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Mesothelioma News | 2001
Asbestos harms corporate health as lawsuits grow
Since October, three major firms have filed for bankruptcy protection from asbestos claims.
Even brief exposure to asbestos can kill. For Crown Cork & Seal Co. Inc., it has been financial poison. In November 1963, the Philadelphia packaging company purchased a cork company with an insulation business that made one product alleged to have contained asbestos. Crown Cork sold the insulation division three months later.
Even today, Crown Cork is paying dearly for that fleeting association with the asbestos industry. Crown Cork spent $90 million out of cash flow last year - more than it spent during the previous 20 years - settling claims by individuals alleging harm from asbestos. The increased payments have come at a terrible time for Crown Cork, which has struggled over the last two years with a heavy debt load from a big acquisition coupled with weak financial performance. Its bonds were downgraded in November to junk status.
Crown Cork is just one of more than 100 companies ensnared in a medical and legal nightmare stemming from the widespread use of asbestos from the 1940s to the 1970s in ships, power plants and other buildings. A fibrous mineral, asbestos has three extraordinary characteristics: It works as an insulator for heat and electricity; it resists chemicals; and when inhaled, it causes cancer and other illnesses that can take decades to develop.
Within the past three months, three major U.S. companies - Owens Corning in October, Armstrong World Industries Inc. in December, and G-I Holdings this month - have sought bankruptcy protection to resolve liabilities stemming from asbestos-containing products that they stopped making or selling decades ago.
The tentacles of asbestos litigation appear to be spreading. In September, a New York jury ordered Sears, Roebuck & Co. to pay $1.5 million to a 78-year-old man. It found that asbestos contained in building materials bought at Sears 50 years ago contributed to his case of mesothelioma, the worst form of asbestos disease.
Every company that is a defendant in asbestos litigation finds a cloud over its business operations. The lawsuits sop up cash flow, diverting money that could be used to develop new products, hire new employees, and build new plants. And stock and bond values tend to fall because Wall Street loathes the uncertainty of a liability that seems to have no end.
Most companies have had at least some insurance coverage for asbestos-related costs. The insurance industry estimates it has paid out $20 billion to settle claims and expects to pay $10 billion to $30 billion more.
Before his company filed for bankruptcy in December, Michael D. Lockhart, chief executive officer of Armstrong Holdings Inc., said: "We're struggling because the current system does not allow companies to adequately defend themselves because of the risk of huge punitive damages."
Since the onset of asbestos litigation in the early 1970s, more than 550,000 claims have been filed, Credit Suisse First Boston estimated in a November report. The report also estimated that roughly 390,000 to 750,000 more claims remain to be filed by people who were exposed to asbestos.
A 1997 U.S. Supreme Court decision has contributed to the resurgence of asbestos litigation. That year, the court struck down a $1.3 billion class-action settlement that had been forged in Philadelphia in the early 1990s.
Companies have to deal with cases "one at a time in this endless string," said Jean Eggen, a professor at the Widener University School of Law who specializes in toxic tort.
Plaintiff lawyers say the number of claims is going down. However, observers from the insurance industry and Wall Street say trial lawyers have become more aggressive in looking for plaintiffs, some courts have lowered the level of admissible claims, and law firms have been seeking higher settlements.
G-I Holdings of Wayne, N.J., which filed for bankruptcy on Jan. 5, struck back last week with a lawsuit against three law firms, accusing them of racketeering for bringing an "avalanche" of "meritless" asbestos complaints.
At least 26 firms with asbestos connections have gone bankrupt since 1982. Most companies settle claims out of court because they say the risk of a jury awarding large punitive damage awards is too great.
A reorganization under Chapter 11 of the bankruptcy code is the only way a company can isolate its operations from its asbestos liabilities. The recent bankruptcy cases put additional pressure on the remaining defendants because payments stop during a bankruptcy proceeding. The overall liability of the defendants, which Credit Suisse has estimated at up to $50 billion, remains the same. It is just spread out over fewer companies.
Typically, as part of an asbestos-related bankruptcy case, the court sets aside a trust fund for asbestos claims. The victims do not get as much compensation from bankrupt companies, plaintiff lawyer Martin Greitzer said. "But as least through Chapter 11, you can set up a system that takes care of the present people and future victims," Greitzer said.
Companies and some judges say a legislative solution is the only answer. A precedent for that is the federal Black Lungs Benefits Act of 1972.
A measure in a congressional committee, the Fairness in Asbestos Compensation Act, would bar punitive damages in asbestos liability cases and move lawsuits out of the courts into a new federal agency. It would also establish strict medical criteria for claims.
"The problem with the legislative solutions is that they start out from the wrong premise: That there is a crisis out there," said Greitzer, a Center City lawyer who has been involved in asbestos litigation since 1974. "There is no litigation crisis," Greitzer said. "There is something basically unfair about saying that you can go to court if you're in an automobile accident, but that if you have asbestos disease, you have to go through a system that the companies designed," Greitzer said.
Supporters of reform mention what the litigation is doing to corporate health. "We are at a point where it does not seem to serve the common interest . . . to effectively execute the corporation because it has this problem," said Neal D. Colton, chairman of the bankruptcy, insolvency and restructuring department at Cozen & O'Connor.
Many companies have emerged from asbestos-related bankruptcy. In fact, Johns Manville Corp., which declared bankruptcy in 1982, emerged from bankruptcy in 1988. Once the world's largest asbestos manufacturer, it is about to be acquired by Warren Buffet's Berkshire Hathaway Inc.
In 1963, Crown Cork bought Mundet Cork Corp., of North Bergen, N.J., for its cork business. This was in the days when metal bottle caps still had a cork liner. Three months later, in February 1964, Crown Cork sold Mundet's insulation business. One of Mundet's insulation products may have contained asbestos, Crown Cork said. Baldwin-Ehret-Hill, the company that bought the insulation division, soon went bankrupt, and Crown Cork has ended up liable for asbestos claims against Mundet.
Since the late 1970s, Crown Cork has been settling those claims - usually as one of up to 20 companies sued by a person alleging asbestos-related illness. Crown Cork settled about 70,000 claims for around $40 million from 1985 through 1997, for an average of $571. In the last three years, the average settlement was $1,876, according to figures from the company.
The impact of that increase became most severe after the October bankruptcy filing by Owens Corning, which stopped that company's asbestos-related payments and shifted more of the burden to remaining companies including Crown Cork. Moody's Investors Service downgraded Crown Cork's debt to junk-bond status, making it more costly for the firm to borrow money.
Crown Cork's higher payments are "hitting the company when it's vulnerable," Christophe Razaire, a Moody's analyst, said. In response to the financial squeeze caused by the ratings downgrade, the company last month suspended its 25-cent quarterly dividend, freeing up $126 million annually to put toward its debt, which stood at $5.1 billion at the end of the third quarter.
The stock market also turned sour. Crown Cork's shares traded for as little as $2.94 in early December, before bouncing back to around $9 by the end of the year. They closed on Friday at $8.50.
Crown Cork is negotiating a renewal of its $2.5 billion bank credit line and hopes to have something lined up well before the line expires next year, said Crown Cork's senior vice president for finance, Timothy J. Donahue. "We think a solution is very workable with our bank group," said Donahue, who was 1 year old when his employer made its ill-fated acquisition of Mundet Cork.
Some company insiders have been expressing confidence in the company's future. John B. Neff, who ran the Vanguard Windsor fund for 31 years and now sits on Crown Cork's board, bought 100,000 of the company's shares in November. William J. Avery, Crown Cork's chairman and longtime chief executive officer, bought 25,000 shares in early December.
But the future of asbestos litigation is uncertain, credit analyst Razaire said. "No one is sure whether the pool [of potential plaintiffs] has been fully explored."
