Asbestos Verdict in California Case Worries Insurers

By JOSEPH B. TREASTER, NY Times

May 8, 2003

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A jury verdict in California may lead to a wave of new asbestos litigation that would greatly increase costs for insurance companies, industry experts and plaintiffs' lawyers said yesterday.

On Monday, a jury in a civil trial in Los Angeles concluded that a group of London insurance companies and two American insurers must immediately pay nearly $200 million for claims already filed against the bankrupt Fuller-Austin Insulation Company, as well as those expected to be filed against a trust created by the company.

Typically, insurers pay claims only after they are filed - a process that can stretch over decades, particularly when dealing with health damage caused by asbestos. In the meantime, the insurance companies have the use of the money they were paid for the coverage for investment and other business purposes.

If the decision in the California Superior Court were widely adopted, insurance companies would have to suddenly pay tens of millions of dollars that they had expected to pay over decades.

Small insurers could be driven out of business, experts said, and others might be forced to limit their coverage in other areas.

"This is very significant," said Philip C. Stahl, a specialist in defending insurance companies at Grippo & Elden, a law firm in Chicago.

Several insurance experts said the California verdict underscored the need for a broad solution that is now being negotiated by Congress, the Bush administration, insurers, lawyers and corporations that would create a national trust to deal with asbestos claims and remove the issue from the courts. People close to the talks say the trust would provide for payment of more than $100 billion to hundreds of thousands of asbestos victims.

"Congress is moving toward some sort of global solution, something rational," said Robert P. Hartwig, the chief economist for the Insurance Information Institute, a trade group in New York, "yet you have the courts continuing to move in a direction that is increasingly irrational."

In the California case, Fuller-Austin, a company in Houston that installed asbestos products in gas and oil refineries and had been a subsidiary of a Virginia defense contractor, sued its insurers.

Facing more than 11,000 claims from refinery workers and their families for illnesses attributed to asbestos, the company filed for bankruptcy in September 1998.

In doing so, it became the first company to use the new provision in the federal bankruptcy code designed by Congress in 1994 to help industrial companies cope with large asbestos claims without being driven out of business. Companies that agreed to place a substantial amount of their assets in a trust to pay asbestos claims could then start anew, free of further asbestos liability worries. Fuller-Austin, however, had stopped doing business in the mid-80's.

On the basis of those provisions and a 1991 federal appeals court decision, Judge Judith C. Chirlin of the California Superior Court in Los Angles ruled in August 2002 that Fuller-Austin's insurers were required to pay the trust for present and future claims, provided a jury could determine the total cost. The insurers refused to pay and the original suit was expanded.

After a nine-week trial, the jury upheld the original decision. Robert M. Horkovich of the New York firm of Anderson Kill & Olick, argued successfully that the insurers were required to pay. Using insurance company methods for calculating future claims costs, he persuaded the 12-member jury to conclude Monday that the trust faced a total of more than $966 million in claims.

Altogether, the insurers, about 40 British companies, including units of Lloyd's of London and the two American companies, the Stonewall Insurance Company in Cincinnati and the Highlands Insurance Group in Lawrenceville, N.J., had provided $190 million in coverage. The jury directed that they pay the trust all but $5 million of that. About a dozen other insurers had settled earlier with the trust for $190 million.

Patrick Cathcart, a California lawyer defending the British insurers, said the verdict would be appealed. Other lawyers said that, in any event, it would not be binding outside the state. Still, the legal strategy in the case is expected to be employed in new cases across the country. Scott Gilbert, a Washington lawyer who specializes in suing insurance companies, said that his firm, Gilbert, Heintz & Randolph, planned to use it in at least half a dozen cases in Delaware, Pennsylvania, Louisiana and other states.

Huge amounts of money are at issue. The Rand Institute for Civil Justice, a California research organization, estimates that total claims for asbestos damages could rise to as much as $250 billion. And Matthew Carletti, an analyst at Fox-Pitt, Kelton, a brokerage firm and investment bank in Hartford, estimates that about half of those claims would be covered by insurance. Several large insurers have sharply increased their reserves to pay claims over the last year or so, creating a direct charge against earnings.

Some lawyers argue that the 1994 provision has been leading companies to file for bankruptcy sooner than in the past.

"Under this provision, the earlier a company goes in and the more assets it goes with the more impact it can have on the shape of its bankruptcy and the speed with which it emerges from bankruptcy," said Mr. Gilbert, the Washington lawyer.

Insurance industry experts say that, while other courts may not adopt the approach of the California court, it is still a cause of major concern. The prospect of these kinds of cases becoming a trend is causing insurers "to get sick to their stomach," said Mr. Carletti, the analyst, who specializes in asbestos and other environmental issues.

Mr. Stahl, the insurance company defense lawyer in Chicago, said that while he was skeptical that the strategy would be widely adopted, doing so "could drive insurance companies out of business or at least limit their ability to provide coverage."

Mr. Hartwig, the Insurance Information Institute economist, said the California verdict "was certainly a negative from the insurance industry's perspective."

Mr. Cathcart, in the Los Angeles office of Hancock, Rothert & Bunshoft, said Judge Chirlin misinterpreted and misapplied California law and "did not correctly interpret what happened in the bankruptcy court."