As Asbestos Claims Continue to Grow, Broker of Settlements Reduces Its Role

By QUEENA SOOK KIM Staff Reporter of THE WALL STREET JOURNAL

Asbestos hasn't been used in products since the '70s but companies are still hurting from lawsuits related to the deadly dust.

Companies say they have paid well over $10 billion in settlements. In addition, 26 major companies have filed for bankruptcy-court protection as a result of asbestos liability. In 1999, there were about 275,000 claims that were either being settled or tried in court, according to Mealey Publication, a legal newsletter that tracks asbestos litigation.

And the issue is far from over. In fact, more claims than ever are being filed, partly because it takes so long -- sometimes decades -- for asbestos-related illnesses like mesothelioma, a deadly cancer of the lining of the lungs, to develop. But also because plaintiffs' lawyers are seeking out more claimants.

In an unfortunate twist, an organization set up to broker settlements for asbestos makers may have inadvertently encouraged attorneys to file even more claims. Set up in 1988, the Center for Claims Resolution in Princeton, N.J., has settled more than 350,000 claims and paid more than $5 billion on behalf of its member companies. But in the past year alone, about a half-dozen companies have filed for bankruptcy-court protection as a result of the influx of new claims. So on Feb. 1, the CCR became the latest asbestos-liability casualty after it stopped brokering settlements at the request of its members.

"With the benefit of hindsight, we can see that it's a kind of 'Field of Dreams' strategy," says David Bernick, an attorney who specializes in tort reform. "If you build a field, the players will come."

Mr. Bernick and other experts don't fault the CCR. Rather, they say the CCR tried to make up for the tort system's inability to resolve the estimated 40,000 asbestos suits filed each year. To do this, the CCR brokered "inventory" settlements or settled claims in bulk before they went to court and with little examination of the claims. What went wrong is that attorneys involved in asbestos liability underestimated the number of suits on the horizon.

Certainly, there have been indications that inventory settlements haven't abated the number of asbestos claims. Babcock & Wilcox, a unit of McDermott International Inc., a New Orleans energy concern, paid $1.6 billion to settle 349,000 claims before its Chapter 11 filing last February. And a program by Owens Corning to settle past and future asbestos obligations didn't keep it out of Chapter 11.

But CCR members like Federal-Mogul Corp. are taking another approach: trying to limit the number of settlements. The Detroit auto-parts maker says it will no longer settle with people who aren't medically impaired or who weren't exposed to its products. In effect, the end of the CCR's shared-settlement arrangement signals the end to an era of open-ended asbestos settlements.

The CCR was created after the breakup of the Asbestos Claims Facility, a group that started in 1985 and represented most of the nation's asbestos producers. Acting as an agent for 35 companies, the ACF resolved lawsuits, often with settlements. As lawsuits named dozens of companies, ACF members could share one lawyer and the costs for processing claims. Most notably, ACF got discounts on settlements from plaintiffs' attorneys because they could negotiate with several companies at once. While in the ACF, companies had to kick in a part of every settlement according to a formula even if they weren't named in the suit. The idea was that it would all even out at the end. And at that time, the end seemed foreseeable. A 1984 study by the Rand Institute for Civil Justice said claims would fade by 2005. But in 1986, experts at Johns Manville Corp.'s Chapter 11 hearing testified the company would get as many as 100,000 asbestos claims through 2049.

By 1988, claims for the ACF's larger members doubled to about 20,000 from the group's inception. Members felt the sharing formula was unfair, and many of the large companies that were hit hardest by claims left. All that remained were 21 second-tier companies like Dana Corp., Armstrong World Industries Inc. and USG Corp., which formed the CCR.

For the first two years, the CCR ambitiously settled many suits, and by 1991, only companies named in the suits paid settlements. But while the number of claims didn't diminish, the quality did, say CCR members. Unlike earlier plaintiffs, who often had fatal asbestos-related diseases like cancer, people filing in the 1990s had minor injuries like lung scarring, say experts. Defendants in these suits say many of these people aren't medically impaired and can function normally.

Plaintiffs counter that the law requires them to file within a year of finding injury. What's more, Dallas-based plaintiff's attorney Fred Baron says, the description "unimpaired" is unclear. "Does somebody have to be on a breathing machine to fit the criteria of impaired?" he asks.

By 1992, members began losing faith in CCR's strategy. The number of injured seemed infinite as asbestos was used in such products as insulation, roofing, boilers and tire brakes. In 1993, USG, a Chicago building-materials maker and member, said it saw its claims rise more than twofold to about 27,000 from 13,000 in 1991.

The floodgates opened in 1997 for companies when the Supreme Court overturned a district court's class-action settlement that required plaintiffs to show specific medical conditions before they could receive a settlement. That year Armstrong saw claims nearly double to 83,000. CCR members fell back on the strategy of settling. Only this time, they had little hope that it bring an end to the claims, and cracks began to form in the CCR's foundation.

G-I Holdings Inc. of Wayne, N.J., formerly known as GAF Corp., urged its fellow members to shift their strategy. At CCR board meetings, G-I proposed that the CCR fight claims of plaintiffs who were unimpaired. But other members disagreed. "People of good conscience differed," says G-I Holdings Chairman Richard Weinberg, "but the CCR strategy did nothing but accelerate settlement of tens of thousands of unimpaired claims and only served to place inordinate financial pressure on all of the members."

CCR's board decided it was safer to stick with settling. In 1998, in one of its few forays into court, CCR was hit with a $48.5 million verdict. As large awards whet plaintiffs' appetites, CCR members felt it was too risky to go to trial. This belief, say defense lawyers, led plaintiffs' attorneys to view the CCR as an easy source of money.

The numbers bear this opinion out. Since the Supreme Court ruling, the CCR said it has seen a five-fold increase in the number of new plaintiffs' attorneys filing suits, says the CCR's chief executive officer, Mike Sheppard.

The CCR started to unravel last year, when G-I dropped out of the organization. The company says it doesn't owe its estimated $200 million share of settlement money. The CCR says companies entered settlements separately and are solely responsible for their share. (G-I has since filed for Chapter 11 bankruptcy protection.) The unresolved dispute worried members, who feared being left with the tab of settlements for companies that left the CCR or filed for Chapter 11.

Then Federal-Mogul said it would go another route. The company says it will fight claims of unimpaired plaintiffs and those who can't prove exposure to its products. CCR's "strategy has been heretofore to settle these early, way before they might go to litigation," says Federal-Mogul chief financial officer, Mike Lynch. "We think the time is to change that strategy."

Other members agree. Today, the onetime emissary has been knocked down to clerical assistant, existing, for the most part, to process claims. It will offer services like connecting members with attorneys and even brokering shared settlements, but it won't be required. Several companies say they probably won't enter shared settlements.

"We'll be pursuing our own corporate strategy rather than a group strategy," says Christopher J. McElroy, senior corporate counsel for USG. "But it's too early to tell how it's going to play out."

Write to Queena Sook Kim at queena.kim@wsj.com