Dr. Mark A. Peterson

June 4, 2003

STATEMENT OF MARK A. PETERSON BEFORE THE
SENATE JUDICIARY COMMITTEE HEARING ON S.1125
"FAIRNESS IN ASBESTOS INJURY RESOLUTION ACT OF 2003"

June 4, 2003

Mr. Chairman and Members of the Committee, I am Mark Peterson,
and I am submitting this statement to provide data, quantitative
analyses and comments that I hope will aid the committee in its
consideration of the "Fairness in Asbestos Injury Resolution Act
of 2003".

My Background and Expertise

First let me describe my background and knowledge about asbestos
injuries and litigation. For over twenty years I have studied,
written about and participated as an expert in asbestos litigation
and other mass tort litigation. I have worked for four U. S.
District and Bankruptcy Courts as the Courts' expert on how
asbestos claims are valued and on asbestos claims procedures and
trusts. For thirteen years I have been the "Special Advisor to
the Courts" regarding the Manville Trust, serving Judges Jack
Weinstein and Burton Lifland for five years and the Manville Trust
and all of its beneficiaries for the past eight years. I am a
consultant and expert for ten asbestos trusts. I have developed
claims procedures for ten asbestos trusts. I am a trustee of an
asbestos trust. I am a director of a nonprofit corporation that
administers the process for allowing and paying claims for four
asbestos trusts. I have worked as an expert on asbestos
litigation for defendants, insurance companies, actuarial firms,
other businesses, law firms and claimants' committees in
bankruptcy. I have participated as an expert on asbestos
liabilities in over 20 bankruptcies of asbestos defendants.

I have studied asbestos litigation for over twenty years as a
founding member of the RAND Corporation's Institute for Civil
Justice. I have published peer-reviewed scholarly articles on
mass torts, asbestos litigation, claims facilities for paying
asbestos and other mass tort claims, workers compensation and how
medical and legal issues determine the values of asbestos bodily
injury claims and other subjects related to asbestos litigation.
I have taught courses on mass torts at UCLA Law School and the
RAND Graduate Institute. I am a lawyer, a graduate of Harvard Law
School and have a doctorate in social psychology from UCLA. I
have been recognized by courts as an expert on all areas that I
address in this letter and all of my comments come from
scholarship and work as an expert on asbestos litigation.

Asbestos Injuries and Compensation

The burdens and costs of asbestos litigation result from the large
number of persons exposed, injured and killed by their workplace
exposures to asbestos. Twenty five million workers had been
exposed to asbestos in primary asbestos industries by 1980.
Millions more were exposed in other industries and in more recent
years. Diseases caused by these exposures have created a public
health catastrophe. By now 300,000 workers have died because of
their asbestos exposures. Almost as many more will die over the
next three or four decades. Millions more exposed workers have or
will develop asbestosis or pleural disease.

Others have described these diseases. My expertise includes
collection and analysis of data on the "values" of these diseases,
how much money is paid to compensate victims of asbestos related
diseases.

The general values of asbestos diseases are well understood.
There is enormous experience about this. Hundreds of thousands of
claims have been settled by many defendants creating histories of
claim values that are understood by professionals who work with
these cases.

Victims of asbestos disease receive payment from many different
defendants. There is no central database from which we can total
the average payments for each disease across every defendant, so
we cannot simply count up the total of recent settlement amounts
across all settling defendants. But I have reviewed asbestos
claims databases for many asbestos defendants, mostly databases
provided in bankruptcy proceedings of a company's settlements
prior to its bankruptcy, and can add up that portion of their
compensation that victims receive from these defendants.

These databases show that the average recent settlements paid by
eight defendants to mesothelioma victims add up to $900,000. This
$900,000 paid by eight defendants would grow substantially if we
added the rest of the money that victims received from the many
other defendants. For this reason, the best evidence is that
mesothelioma claimants now receive total settlements ranging from
$2 million to $3 million and that lung cancer victims now receive
more than $1 million, ranges reported by plaintiffs lawyers
throughout the country.

Future Asbestos Claims

To date asbestos defendants and their insurers have not been asked
to pay the full costs of asbestos injuries and death, because most
injured workers have not made claims. Among the 300,000 deaths to
date from asbestos related cancers, fewer than a third have filed
law suits.

This is now changing. The number of cancer claims is up sharply.
In recent years the number of claims for each asbestos disease
approaches published epidemiological estimates of the number of
asbestos related deaths for each cancer.

While we must anticipate a high level of future claim filings, we
cannot be certain of the number of future asbestos claims either
within the tort litigation system as it now exists or within a
national fund of the proposed act.

First, forecasting is inherently uncertain. Forecasts of future
claims for specific defendants have been uncertain for many
reasons. For example, eight forecasts for the Manville Trust in
2001 had almost a 4 to 1 range from a low of 747,726 to a high of
2,684,719 claims from 2001 to 2049. Such a range in forecasts is
not unusual. Further, this uncertainty is not symmetrical:
forecasts are more likely to be too low rather than too high.
Past forecasts have been consistently wrong, consistently too low.

Second, the task here is more daunting. We have no data about the
total number of asbestos law suits that have been filed against
any and all defendants. All of our data is about the claims
against specific defendants. There is no central data repository
across defendants. Consequently, we lack the data required by
standard forecasting methods, all of which look to past claim
filings in order to forecast future filings.

Third, the number of claims that will qualify under each category
of the Asbestos Injury Claims Resolution Procedures will depend
greatly upon how those procedures are administered and who
administers them. The Manville procedures are administered by
trustees who have fiduciary duties to both present and future
claimants. The administrators of the Claims Resolution Procedures
under the proposed act will have different duties.

The Proposed Act Shifts Uncertainties and Risks to Victims

Because the National Fund would limit the amount of contributions
by asbestos defendants and their insurers, it shifts risks and
uncertainties to victims of asbestos diseases. Presently in our
legal system when an insolvent defendant becomes unable to pay
asbestos victims or when liabilities are greater than anticipated,
solvent and responsible defendants continue to compensate victims.
In contrast, under the proposed act victims bear the risks that
insolvent defendants will not pay their contributions and that
liabilities will exceed the $108 billion fund limits.

These risks to victims are significant. While ultimate
compensation under the proposed act is uncertain, it is likely
that $108 billion would not be sufficient to pay all claims at
promised levels.

To examine these risks I estimated how much money would be needed
to provide compensation under the act using varying assumptions
about the number of future claims and about the categories for
which claimants may qualify. I assumed 294,800 pending claims,
which I understand is the assumption used both by the AFL-CIO and
the ASG, and that pending claims would have the same disease
distributions as claims pending in current bankruptcies. I used
two alternative assumptions of the number of future claims:
1,903,331 and 2,439,507 which differed only in the number of
asbestosis and pleural disease claims. These assumptions are
consistent with forecasts in current asbestos bankruptcy cases.
To estimate how many victims would qualify for each category in
the proposed act, I used a summary of the experiences of present
asbestos trusts which produces an assumption of relatively "higher
injury severity" for asbestosis and pleural disease claims and an
alternative assumption of relatively "lower injury severity" for
those claims.

I assumed that, contrary to the currently proposed legislation,
future payments would be adjusted for inflation so that all
claimants receive the same real value of compensation, using a
future inflation rate of 2.5 percent from the Congressional Budget
Office. The fund is proposed to compensate victims whose claims
will arise over the next 50 years. Funds intended for such long
periods must be adjusted for future inflation if they are to make
meaningful and equitable payments to future claimants. The
Fund's compensation obligation would be reduced by the present
omission of any provision for future inflation, but even without
an inflation adjustment, the fund could not pay all of its
obligations with $108 billion.

The table below shows the total compensation that would be needed
for pending and future claims under these various assumptions.

TOTAL PROPOSED COMPENSATION
UNDER ALTERNATIVE ASSUMPTIONS
(Billions of Dollars)

Number of Injury Estimated
Futures Severity Compensation

1,903,331 Higher $215
1,903,331 Lower 146

2,439,507 Higher $254
2,439,507 Lower 163

This analysis indicates that under any set of these assumptions
the total amount of money needed to compensate asbestos victims
under the proposed act would exceed $108 billion. Under any set
of these assumptions, some future claimants would go without
compensation. The Fund could become insolvent as early as year
2010 when it would have received claims whose values exceed all of
the $108 billion that the Fund could ever receive. Because the
proposed act has no provision for reserving money for future
claimants, victims who suffer an asbestos disease and file claims
as early as 2010 may expect to receive no compensation. Victims
who had filed claims before them would have already consumed all
of the money to be received by the Fund.

To reiterate, these analyses are estimates based on plausible
assumptions about pending and future claims under the proposed
act. I expect that the Fund's obligations would greatly exceed
$108 billion, but I cannot say with certainty what will happen --
no one can provide certainty. But at a minimum the analyses
demonstrate that there are real risks that a proposed $108 billion
fund would be inadequate and that future claimants would be denied
both compensation under the act and the opportunity to pursue
legal claims for their injuries. Asbestos victims do not face
such a risk now. It is a risk created by the proposed act.

Delays in Payments

There is no uncertainty, however, about the fact that claimants
will have to wait many years to receive compensation under the
proposed act, well beyond the three years that has been suggested.
To examine how the Fund would operate, I ran an analysis of how
long claimants would have to wait for payment if we assumed that
the $108 billion would be sufficient to pay all compensation. The
analysis shows that, assuming an ultimate liability of $108
billion, those asbestos victims who already have claims pending
today will not receive full compensation until year 2011 or 2012,
eight or nine years in the future.

For this analysis I assumed that the proposed Asbestos Injury
Claims Resolution Fund would be operational and initially funded
sometime in year 2005. This is optimistic. Both the claims
process and the funding mechanisms proposed in the act are far
more demanding than those of other, previous mass tort claims
processes which typically have taken years to start.

Then when it begins the Resolution Fund will face a stark
imbalance between its then present obligations for compensation
and the money available to meet those obligations. The Fund's
liabilities would be front loaded while its income would be paid
evenly over at least twenty two years. With its formation, the
Fund will be faced with pending claims which both the AFL-CIO and
the ASG have estimated at 294,800 in number. (I expect that well
over 294,800 persons have pending asbestos claims, but I use this
estimate to provide continuity with work done by others.) The Fund
will also face accrued claims that would have been filed in 2003
and 2004 as well as claims arising in 2005. Even assuming that
these claims would come in and be allowed in amounts that would
produce only $108 billion in total liabilities for the Fund, about
$30 billion of that liability would arise in 2005 from pending
claims and claims forecasted to be filed between 2003 and 2005.
The Fund would be able to fully pay these claims that arrive in
2005 only when it had collected its first five or six payments of
$5 billion per year, the maximum available under the proposed act.
Note that conversion of the assets of existing asbestos trusts
would not relieve the Fund's initial illiquidity. The estimated
$4 billion in assets of those trusts would be small in comparison
to the Fund's early liabilities and, in any event, many of the
assets of existing trusts are themselves illiquid.

More likely the Fund's total liabilities would substantially
exceed $108 billion, its obligations for claims arriving in year
2005 would exceed $30 billion and victims who already have claims
or whose claims arise by 2005 would have to wait beyond year 2011
to be paid in full.

Victims who file after the Fund's first year would face real
threats of even longer delays. During the minimum five or six
years while the Fund is collecting the annual payments that it
will need to pay the claims that arose in 2005, the Fund will
continue to receive additional claims, claims that the Fund could
not pay until it had paid those claims that had arrived in 2005.
So by year 2010 or 2011 when the Fund finally has fully paid its
first year's claims, it will then face a new backlog of five or
six years of filed, unpaid claims. Indeed under some of the
scenarios discussed above, using likely assumptions about the
numbers and categories of claims, victims who file claims in 2010
or 2011 would have to wait to be fully paid until the Fund has
received all of its payments in year 2026. Victims filing later
would never be paid.

Summary

While the creation of a national fund for asbestos victims offers
an appealing alternative to the burdens of current litigation, the
risks of underfunding and certainty of delay seem to make the
current proposal unworkable. Total compensation under the
proposal will almost certainly exceed the $108 billion proposed
funding level, most likely by a great amount. While total
compensation is uncertain, asbestos victims alone would bear the
risk that actual liabilities would exceed $108 billion.

More specifically future asbestos claimants would bear this risk.
The Fund could pay victims who have already filed claims and those
whose claims arise in the next few years. But exposed workers who
develop asbestos disease more than a few years in the future would
have no assurance of payment. Thus the proposed act would
abrogate the protections of Bankruptcy Code Section 524(g). The
proposed act would also turn on its head the assurances of
resolved bankruptcies and the obligations of existing asbestos
trust to treat future claimants equivalently to present claimants.
The Fund would take money that trusts have set aside for future
claimants, pay that money to pending claimants and provide future
claimants with no assurance that they would ever be paid.

The present proposal's failure to provide for inflation
adjustments further disadvantages future victims. If payments are
not adjusted for inflation, a future claimant would receive 22
percent less than current claimants if his or her disease arises
ten years in the future, 39 percent less if her or his disease
arises 20 years in the future.

Both pending and future claimants would bear extended delays.
Asbestos victims who have already filed claims would not be fully
paid until years 2010 or 2011 under any circumstances. Victims
who file claims within the first few years of the Fund would have
similar delays. Victims who file later run the risk of far longer
delays, if they receive compensation at all.

Finally, the Manville Trust's maximum values do not represent, and
were not intended to represent, the full value of asbestos disease
claims across all defendants. These maximum values were set to
provide room for individual negotiations of claims that do not
accept the Manville Trust's scheduled values, and were simply
ratios of maxima used in the earlier Manville Trust distribution
procedures. In fact, claimants who were exposed predominantly
through Manville products and who must look only to Manville for
their entire compensation can and do have their claims valued well
in excess of the Manville maxima. I know of these matters both
because I helped draft the Manville Trust distribution procedures
and because I serve on the Manville extraordinary claims panel
that decides on these matters. Also, because Manville has not
participated in litigation for over 20 years, the notion of a
Manville "share" now has little meaning. When Manville was
participating in litigation, Earl Parker, Manville's general
counsel, estimated that Manville represented about 25 percent of
the liability of all asbestos defendants. Today, because the
liability of other defendants has increased with Manville's
absence from litigation, Manville's "share" would be less than 15
percent.

Thank you for the opportunity to comment on the proposed "Fairness
in Asbestos Injury Resolution Act of 2003". I would be pleased to
provide any further information that would help your committee in
its consideration of the proposed act.

Mark A. Peterson