1. A3822-1 07/02 Draft/Do Not Cite The Dimensions of Asbestos Litigation Stephen Carroll September 2002 RAND INSTITUTE FOR CIVIL JUSTICE

2. A3822-2 07/02 Draft/Do Not Cite Trends in Asbestos Litigation Are Raising Policy Concerns  Asbestos litigation began to attract policy attention in early 1980s  Settlement agreements in late 1980s led many to believe litigation was “manageable”  But rapid increases in the number of claims and costs have reawakened interest  Growth in litigation appears likely to continue  Is there a better way of compensating asbestos victims?

3. A3822-3 07/02 Draft/Do Not Cite To Address These Concerns, Policymakers Must Know Dimensions of the Litigation  How many claims and of what type?  Who are the defendants?  How much is being spent on litigation?  How much of that goes to claimants?  What is the extent of asbestos bankruptcies?  What are their broad economic effects?  Where is this all headed? Claims Costs Economic effects Future outlook The RAND study addressed these questions

4. A3822-4 07/02 Draft/Do Not Cite Over 600,000 Claimants to Date  Number of claims filed annually has risen sharply  Average severity of claimed injuries is declining  Little change in frequency of seriously ill claimants  Increasing proportion of claims for less serious injuries  Typical claimant files against several dozen defendants

5. A3822-5 07/02 Draft/Do Not Cite Annual Claims Filings Have Risen Sharply Since 1990 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 1991199219931994199519961997199819992000 Number of claims Asbestos Claims Against Five Major Defendants

6. A3822-6 07/02 Draft/Do Not Cite “Other” Nonmalignant Claims Account for the Growth in Claims 0 1 2 3 4 5 19901991199219931994199519961997199819992000 Mesothelioma Other Cancer Asbestosis Other Ratio of the number of claims in each year to the number of claims in 1990

7. A3822-7 07/02 Draft/Do Not Cite Various sources Suggest Increasing Numbers of Claimants Are Unimpaired 1982 4% of claims showed no manifest asbestos-related injury (RAND) 1993 Up to one-half of all asbestos claims have little or no physical impairment (Harvard Journal of Legislation) 1998 No evidence of disease in 57% of asbestos claims (Manville Trust) 2001 74% of pending claims are unimpaired (confidential report prepared for a defendant) Two-thirds of claims show no evidence of impairment (Babcock & Wilcox) Vast majority of claims provide no evidence of impairment (Rourke)

8. A3822-8 07/02 Draft/Do Not Cite The Number and Range of Defendants Have Also Increased Sharply  Our list of defendants includes over 6,000 firms  Increasing number of defendants outside the asbestos and building products industry  Both large and small businesses  At least one company in nearly every U.S. industry (at the 2-digit SIC level) now involved in litigation  By 1998, non-traditional defendants account for over 60% of expenditures (confidential study)

9. A3822-9 07/02 Draft/Do Not Cite Estimated Total Costs of Resolving Asbestos Claims Through 2000: $54 B  Publicly available data are very limited  We estimate total outlays of $54 B through 2000  U.S. insurers $22 B  Insurers outside U.S. $8 to 12B  Defendants$20-24 B  At least 5 major companies have spent more than $1B each on asbestos litigation

10. A3822-10 07/02 Draft/Do Not Cite Plaintiff Compensation Plaintiff Expenses Defense Expenses 0 20 40 60 80 100 1980s Litigation 1990s Litigation Transaction Costs Have Consumed More Than Half of Total Spending And they are likely to go back up in next decade

11. A3822-11 07/02 Draft/Do Not Cite But Transaction Costs of Bankruptcy Trusts May Be Low 0 20 40 60 80 100 1980s Litigation Manville Trust Plaintiff Compensation Plaintiff Expenses Defense Expenses

12. A3822-12 07/02 Draft/Do Not Cite It Is Difficult To Determine What An Individual Claimant Receives  Only plaintiffs and their attorneys know how much claimants receive (net)  Claimants receive money from multiple sources over long time periods  Defendants pay different amounts for same injuries  There are wide variations by jurisdiction  Most of the data are not public  But some aggregate distributional data are available

13. A3822-13 07/02 Draft/Do Not Cite Most Dollars Are Paid to Nonmalignant Claimants Other cancer 20% Mesothelioma 17% Nonmalignant 63% Estimated Allocation of Compensation 1991-2000

14. A3822-14 07/02 Draft/Do Not Cite Bankruptcies Are Becoming More Frequent  3 bankruptcies in 1982--the first ones  13 more in the rest of the 1980s  9 in the first half of the the 1990s  9 in the second half  22 since January 1, 2000  4 dates to be determined

15. A3822-15 07/02 Draft/Do Not Cite Costs of Bankruptcy Can Be Substantial  Transaction costs of bankruptcy reorganization are generally about 3% of firm value  Bankruptcy imposes other costs  Disrupts relationships with suppliers and customers  Impairs (or eliminates) access to credit  Distracts managers’ attention  After reorganization, the bankruptcy trust may hold all or most of the firm’s equity

16. A3822-16 07/02 Draft/Do Not Cite And Bankruptcy Is Only Part of the Story  Defendants’ net payments to asbestos claimants weaken their financial position, cost jobs  Reduce retained earnings  Increase the cost of capital  Reduce investment  Reduce creation of new jobs  However, other firms’ reactions may offset these losses

17. A3822-17 07/02 Draft/Do Not Cite The Future Course of Litigation Is Uncertain  Experts’ future projections also vary dramatically  Total claims: 1.1 to 3.1 million  Total costs: $200 to 265 billion  Whether there will be money left to pay future claimants— and who will pay —remain open questions

18. A3822-18 07/02 Draft/Do Not Cite Will There Be Enough Money for Future Claimants? 1988 Trust payments began 1990 Payments suspended 1995 Payments resumed 2001 Payment plan revised Compensation as percent of liquidated value 100% (Only exigent cases paid) 10% 5% Example of Johns-Manville raises doubts

19. A3822-19 07/02 Draft/Do Not Cite Policy Implications  How to resolve asbestos claims fairly and efficiently is still a significant policy question  We may have seen less than half of all claims that will ultimately come forward  Current bankruptcies provide a window of opportunity for reviewing and rethinking our strategy

20. A3822-20 07/02 Draft/Do Not Cite