Cover Story: Danger: Asbestos Exposures

Several rating agencies and actuarial consultants like A.M. Best, Fitch Ratings, Tillinghast Towers-Perin and Milliman & Robertson have significantly raised their asbestos liability cost estimates facing U.S. insurers to around US$55-$70 billion. They have also expressed concern that many insurers remain under-reserved relative to asbestos exposure, particularly with regard to the broadening of defendants now being named in actions.

In response, several leading U.S. insurers such as ACE, St. Paul Cos. And Hartford Financial Services recently disclosed multi-billion dollar “top up” reserve adjustments relating to asbestos exposures. The reason for this sudden “hive of activity” around asbestos is that a new wave of litigation – of which many filings are in the form of class action suits – has hit primarily the U.S. courts (although the U.K. and other global jurisdictions are becoming hot spots) through non-product type cases.

A report compiled by GeneralCologne Re notes that the majority of asbestos cases before the U.S. courts are now non-product related with “non-traditional defendants” paying about 60% of asbestos expenditures. Furthermore, a report issued by Fox-Pitt, Kelton suggests that around 85% of the current asbestos claims are from claimants showing no signs of related injury or sickness. The litigation shift from products liability to non-products liability has opened the door for many U.S. insurers engaged in commercial general liability (CGL) covers to be attacked, the report observes. “Insurers that wrote large, national-account general liability coverages during 1950-1985 and their reinsurers are most exposed to this shift [in litigation approach]…We expect the focus on the asbestos issue to continue to intensify.”

The “dirty dozen”

Asbestos litigation began with actions taken against producers of the material. As early as the 1930s, asbestos was recognized as a toxin which could manifest over time to cause cancer-related afflictions such as “mesothelioma”. In order for asbestos to be harmful, it has to become “friable”, in other words, turned into a dust form that can be inhaled.

The 1980s saw a wave of personal injury cases taken up against U.S. producers of asbestos which culminated in the top 12 companies, or the “dirty dozen”, being forced into bankruptcy. Insurers incurred multi-billion dollar claims costs under product liability policies. In 1989, the U.S. Environmental Protection Agency (EPA) banned the manufacture, importation, processing and selling of most products containing asbestos (although asbestos is still used in minute quantities in many products and remains resident in older building structures).

With the financial resources of the asbestos producers having been largely exhausted by the 1990s, the litigation pressure through asbestos liability began to ease off, and insurers breathed a sigh of relief. The resurgence of asbestos litigation in the U.S. over recent years was sparked by a new approach by the plaintiffs’ bar to attack “non-traditional” defendants (those who still had money, and range from auto manufacturers, textile producers to roofing installers – the list is endless) who sold or serviced products containing asbestos. The GeneralCologne Re report notes that asbestos risk now falls into two main streams: “The handling of old products containing asbestos and the production of new products containing some amount of the hazardous substance.”

Defense counsel in turn began to look at other insurance covers than product liability that could be triggered – they found it in “premises/operations” coverage. This exposure has become a major area of concern for insurers underwriting CGL policies with regard to the “when and where” that liability could be attached, and how the courts would deem the appropriate “trigger” of coverage and allocation of burden where more than one policy was in effect during the alleged period of contact by the plaintiff to asbestos.

Also, a recent landmark ruling handed down by the House of Lords in the U.K. that it would not be necessary for plaintiffs to prove which place of business they came into contact with asbestos dust resulting in an affliction has also set off warning bells. Before, the plaintiff(s) would have to establish proof that they became afflicted during the employment of a specific employer (mesothelioma normally only develops 20 years after contact with asbestos). The new ruling states that compensation will now be split proportionally between all defendants found to be liable(the proportion of compensation will depend on the amount of time the employee worked at each place of business with an asbestos exposure).

Canadian reinsurance concern

“The U.S. is like storm clouds on the horizon,” says Brian Gray president of Swiss Re Co. Canada. His comment relates to the relatively low profile that asbestos liability has attracted in Canadian courts as well as being a low priority concern for local insurers. But, he notes, the litigation shift south of the border does present concerns for the Canadian marketplace – namely the move from product to non-product liability. “The concern now is, who are the potential claimants? It’s almost impossible to identify them. A whole new wave of defendants are being targeted by the plaintiffs’ bar, and clearly there’s a concern that this shift is being focused on ‘solvent policies’.”

Another factor is the growing acceptance of class actions within Canada. There are five provinces in Canada that allow class action suits, and Alberta is not far behind in joining this move, Gray notes. “We can’t prove that asbestos liability is going to become a huge problem in Canada, but then the same thing applies to an earthquake in Vancouver – we all know that there is the potential for significant exposure there.” In this respect, he believes that the risk of asbestos exposure in Canada has been greatly under-rated, and that insurers could face significant long-term under-reserving in the event that the form of litigation gripping the U.S. takes hold locally. Plus, he observes, the risk is not only “Canadian specific”, but whether an increased number of Canadian issued policies may have to respond to U.S. cases where Canadian businesses are implicated through dealings down south.

As a result, Swiss Re is currently engaged in discussions with primary clients to identify what exposures might exist, and what actions are being taken to mitigate this exposure. “This is really more a primary company concern than reinsurance because of the number of potential claimants insurers could face. We’re trying to determine our clients’ exposures.” Gray says that these discussions have revealed “some awareness” at the primary company level of asbestos risk, but “there is really not enough concern out there”.

Gray concedes that the Canadian legal environment with regard to workers being exposed to asbestos-causing illness is different to the U.S., due to the fact that workers’ compensation locally is government-run whereas down south it is private. “Clearly there are exposures that won’t apply here, but we are worried about the shift to non-product litigation like premises/operations coverage under CGL policies. Our whole business is about ‘probabilities”. By the time we know the cost, it’s too late. Is asbestos liability going to cost a lot of money in Canada, we don’t know, but there is that possibility.”

Gerry Wolfe, chief agent for Canada at General Reinsurance Corp., holds similar concerns for the Canadian market. “Who knows what the legal climate in Canada will look like five to 10 years from now?” Wolfe’s premise is that now is the time to address outstanding dangers/concerns while the opportunity still exists. A return to weaker pricing, coupled with unexpected future major losses arising from an area such as asbestos liability could prove devastating for some companies. General Re is also in the process of evaluating potential asbestos exposures with their primary clients. “I think it’s a case of the better the devil we do know than don’t know. We should have been addressing issues like
asbestos years ago.”

Notably, Wolfe points out that the shift in U.S. asbestos litigation has raised numerous concerns applicable to the Canadian marketplace. For instance, insurer exposures could exist through errors and omission (E&O) claims relating to the property management sector where it is discovered that a building under management is contaminated, and investment values plummet. The spread of litigation from asbestos producers to a host of potential new claimants means that we have turned a corner where identifying the source of potential exposure is unknown, he adds.

Furthermore, Wolfe is also troubled by the type of policies issued in Canada. Most CGL policies in Canada are issued on an “occurrence” basis, he notes, as opposed to “claims-made” which the former means that coverage can be triggered from the first exposure to the hazard through to the date of discovery of the damage. The claims-made provision limits the exposure to a specific time frame. Although CGL policies are issued on an occurrence basis in the U.S., these coverages tend to hold specific asbestos exclusions, he notes. And, when writing occurrence trigger CGL/umbrella policies, there is always the concern with “stacking limits”, he adds. Furthermore, the concern with asbestos is not just indemnity related, but as well the legal and defense costs which could escalate if insurers are faced with new suspected cases, Wolfe comments.

Asbestos claim triggers

There are four theories that can be used to trigger coverage with regard to asbestos claims, (based on definitions from Nils Publishing). These are:

Injury in fact – if it can be proven that an injury or damage predated its discovery, coverage can be triggered under any and all policies in effect during the time the damage developed;

Exposure theory – indicates that every policy that was in effect while the person came in contact with the pollutant or hazard must respond to the loss;

Manifestation theory – stipulates that coverage for an injury or illness is invoked or triggered at the time the loss becomes apparent (when the symptoms of illness have manifested or when the loss should have been discovered);

Continuous trigger – known as the “triple” or “multiple” trigger, means that coverage is extended from the time of the first exposure to the pollutant or hazard through to and including the date of discovery of the damage.

Canadian legal environment

A report compiled by solicitors Rogers, Moore on behalf of GeneralCologne Re notes that there have not been many asbestos-related cases that have gone before the courts in Canada. “The number of asbestos cases which have been litigated and reported in Canada is fairly small. One of the reasons for our relative tranquility in the area is undoubtedly our publicly funded healthcare system,” observes the report’s author Allyn Abbott.

The Rogers, Moore report focused primarily on Ontario, noting that class actions are a relatively new development within the province, which could be one reason why issues such as asbestos have not been as prominent in the province’s courts. Furthermore, each province in Canada has its own “limitations period” applying to negligent actions. In Ontario, the report comments, this limitation is six years, which would restrict the scope for asbestos claims. However, the limitation period can be extended under the “discoverability principle” if evidence suggests that the cause of injury could be shown to predate this period. “In most asbestos related personal injuries, this would be from the time that the plaintiff’s symptoms were diagnosed by a physician to have been the caused by exposure to asbestos.”

The report also refers to the recent U.K. court decision, noting “you have drawn our attention to a House of Lord’s decision which held that a plaintiff could sue multiple employers even if it was impossible to tell which employer caused the exposure to asbestos which resulted in the plaintiff’s disease. I think our courts, given the right situation, would follow that decision. As long as a plaintiff can prove that each defendant materially contributed to the risk of injury, it is likely that the court would apportion liability between them.”

The Rogers, Moore report also observes that the Workers’ Compensation Board can subrogate losses incurred against other parties. The other public health insurance authorities have the same subrogated right to claim payments made on behalf of an injured plaintiff outside of claims relating to motor vehicle accidents, it adds.

Furthermore, Rogers, Moore notes that policy exclusions are strictly construed by the courts so that the insured gets the benefit of any ambiguity. They therefore suggest that, in implementing any form of an asbestos exclusion, insurers should also offer an endorsement for coverage at a higher premium. “If an insured has turned down the opportunity of coverage for asbestos related claims, that gives one more piece of evidence of the intentions of the parties to the insurance policy.”

A senior claims manager, speaking “off the record”, notes that main two factors hinder an explosion of asbestos liability claims in Canada. The first being a shortage of professionals in the field available to the plaintiffs’ bar to provide evidence, and the second being the limited population size relative to the U.S., and therefore the scope for more cost-effective class actions. “There are about 10 toxicologists in Canada whereas in the U.S. there’s no shortage, just in Washington there are thousands of them. In the U.S., there’s money to be made from suing people. You can’t make a living being an expert witness in litigation in Canada, you’d starve to death.”

And, observes Dr. Torgny Vigerstad, director for scientific investigations at Cunningham Lindsey, the high cost of litigation in Canada, particularly consumer product litigation, acts as a deterrent against opportunistic claims. From a workers’ exposure perspective, Vigerstad points out that the vast majority of Canada’s provinces have detailed guidelines with regard to the handling of asbestos, whether it be in removal, etc. “If everyone follows the rules, then there shouldn’t be any claims arising from workers’ compensation.” Vigerstad concurs with the above view that the relatively small population of Canada limits the potential for “wide-scale” asbestos litigation, as well as potential exposure to the toxin. “The potential for strict liability is small because of the population size and the expected exposure levels.”

Several rating agencies and actuarial consultants like A.M. Best, Fitch Ratings, Tillinghast Towers-Perin and Milliman & Robertson have significantly raised their asbestos liability cost estimates facing U.S. insurers to around US$55-$70 billion. They have also expressed concern that many insurers remain under-reserved relative to asbestos exposure, particularly with regard to the broadening of defendants now being named in actions.

In response, several leading U.S. insurers such as ACE, St. Paul Cos. And Hartford Financial Services recently disclosed multi-billion dollar “top up” reserve adjustments relating to asbestos exposures. The reason for this sudden “hive of activity” around asbestos is that a new wave of litigation – of which many filings are in the form of class action suits – has hit primarily the U.S. courts (although the U.K. and other global jurisdictions are becoming hot spots) through non-product type cases.

A report compiled by GeneralCologne Re notes that the majority of asbestos cases before the U.S. courts are now non-product related with “non-traditional defendants” paying about 60% of asbestos expenditures. Furthermore, a report issued by Fox-Pitt, Kelton suggests that around 85% of the current asbestos claims are from claimants showing no signs of related injury or sickness. The litigation shift from products liability to non-products liability has opened the door for many U.S. insurers engaged in commercial general liability (CGL) covers to be attacked, the report observes. “Insurers that wrote large,
national-account general liability coverages during 1950-1985 and their reinsurers are most exposed to this shift [in litigation approach]…We expect the focus on the asbestos issue to continue to intensify.”

The “dirty dozen”

Asbestos litigation began with actions taken against producers of the material. As early as the 1930s, asbestos was recognized as a toxin which could manifest over time to cause cancer-related afflictions such as “mesothelioma”. In order for asbestos to be harmful, it has to become “friable”, in other words, turned into a dust form that can be inhaled.

The 1980s saw a wave of personal injury cases taken up against U.S. producers of asbestos which culminated in the top 12 companies, or the “dirty dozen”, being forced into bankruptcy. Insurers incurred multi-billion dollar claims costs under product liability policies. In 1989, the U.S. Environmental Protection Agency (EPA) banned the manufacture, importation, processing and selling of most products containing asbestos (although asbestos is still used in minute quantities in many products and remains resident in older building structures).

With the financial resources of the asbestos producers having been largely exhausted by the 1990s, the litigation pressure through asbestos liability began to ease off, and insurers breathed a sigh of relief. The resurgence of asbestos litigation in the U.S. over recent years was sparked by a new approach by the plaintiffs’ bar to attack “non-traditional” defendants (those who still had money, and range from auto manufacturers, textile producers to roofing installers – the list is endless) who sold or serviced products containing asbestos. The GeneralCologne Re report notes that asbestos risk now falls into two main streams: “The handling of old products containing asbestos and the production of new products containing some amount of the hazardous substance.”

Defense counsel in turn began to look at other insurance covers than product liability that could be triggered – they found it in “premises/operations” coverage. This exposure has become a major area of concern for insurers underwriting CGL policies with regard to the “when and where” that liability could be attached, and how the courts would deem the appropriate “trigger” of coverage and allocation of burden where more than one policy was in effect during the alleged period of contact by the plaintiff to asbestos.

Also, a recent landmark ruling handed down by the House of Lords in the U.K. that it would not be necessary for plaintiffs to prove which place of business they came into contact with asbestos dust resulting in an affliction has also set off warning bells. Before, the plaintiff(s) would have to establish proof that they became afflicted during the employment of a specific employer (mesothelioma normally only develops 20 years after contact with asbestos). The new ruling states that compensation will now be split proportionally between all defendants found to be liable(the proportion of compensation will depend on the amount of time the employee worked at each place of business with an asbestos exposure).

Canadian reinsurance concern

“The U.S. is like storm clouds on the horizon,” says Brian Gray president of Swiss Re Co. Canada. His comment relates to the relatively low profile that asbestos liability has attracted in Canadian courts as well as being a low priority concern for local insurers. But, he notes, the litigation shift south of the border does present concerns for the Canadian marketplace – namely the move from product to non-product liability. “The concern now is, who are the potential claimants? It’s almost impossible to identify them. A whole new wave of defendants are being targeted by the plaintiffs’ bar, and clearly there’s a concern that this shift is being focused on ‘solvent policies’.”

Another factor is the growing acceptance of class actions within Canada. There are five provinces in Canada that allow class action suits, and Alberta is not far behind in joining this move, Gray notes. “We can’t prove that asbestos liability is going to become a huge problem in Canada, but then the same thing applies to an earthquake in Vancouver – we all know that there is the potential for significant exposure there.” In this respect, he believes that the risk of asbestos exposure in Canada has been greatly under-rated, and that insurers could face significant long-term under-reserving in the event that the form of litigation gripping the U.S. takes hold locally. Plus, he observes, the risk is not only “Canadian specific”, but whether an increased number of Canadian issued policies may have to respond to U.S. cases where Canadian businesses are implicated through dealings down south.

As a result, Swiss Re is currently engaged in discussions with primary clients to identify what exposures might exist, and what actions are being taken to mitigate this exposure. “This is really more a primary company concern than reinsurance because of the number of potential claimants insurers could face. We’re trying to determine our clients’ exposures.” Gray says that these discussions have revealed “some awareness” at the primary company level of asbestos risk, but “there is really not enough concern out there”.

Gray concedes that the Canadian legal environment with regard to workers being exposed to asbestos-causing illness is different to the U.S., due to the fact that workers’ compensation locally is government-run whereas down south it is private. “Clearly there are exposures that won’t apply here, but we are worried about the shift to non-product litigation like premises/operations coverage under CGL policies. Our whole business is about ‘probabilities”. By the time we know the cost, it’s too late. Is asbestos liability going to cost a lot of money in Canada, we don’t know, but there is that possibility.”

Gerry Wolfe, chief agent for Canada at General Reinsurance Corp., holds similar concerns for the Canadian market. “Who knows what the legal climate in Canada will look like five to 10 years from now?” Wolfe’s premise is that now is the time to address outstanding dangers/concerns while the opportunity still exists. A return to weaker pricing, coupled with unexpected future major losses arising from an area such as asbestos liability could prove devastating for some companies. General Re is also in the process of evaluating potential asbestos exposures with their primary clients. “I think it’s a case of the better the devil we do know than don’t know. We should have been addressing issues like asbestos years ago.”

Notably, Wolfe points out that the shift in U.S. asbestos litigation has raised numerous concerns applicable to the Canadian marketplace. For instance, insurer exposures could exist through errors and omission (E&O) claims relating to the property management sector where it is discovered that a building under management is contaminated, and investment values plummet. The spread of litigation from asbestos producers to a host of potential new claimants means that we have turned a corner where identifying the source of potential exposure is unknown, he adds.

Furthermore, Wolfe is also troubled by the type of policies issued in Canada. Most CGL policies in Canada are issued on an “occurrence” basis, he notes, as opposed to “claims-made” which the former means that coverage can be triggered from the first exposure to the hazard through to the date of discovery of the damage. The claims-made provision limits the exposure to a specific time frame. Although CGL policies are issued on an occurrence basis in the U.S., these coverages tend to hold specific asbestos exclusions, he notes. And, when writing occurrence trigger CGL/umbrella policies, there is always the concern with “stacking limits”, he adds. Furthermore, the concern with asbestos is not just indemnity related, but as well the legal and defense costs which could escalate if insurers are faced with new suspected cases, Wolfe comments.

Asbestos claim triggers

There are four theories that can be used to trigger coverage with regard to asbestos claims, (based on definitions from N
ils Publishing). These are:

Injury in fact – if it can be proven that an injury or damage predated its discovery, coverage can be triggered under any and all policies in effect during the time the damage developed;

Exposure theory – indicates that every policy that was in effect while the person came in contact with the pollutant or hazard must respond to the loss;

Manifestation theory – stipulates that coverage for an injury or illness is invoked or triggered at the time the loss becomes apparent (when the symptoms of illness have manifested or when the loss should have been discovered);

Continuous trigger – known as the “triple” or “multiple” trigger, means that coverage is extended from the time of the first exposure to the pollutant or hazard through to and including the date of discovery of the damage.

Canadian legal environment

A report compiled by solicitors Rogers, Moore on behalf of GeneralCologne Re notes that there have not been many asbestos-related cases that have gone before the courts in Canada. “The number of asbestos cases which have been litigated and reported in Canada is fairly small. One of the reasons for our relative tranquility in the area is undoubtedly our publicly funded healthcare system,” observes the report’s author Allyn Abbott.

The Rogers, Moore report focused primarily on Ontario, noting that class actions are a relatively new development within the province, which could be one reason why issues such as asbestos have not been as prominent in the province’s courts. Furthermore, each province in Canada has its own “limitations period” applying to negligent actions. In Ontario, the report comments, this limitation is six years, which would restrict the scope for asbestos claims. However, the limitation period can be extended under the “discoverability principle” if evidence suggests that the cause of injury could be shown to predate this period. “In most asbestos related personal injuries, this would be from the time that the plaintiff’s symptoms were diagnosed by a physician to have been the caused by exposure to asbestos.”

The report also refers to the recent U.K. court decision, noting “you have drawn our attention to a House of Lord’s decision which held that a plaintiff could sue multiple employers even if it was impossible to tell which employer caused the exposure to asbestos which resulted in the plaintiff’s disease. I think our courts, given the right situation, would follow that decision. As long as a plaintiff can prove that each defendant materially contributed to the risk of injury, it is likely that the court would apportion liability between them.”

The Rogers, Moore report also observes that the Workers’ Compensation Board can subrogate losses incurred against other parties. The other public health insurance authorities have the same subrogated right to claim payments made on behalf of an injured plaintiff outside of claims relating to motor vehicle accidents, it adds.

Furthermore, Rogers, Moore notes that policy exclusions are strictly construed by the courts so that the insured gets the benefit of any ambiguity. They therefore suggest that, in implementing any form of an asbestos exclusion, insurers should also offer an endorsement for coverage at a higher premium. “If an insured has turned down the opportunity of coverage for asbestos related claims, that gives one more piece of evidence of the intentions of the parties to the insurance policy.”

A senior claims manager, speaking “off the record”, notes that main two factors hinder an explosion of asbestos liability claims in Canada. The first being a shortage of professionals in the field available to the plaintiffs’ bar to provide evidence, and the second being the limited population size relative to the U.S., and therefore the scope for more cost-effective class actions. “There are about 10 toxicologists in Canada whereas in the U.S. there’s no shortage, just in Washington there are thousands of them. In the U.S., there’s money to be made from suing people. You can’t make a living being an expert witness in litigation in Canada, you’d starve to death.”

And, observes Dr. Torgny Vigerstad, director for scientific investigations at Cunningham Lindsey, the high cost of litigation in Canada, particularly consumer product litigation, acts as a deterrent against opportunistic claims. From a workers’ exposure perspective, Vigerstad points out that the vast majority of Canada’s provinces have detailed guidelines with regard to the handling of asbestos, whether it be in removal, etc. “If everyone follows the rules, then there shouldn’t be any claims arising from workers’ compensation.” Vigerstad concurs with the above view that the relatively small population of Canada limits the potential for “wide-scale” asbestos litigation, as well as potential exposure to the toxin. “The potential for strict liability is small because of the population size and the expected exposure levels.”