to

    satisfy the eligibility requirements under the Act. (The House of Representatives has

    not yet taken formal action on asbestos legislation, apparently preferring the Senate

    to take the lead.)

    The trust fund will operate on two fronts: first, through the collection and

    management of assessments against corporate defendant and insurance companies,

    as well as a smaller part from existing asbestos compensation trusts; and second,

    through the payment of such funds to compensate claimants who can establish

    eligibility based upon legislatively approved medical criteria. The legislation

    proposes differing funding levels based upon the severity of the asbestos-related

    disease.

    The issues presented in this paper include (1) whether the funding anticipated by

    this legislation is adequate to satisfy pending and future claims; and (2) if funds are

    deemed insufficient, should the federal government contribute to the fund as either a

    “responsible party” or in its overall role to provide for the public welfare?

II. Number of Asbestos Cases, Present and Future

    According to a 2002 study by the RAND Corporation Institute for Civil Justice, more 1than 600,000 asbestos claims have been filed to 2002.

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It is estimated that there are currently almost 300,000 asbestos-related bodily injury

    claims pending in state and federal courts. Roughly 50,000-70,000 new claims were 3 filed per year from 2000-2002.

Moreover, there are currently about 2,000 new mesothelioma cases filed each year.

    There are another 2,000-3,000 cancer cases that are likely attributable (at least in

    part) to asbestos. There are a smaller number of asbestosis cases. The remaining

    cases are either pleural injuries or from claimants who do not presently show signs

    of injury. It is estimated that more than 90 percent (or more than 54,000 claims filed 4 during 2002) are for claimants alleging nonmalignant injuries.

There is no agreement as to the ultimate cost of asbestos-related injuries.

    Estimates range from a low of $108 billion to a high of $275 billion. The former

    estimate was reported by the Senate Judiciary Committee. The latter estimate is 5from a leading actuarial firm.

    III. Funding Mechanism(s)

The bill, as approved by the Senate Judiciary Committee in July 2003, would require

    $108 billion in aggregate contributions. Insurers and defendant corporations would

    each contribute $52 billion and $4 billion from existing bankruptcy trusts. An

    amendment by Senator Diane Feinstein (D. CA) provided additional contingency

    funding amounting to $45 billion to be raised from corporations and insurers. S.

    1125 as reported out of Senate Judiciary would therefore have an overall

    capitalization of $153 billion.

     6Insurers balked at the contingency funding and walked away from the debate.

    Senate Majority Leader Bill Frist (R. TN) later took personal charge of the legislation

    and insurers and corporations appear in agreement on the following funding

    mechanism.

A. An approximate $105 billion in mandatory contributions from defendants and

    insurers spread over 27 years. Insurers will be responsible for $46 billion.

    Corporations would contribute $57.5 billion. Existing bankruptcy trusts would

    contribute $1.5 billion. Insurer contributions would be front-loaded to provide for

    adequate funding in the early years. Defendant corporations would be expected

    to pay $2.5 billion each year over this period, or perhaps a shorter period. B. Defendant corporations would also be required to participate in a contingency

    funding proposal of $10 billion.

     C. Under the Frist proposal the total funding base would be about $114 billion. This

    is $6 billion above the basic funding reported by the Judiciary Committee.

    Absent from the Frist proposal is the $45 billion Feinstein contingency measure.

    The $6 billion increase over the original $108 billion capitalization is reportedly to

    be used to increase benefit amounts.

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    IV. Adequacy of the Funding Mechanism

    The negotiations initiated by Senator Frist apparently included only representatives

    from corporate defendants and the insurance industry. Left out of these discussions

    were representatives of labor and the plaintiffs personal injury bar. It seems patently

    unlikely that legislation will be enacted unless there is greater agreement among all

    effected interests as to a reasonable evaluation of outstanding liabilities.

     The current legislative direction mandates that the asbestos trust funding is the

    primary responsibility of defendant companies and insurers. Sec. 405(a) of S. 1125

    specifically exempts the federal government from any funding obligation.

     The RAND Corporation Institute for Civil Justice estimated the ultimate cost of

    asbestos claim payments and expenses at $200 billion. RAND reported that $70

    billion had been paid through 2002, and estimated the future cost at $130 billion.

    The Judiciary Committee Report relied heavily on the anticipated savings in legal 7. transaction costs to meet its goal of $108 billion

     How Much Money is Needed?

     From what we have seen, there remains a great deal of uncertainty as to the ultimate

    dollars needed to resolve the outstanding claims. There is neither agreement as to

    the number of claims or the final cost to resolve the more serious as well as the less

    impaired-type claims. Failure to narrow differences on the estimated number of

    future claims, as well as agreement on funding adequacy, could well impair the

    efforts of Senator Frist and others to move this legislation forward.

     We have seen the estimates of costs for pending and future claims ranging from:

    a) S. 1125 original estimate of $143 billion. (front-end $108 billion contingent

    $45 billion)

    b) S. 1125 Frist revision changed to $114 billion. (front-end $104 billion

    contingent $10 billion)

    c) Congressional Budget Office (CBO) estimate $136 billion. 8d) Rand estimate $130 billion. 9e) Tillinghast-Towers Perrin and Milliman $200-275 billion.

    At the end of 2002, U. S. insurers and reinsurers had paid approximately $25.5

    billion and held $19 billion in reserves to pay future claims, as disclosed in the 10Annual Statements filed with state insurance departments.

V. Role of the Federal Government

     The federal government appears willing to serve as the catalyst for a final resolution

    of the long-standing asbestos crisis. It is willing to take asbestos claims out of the

    tort system and have them administered by a federally administered trust fund. The

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    government will also have borrowing authority in any calendar year in an amount not 11. to exceed anticipated contributions to the fund in the following year

     The Wall Street Journal recognized this limited role of government when it reported

    recently that “there is an empty chair at the Senate’s asbestos-settlement talks. It

    belongs to Uncle Sam.” The paper reported that some of the most lethal exposures

    to asbestos occurred in U.S. Navy shipyards. The Wall Street Journal cited industry

    data showing that claims from individuals exposed in military and shipyard

    construction accounted for 26 percent of mesothelioma cases, 16 percent of lung 12cancer cases and 13 percent of disabling lung disease cases.

     The New York Times in 1982 reported on the adverse impact on shipyard workers

    exposed to asbestos in Bethlehem Steel Corporation Key Highway Shipyard in

    Baltimore, Maryland. According to the Times, a 1979 study found that more than

    86% of Key Shipyard workers suffered lung abnormalities associated with 13asbestos.

     A recent report of the Environmental Working Group has released a study of the

    impact of asbestos-related injuries upon former shipyard workers in the San Diego

    and Los Angeles areas. This report revealed that San Diego County had the eight-

    highest number of asbestos-related deaths in the country. The report also ranks Los

    Angeles County as No. 1 in asbestos deaths nationally. The study placed the blame 14for these injuries primarily upon asbestos insulation in old Navy ships.

     A 1992 NYU Law Review article by Susan L. Barna contains a comprehensive

    overview of the history of asbestos-related claims and the role of the federal 15government as a major factor in the genesis of these claims.

     Barna writes that there is an historical record dating from as early as 1930 of

    asbestos-related injuries due to exposure to a variety of dust particles, created in the

    process of manufacturing asbestos-related products. Even as early as 1928

    asbestos manufacturers were soliciting the U.S. Navy to secure a list of products 16that could be sold to the Navy.

     The use of asbestos-rated products in naval shipbuilding accelerated greatly during

    World War II. About 4.5 million shipyard workers were employed during World War

    II. The number of shipyards either owned by the Navy or used predominantly by the

    Navy increased from 32 to 131 during the period of the war. The Navy entered

    contracts with many asbestos manufacturers during WWII. Many shipyard workers

    contracted asbestosis and other asbestos-related diseases. Extended latency

    periods delayed the actual manifestation or diagnosis of disease until many years 17following the ending of the war.

     Manufacturers of asbestos products initially attempted to shift responsibility for

    asbestos claims to the federal government. A number of studies pointed directly to

    the federal government as the primary source and cause of these injuries. One

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    study found that shipyard workers whom the federal government exposed to

    asbestos during World War II have filed one-half of the compensation claims 18 Moreover, the Department of Health, pending against asbestos companies.

    Education and Welfare reported that asbestos exposure occurred to 4.5 million 19shipyard workers during World War II.

     While shipyard workers might well have chosen to bring suit against the government,

    many found it far easier to sue the manufacturer in strict liability. Injured employees

    wanting to bring suit in tort against the government faced insurmountable difficulties:

    1. The United States enjoys sovereign immunity and cannot be sued without its

    consent.

    2. Congress has waived sovereign immunity in tort by enacting the Federal Tort 20Claims Act. (FTCA)

    3. Although the government is subject to suit under the FTCA, most

    government-employed shipyard workers instead sued asbestos

    manufacturers. Government employees are not generally eligible to sue

    under the FTCA. The usual path of recovery for injuries suffered by

    government employees is under the Federal Employees Compensation Act. 21(FECA)

Federal workers compensation protection did not work well for injured shipyard

    workers especially those suffering not from accidental injury but from occupational

    diseases:

    (a) The time requirements for filing a claim are often shorter than the

    latency period for asbestos-related diseases.

    (b) Causation is difficult to prove in asbestos-related cases to establish

    the disease was work-related.

    (c) Even where workers compensation claims are successful, 22compensation is likely to be inadequate.

     Because of the difficulties inherent in the FTCA, employees brought actions in strict

    liability directly against asbestos manufacturers. Manufacturers in turn sought

    contribution or indemnity from the federal government for liability resulting from the 23use of asbestos in government products. This path also proved to be difficult. In

    order to obtain contribution under the FTCA, manufacturers must show that the

    government owed an independent duty to the original plaintiffs, the shipyard

    employees. Government is statutorily immune from suit from first-party employee

    liability.

     Manufacturers subsequently filed their claim in contract against the government 24under the Tucker Act. The U. S. Claims Court has been given exclusive jurisdiction over contract claims (over $10,000) against the government.

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     Many asbestos cases were brought against the government alleging various

    expressed or implied warranties by the government to its contractors. Most were

    dismissed for lack of subject matter jurisdiction. Ultimately, several important cases,

    although not consolidated, were considered under one heading.

     25 the manufacturer filed a claim against the In GAF Corporation v. the United States

    government for damages sustained as a result of lawsuits by government-employed

    shipyard workers to recover for injuries or death due to exposure to asbestos.

     The principal argument advanced by GAF was under the “superior knowledge”

    doctrine. This doctrine sets out the government’s duty to its suppliers to disclose

    information essential to successful contract performance. There was evidence that

    the government withheld important information relating to the dangers of asbestos

    exposure. This doctrine assumes the contractors would not have agreed to the

    contract terms if the government had not withheld certain information.

     Barna in the NYU Law Review outlines the GAF arguments regarding the government’s early knowledge:

    1. There was considerable evidence that the government, through its

    investigation of workers’ complaints at shipyard facilities, had substantial data

    on such hazards as early as 1943.

    2. Instead of informing the workers and manufacturers, the government

    classified the results of its investigation under the Espionage Act, making it a

    criminal act to review the results.

    3. Naval documents show the government not only knew of shipyard dangers,

    but also made a conscious effort to suppress the information, thus raising 26serious questions about the government’s conduct.

Despite this evidence establishing government involvement, the Claims Court

    granted summary judgment dismissing the GAF claim. The court determined the

    Navy had no contractual duty to warn an asbestos producer of hazards contained in

    its own products. The Court of Appeals for the Federal Circuit affirmed; the

    Supreme Court refused to review the case. These Claims Court decisions

    essentially ended further efforts to hold the federal government responsible under

    either a tort or contract basis.

VI. History of Federal Government Programs Caused by Injury or Disease

Despite the government’s refusal to accept responsibility for asbestos-related

    injuries, there is recent history of the federal government’s role in resolving public

    policy issues associated with injury or disease. The role of government is set out in 27a letter from the General Accounting Office to Sen. Don Nickles (R. OK).

The GAO offered a comparison of funding mechanism offered under two somewhat

    comparable federal programs. They are the National Vaccine Injury Compensation

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    2829 and the Black Lung Benefits Program GAO then compared these Program

    programs with S. 1125, as reported July 30, 2003.

     Under the Vaccine Program

1. For an injury: past and future medical care, pain and suffering (capped at

    $250,000), lost earnings and reasonable attorney fees. Death payments

    capped at $250,000.

    2. The source of benefit funding is the Vaccine Injury Trust Fund. Claims may

    be payable only from the Fund.

    3. A trust fund was established in the U.S. Treasury.

    4. Sources of fund income came from an excise tax of 75 cents on every dose of

    vaccine purchased.

    5. Treasury is required to invest funds only in interest bearing obligations of the

    U.S. and claims are payable only out of the Fund.

    6. There is no designation of explicit fiduciary responsibility under the Fund.

    7. No borrowing authority is permitted.

    8. The claim process is on a “no fault” basis.

    9. The current status of the vaccine fund was $1.9 billion (FY 2003)

     Under the Black Lung Program

1. Monthly income maintenance payments and medical benefits are allowed.

    2. The source of benefit funding is from “responsible operators” or by the Trust

    Fund where no coal mine operator can be held liable. Under the current

    practice, claims are processed by the Department of Labor and benefits paid

    by the mine operators or from the Fund.

    3. Source of Fund income is an excise tax on coal mining companies.

    4. Treasury is required to invest funds only in interest-bearing obligations of the

    U.S.

    5. There is no explicit fiduciary responsibility.

    6. If tax revenues are insufficient, Congress may appropriate “repayable

    advances” to the Fund. 26 U.S.C. Sec. 9501 (c).

    7. There is no explicit provision in the Black Lung legislation prohibiting tort

    lawsuits by miners; however, they are problematical.

    8. Coal taxes have been inadequate to cover expenditures and the Fund has

    borrowed extensively from the General Fund. The outstanding debt at the

    end of FY 2003 was over $8 billion.

     Under the proposed Asbestos Fund (S. 1125) as described in GAO letter

1. Benefits payable include cash awards payable over 3-4 years, derived from

    “benefit table” based upon medical conditions. “Medical monitoring” costs for

    patients with “nonmalignant disease” and “minimum exposure.” Sec. 132.

    2. The Source of Benefits Funding is the Asbestos Injury Claims Resolution

    Fund. All claims must be paid from the Fund. Sec. 132 (a) (1).

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    3. A “Trust Fund” is established in the Office of Asbestos Injury Claims

    Resolution’ unlike Vaccine and Black Lung where funds are established in the

    U. S. Treasury. (GAO stresses that while S. 1125 shares many

    characteristics of a federal trust fund, it is not designated as a “trust fund” in

    the bill.)

    4. Sources of income are assessments from defendant corporations and

    insurers. Additional contributions may come from asbestos-related civil trusts.

    5. Fund investments are permitted under a “prudent person” standard, but no

    specific role for Treasury. Sec. 222 (a), (b).

    6. There is a specific limitation on government liability, “nothing my be construed

    to create any obligation of funding from the U.S.” Sec. 405 (a).

    7. The Fund is to be administered “in a fiduciary capacity.” (Sec. 222) (a), (b).

    8. The Administrator is authorized to borrow from commercial lending institutions,

    in any calendar year, an amount not to exceed anticipated contribution to the

    Fund in the following calendar year. (Sec. 223) (a).

    9. There is no alternate avenue of redress available. No asbestos claim may be

    pursued in Federal or State court, except for enforcement of claims for which 31an order or judgment has been entered. (Sec. 2(3); 403 (c) (1).

    VII. Legislative Efforts to Force A Government Solution 1977-2001

Numerous legislative efforts have been underway for the past 25 years to make the

    federal government participate in the overall resolution to what is now known as the

    “asbestos crisis.” Following is a summary of these efforts:

Beginning in 1977 Rep. M. Fenwick (R. NJ), serving the legislative district of Johns-

    Manville introduced legislation to compensate asbestos victims from a federally

    administered central fund. This bill was reintroduced in 1981 and, again, failed to 32pass.

Sen. Gary Hart (D. CO) in 1980 introduced the Asbestos Health Hazards

    Compensation Act. This bill left the administration of asbestos-compensation with

    the states. It also called for the establishment of federal minimum standards for

    compensating asbestos victims. The Hart proposal also called upon contributions

    from the federal government to fund the additional cost of compliance with the 33 enhanced federal standards. This proposal reintroduced in 1981 was unsuccessful.

    (The American Bar Association (ABA) in its 1983 meeting advocated appropriate

    legislation to provide adequate compensation for asbestos injuries. In a subsequent

    hearing before the Senate Commerce Committee, the Chairman of the ABA Section

    on Torts and Insurance Practice formally recommended federal legislation in areas

    such as asbestosis.)

In 1994, Congress enacted the Bankruptcy Reform Act. This enabled some

    asbestos manufacturers to reorganize and establish a trust to channel future

    asbestos-related liability.

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    In 1999-2000, H.R.1283 was introduced and would establish the Asbestos

    Resolution Corporation. This bill would provide full compensatory awards, including

    pain and suffering. The corporation would receive funding from defendant

    corporations, not through tax revenue. This effort was unsuccessful.

In 2001, H.R. 1412 Retroactive Tax Relief provided that no tax be imposed on any

    settlement fund to resolve present or future asbestos claims. Did not pass.

    VIII. Judicial Calls for Legislative Action Through 2001

1990 U.S. Supreme Court panel appointed by Chief Justice Rehnquist said in

    1991, “(This) situation has reached critical dimensions and is getting worse,”

    and the courts were ill-equipped to address the mass of claims in an 34 effective manner.”

1996 State v. Mac Queen, Congress. . . has effectively forced the courts to adopt

    diverse, innovative and often nontraditional judicial management techniques

    to reduce the burden of asbestos litigation that seems to be paralyzing the 35active dockets.”

1997 Amchem v. Windsor, The Supreme Court observed that, “the argument is

    sensibly made that a nationwide administrative claims processing regime

    would provide the most secure, fair, and efficient means of compensating

    victims of asbestos exposure. Congress, however, has not adopted such a 36solution.”

1999 Ortiz v. Fibreboard, Supreme Court again calls on Congress, says existing

    asbestos litigation is an “elephantine mass. . . that calls for national 37legislation.”

    2003 Norfolk & Western Railway Co. v. Ayers, the court repeated the call for 38legislation.

    IX. Arguments for Federal Government Contribution

     There are several arguments available to conclude that the federal government

    should contribute its financial resources toward an ultimate and final resolution of the

    asbestos crisis.

A. Legal Arguments

     We have reviewed earlier decisions arising under the FTCA and the Tucker Act

    (actions in contract) that essentially insulated the federal government from

    responsibility for contributions to the resolution of this asbestos problem. Even

    though substantial evidence was available showing the government intentionally

    exposed its shipyard employees to danger of which it was fully aware, the courts

    have been generally unsympathetic to claims for contributions.

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     The government was held immune to suit under the FTCA because of the

    exclusive right of government employees to compensation under the FECA.

    Asbestos manufacturers attempts to seek indemnity under the FTCA from the

    government were not successful.

     Later efforts by asbestos manufacturers to seek indemnification from the federal

    government in the Claims Court under Tucker Act were also unsuccessful. In

    GAF the plaintiff manufacturer alleged that (1) the government promulgated

    mandatory specifications, encouraged development of, purchased and had

    control of the conditions under which GAF products were used; and (2) the

    government implied by warranty that the specifications and use of the products

    would not expose GAF to liability for damages.

     While other variations of this implied warranty were also alleged, they essentially

    came down to this: the government made an implied warranty to sellers that its

    own use of the product would not expose the sellers to unforeseen defective

    product liabilities to persons who might be injured.

     These arguments were rejected by the Claims Court and by the Federal Circuit.

    Even though there is evidence that the government failed to disclose information

    regarding shipyard asbestos hazards, the Claims Court refused to accept the

    implied warranty standard. Even if the government possessed “superior

    knowledge” of the product, GAF was unable to overcome the presumption of the

    “experienced manufacturer.” Barna in the NYU Law Review article forcefully

    argues that the designation of the “experienced manufacturer” is, in effect, an

    irrebuttable presumption and is contrary to existing contract law. GAF essentially

    established an “irrebuttable presumption that the government never had

    knowledge “superior” to that of an experienced manufacturer.”

     In her law review article, Barna argues that if the government did have “superior

    knowledge,” this should result in government liability. Asbestos manufacturers

    argued that had they been aware of the inside information possessed by the

    government they would have revised the price of their services as well as

    changing the nature of their products insurance coverage.

    Despite determined efforts by asbestos manufacturers to hold the government

    responsible for injuries to government employees, these efforts have been

    unsuccessful. It appears almost certain now that asbestos manufacturers may

    never be able to use judicial means to shift some of the financial burden of

    asbestos tort claims to the federal government.

    Public Policy Arguments

     While the legal arguments for holding the federal government responsible for

    injuries inflicted on its government workers, as well as employees of government

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