Never-ending Asbestos Quagmire

It began on Dec. 10, 1966, at a courthouse in Beaumont, Texas. Attorney Ward Stephenson filed a lawsuit, on behalf of a client suffering from asbestosis, against 11 manufacturers of products…

It began on Dec. 10, 1966, at a courthouse in Beaumont, Texas. Attorney Ward Stephenson filed a lawsuit, on behalf of a client suffering from asbestosis, against 11 manufacturers of products containing asbestos. Though a jury ruled for the defendants in this first case, Stephenson tried again with a different client, and in 1973 a jury awarded Stephenson’s plaintiff $79,436.24 in damages.

Thus began the largest and most expensive mass tort litigation in history. During the next 40 years, hundreds of thousands of asbestos exposure lawsuits were filed against businesses, large and small, in nearly every state. By 2002, more than $79 billion in damages had been paid out to an estimated 730,000 claimants. The cost of this litigation contributed to the bankruptcies of nearly one hundred companies, employing tens of thousands of workers.

For decades, experts have predicted that the flood of asbestos claims would eventually decrease. After all, the use of asbestos declined rapidly beginning in the 1970s, a development that would presumably lead to a decrease in cases of mesothelioma, asbestosis and other asbestos-related diseases.

Yet asbestos litigation costs show no signs of decreasing. In fact, they appear to be increasing.

Earlier this summer, three of America’s largest insurance companies announced increases in asbestos claims against companies they insure. One of those companies, The Hartford Financial Services Group Inc., said it would have to increase its asbestos reserves by $290 million as a result. Add that to a number of record-setting verdicts and the massive volume of asbestos-related advertising from plaintiffs’ lawyers, and it’s clear that the asbestos litigation problem is as severe as ever.

There are a number of reasons for the continued asbestos litigation crisis. Forum-shopping remains a significant problem, as plaintiffs’ lawyers seek to bring asbestos cases in courts with a long history of favoring plaintiffs and issuing large verdicts. This issue was spotlighted by two record-setting jury awards from earlier this year, one in Mississippi for $322 million and another in Illinois for $90 million. Both of these massive awards went to single plaintiffs.

In addition, many of these large cases are brought under increasingly novel theories of liability. In some jurisdictions, businesses are being sued for “civil conspiracy” by plaintiffs who can’t prove any asbestos exposure directly attributable to the defendant businesses. Other lawsuits target companies whose products had asbestos added to them by third parties after their original manufacture.

Another persistent problem is fraudulent diagnoses of asbestos-related diseases by doctors with ties to the plaintiffs’ bar. In the previous decade, high-profile court cases and congressional hearings exposed a group of doctors who issued a massive number of false diagnoses for asbestos-related diseases. Many of these practitioners have since left the asbestos arena, but a new group of doctors is emerging to take their place.

An emerging set of problems relates to the activities of the asbestos bankruptcy trusts established under § 524(g) of the bankruptcy code. These trusts, which have a total capitalization of more than $30 billion, were established by companies forced into bankruptcy because of their asbestos liabilities and are meant to compensate asbestos claimants while allowing the companies to address their liabilities.

Unfortunately, the trusts’ opaque operations, controlled by the plaintiffs’ lawyers who dominate their operating committees, have led many to question whether they have the internal controls necessary to prevent fraud and abuse. A recent study by the Government Accountability Office found that 65 percent of trusts have implemented procedures that block the information sharing necessary to prevent fraudulent claims. In addition, only three of the 11 trusts interviewed by GAO have audited their claims, and only one has submitted medical evidence for external review.

Lack of transparency by the trusts invites fraud in the asbestos compensation system. For instance, in a 2007 Ohio case, a claimant alleged in court that his mesothelioma was entirely caused by asbestos in cigarettes. Yet he simultaneously obtained hundreds of thousands of dollars in payments from the trusts by claiming that additional, noncigarette products caused his disease. Although this particular fraudulent conduct was discovered, similar fraud goes largely undetected because of the trusts’ lack of transparency about claims.

Asbestos bankruptcy trust fraud victimizes legitimate claimants, as every improper payment by the trusts results in compensation withheld from those who truly deserve it. It also victimizes the job-creating businesses that are still subjected to litigation in the tort system. After all, most of the companies with the greatest responsibility for manufacturing asbestos-containing products have already filed for bankruptcy and addressed their liabilities through the bankruptcy trusts. With the biggest players essentially removed from the tort system, plaintiffs’ lawyers are now targeting solvent businesses much more peripheral to the asbestos problem and alleging liability far in excess of those businesses’ actual responsibility.

A good example concerns Bondex International, a midsize U.S. company manufacturing joint-compound and basement sealants. With less than 1 percent of the sealant market, it stopped using asbestos in its products in 1977 and paid out only $1.6 million in asbestos claims through the end of the 1990s. But after several of Bondex’s larger competitors filed for bankruptcy, asbestos claims against Bondex began to skyrocket, rising 685 percent between 2001 and 2009. In 2010, the company was forced into bankruptcy.

Who are the winners from the current system? It’s clearly the plaintiffs’ lawyers, who profit from every asbestos claim brought through the courts and the trusts. The fact that the seven most expensive keywords for Google online ads all relate to asbestos (mesothelioma is number one at $84.02 per click) shows how lucrative the asbestos litigation business remains for the plaintiffs’ bar.

It is long past time to reform this out-of-control system. Although there are a number of measures that would help, policymakers can begin by mandating greater claims transparency from the asbestos bankruptcy trusts. This sunshine will reduce the likelihood of fraud and abuse while ensuring that those who truly deserve compensation receive it. After 40 years of asbestos litigation, it is time to chart a new path that provides fairness to all stakeholders while allowing businesses to focus on job creation — not another 40 years of litigation.

This column first appeared in the National Law Journal.