The big guns are being dusted off for the coming congressional battle to rein in runaway lawsuits. Any reform effort will have to blast past the American Trial Lawyers Association, which donated $2.4 million to candidates this last election. But a new study on asbestos shows why reform is desperately needed.
Asbestos was once a wonder product, used up into the 1970s to insulate everything from buildings to wire. Unfortunately, it turns out that breathing asbestos can cause conditions ranging from relatively harmless pleural plaques on the lungs to mesothelioma, a deadly cancer. Victims originally received worker’s compensation, but in 1973 the litigious flood began.
At least 600,000 people have filed suit against 6,000 different companies, estimates the RAND Corporation. Although the number of cases was widely expected to peak a decade or more ago, the number continues to accelerate. The half-dozen largest defendants have seen the annual average number of new cases rise from 15,000 or 20,000 to 50,000; the number of cases filed against the Manville Trust nearly trebled from just 1999 to 2001, to 91,000 cases.
Asbestos has killed and will continue to kill some people. But they are not filing the bulk of the cases.
Mesothelioma and other cancer cases continue to arrive at a roughly constant rate, about 4,000 total. What is different, says a new report by economists Joseph Stiglitz, Jonathan Orszag, and Peter Orszag for the American Insurance Association, “is that the share of total new claimants who are unimpaired has increased sharply.” The percentage demonstrating no impairment has risen from about four percent to three-quarters over the last two decades.
Moreover, with most of the original asbestos producers ruined and bankrupt, creative lawyers keep finding ever less likely defendants. Over the last two years filings against food and beverage companies have risen 284 percent, pulp and paper firms 296 percent, and textile producers 721 percent.
Litigation has already cost $54 billion and total costs could eventually hit $200 billion to $275 billion, according to actuarial consulting firms. No surprise, then, Stiglitz and his coauthors report that “the staggering costs of asbestos liabilities have pushed many defendant companies into bankruptcy or to the brink thereof.”
Through 1998 26 companies went Chapter 11; another 35 did so in the last four years. Fifteen of the latter filed in the first ten months of this year.
Every new bankruptcy places increasing pressure on other firms, because joint and several liability means that a steadily smaller number of companies are liable for all potential damages in an expanding number of cases. Concludes the AIA report: “Such a structure creates a number of perverse effects, including the incentive for firms to declare bankruptcy in order to shift liabilities to other firms (which in turn raises the probability that the other firms will be forced into bankruptcy) and the incentive for claimants to sue as many defendants as possible.”
The bankrupt are not just the obvious candidates, the miners and manufacturers, like Johns Manville. RAND figured that the bankrupt enterprises were involved in 75 different industrial categories.
A study by Prudential Financial notes that “Defendants are increasingly ‘peripheral’”; asbestos “was more or less ‘incidental’ in their products or facilities; [i]f it was in their products, it was enclosed [and] therefore, only a minimal number of fibers were released into the air.” Yet the bulk of the cases are now being filed against such firms.
The costs of litigation are obvious, and fall on companies and insurers alike. But bankruptcy, too, is costly, especially when used by desperate firms with minimal connection to the problem from suits by plaintiffs with no evidence of injury.
Shareholders lose investments and workers lose jobs and pensions. Stiglitz, Orszag, and Orszag estimate that so far the asbestos bankruptcies have destroyed between 52,000 and 60,000 jobs.
Those employees are likely to lose between $25,000 and $50,000, depending upon the time they are unemployed and the kind of new work they find. Those with 401(k) accounts lost an average of 96 percent of the value of their companies’ stock, which ran about a quarter of the overall value of their accounts.
This estimate only applies to bankrupt firms. RAND figured the number of lost jobs at 128,000 when including all corporate defendants. Ever-expanding liability also cuts their stock value, reduces the possibility of mergers, and otherwise hinders business operations.
In sum, say the AIA researchers: “the current system for handling asbestos claims imposes significant costs on the workers (and shareholders) of the defendant firms. Since many of these firms were not asbestos manufacturers, the costs imposed on workers may seem unfair and inefficient from an economic perspective.”
To this expensive anomaly must be added another: As ever more lawsuits are filed driving ever more companies into bankruptcy, less money is available to pay real victims. Notes Julie Rochman of the AIA: “Those people who are sick and dying are getting in some cases five or ten cents on the dollar because money is being shifted instead to people who are not sick.”
Only legislative action can stop this litigious overflow. Congress should set medical criteria for actual illness to create a cause of action for asbestos lawsuits. Those who are healthy today could sue later if they become ill later, but mere exposure would not warrant compensation today.
Requiring evidence of harm reflects the purpose of tort law. Indeed, unlike some controversial “tort reform” measures, this would concentrate rewards on those most severely harmed rather than limit damages.
“Citizens who have suffered from asbestos-related illnesses deserve appropriate compensation,” note the AIA researchers, but, they add in dry economists’ language; “The current system does not appear to [be] an optimal mechanism for doing so.”
No, it is not optimal. Judges are overwhelmed, companies are unfairly charged, and victims are left uncompensated. Fixing the asbestos imbroglio should be near the top of the new Congress’ agenda.
— Doug Bandow is a senior fellow at the Cato Institute.