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Mr. Edmund F. Kelly
June 7, 2006
Testimony of Edmund F. Kelly
Before the Senate Judiciary Committee Hearing on S.3274
Thank you for the opportunity to testify and to work with you to address the asbestos litigation abuses that have resulted in denying sick claimants their just compensation, bankrupted approximately seventy companies and jeopardized a bedrock principle of American justice; namely, all parties involved in the tort system will be treated fairly and no one person, whether an individual or a corporation, will get special treatment. It is this fundamental principle that protects a corporation, whatever its size, and guarantees that it will have its "day in court" so that, when there is a valid claim, it will be judged on its own conduct and assessed its fair share of any wrong it caused.
The question we have all wrestled with is would the Trust Fund as envisioned in the Fair Act work? To answer that question we need to look at four issues: (1) Is the Trust Fund fair and equitable? (2) Does it provide an exclusive remedy for all asbestos claims? (3) Is it viable and sustainable so that it provides "global peace" for asbestos victims, asbestos defendants and asbestos insurers at a known cost? (4) Is there a better alternative to the Trust Fund with a proven record of success? When originally proposed, the Trust Fund's purpose was to extinguish all asbestos-related tort system liability in exchange for a simple, no-fault administrative system at a single fixed price fair to all contributors. I will now address in turn each of these issues to determine if S.3274 meets these goals and, if not, what should be done in its place.
(1) Is the Trust Fund fair? As originally contemplated, each participant - whether a defendant or an insurer - would contribute to the Trust Fund based upon its relative share of liability in the tort system. No participant would receive special treatment to the disadvantage of another participant. This over-arching principle of fairness was absolutely fundamental to the integrity of the Trust Fund because the fault-based tort system was being replaced by the no-fault Trust Fund. That core principle of fairness, however, has now been violated. Rather than have the Trust Fund allocate payments to correspond to liability, the Trust Fund guarantees a complete windfall to certain Fortune 100 companies facing significant asbestos-related exposure. For example, one such company, whose own projections estimated its future asbestos liability at $1.6 - $2.2 billion for the next 15 years, will only pay $378.5 million for the next 30 years under S.3274. The recent settlements of Owens Corning and USG further prove the gross inequities embedded in this legislation. In January, USG settled its asbestos liability for $4 billion and, less than a month ago, Owens Corning settled for $5.2 billion. Both of these settlements, which occurred in the context of a bankruptcy court, have FAIR Act "carve-outs" or exceptions which, in the event of enactment of the Trust Fund, extinguish billions of dollars of obligations and reduce their remaining payments to $378.5 million. While that is good news for these companies, it is grossly unfair to the rest of the defendants. Under this wealth transfer, companies with dramatically lower revenues and dramatically lower asbestos exposure will be called upon to pay not only their own share, but now be obligated to pay a much greater amount solely because of this multi-billion dollar windfall to a few Fortune 100 companies. A corporate bailout, to enrich a few companies at the expense of numerous other companies, is unacceptable as both a business proposition and a matter of public policy.
Collectively, these windfalls are the antithesis of fairness. As the CEO of a mutual company, I cannot support legislation that hurts our policyholders - many of whom are smaller companies who will be required to shoulder an unfair economic burden - and likewise demands that Liberty Mutual pay its policyholders' equity to their and Liberty Mutual's own disadvantage. For example, as David Lascell, principal owner of Hopeman Brothers, Inc., a small company which Liberty Mutual has insured for decades, has testified, Hopeman will be required to absorb a liability on its books for 30 years that is grossly disproportionate to its own liability in the tort system today. It simply is not fair to Hopeman or any other company to have to pay into the Trust Fund an amount of money that does not reflect that company's own liability while at the same time allowing other companies to pay materially less than their own fair share.
(2) Does the Trust Fund provide an exclusive remedy for all asbestos claims? As is apparent throughout S. 3274, there are numerous exceptions that allow asbestos claims to continue outside the Trust Fund thereby violating the second cornerstone principle of the Trust Fund; namely, the Trust Fund would be the sole remedy for all claimants and the sole obligation for all participants.
In particular, S.3274 specifically entitles a claimant to recover both (i) an award from the Trust Fund and (ii) benefits under state workers' compensation programs. Consequently, as a result of this "double-dipping", workers' compensation insurers, such as Liberty Mutual, are required to pay twice - once for the Trust Fund awards and again for the workers' compensation benefits. Critically, S. 3274 eliminates the right to offset any workers' compensation benefits because of the Trust Fund awards, an outcome that not only violates and encroaches upon state workers' compensation laws but also will add tens of billions of dollars in costs to the state workers' compensation system. By preventing the operation of state workers' compensation lien laws, the National Council on Compensation Insurance, Inc. (NCCI), using CBO projections, has estimated the ultimate additional cost to state-based workers' compensation systems to be between $39 billion - $88 billion which implies an increase of 20% - 50% in total workers' compensation system reserves. The American Academy of Actuaries, in its September 8, 2005 letter to the Chairman and Ranking Member, predicted equally ominous results.
(3) Is the Trust Fund sustainable and viable? Given that insurers will have paid in their asbestos reserves, it is critical that the Trust Fund be able to sustain itself. Solvency is threatened in two basic and obvious ways: too many dollars paid out or too few dollars paid in. As to the former, diluted medical and exposure criteria, with ineffective efforts to eliminate the very doctors and screening companies who have provided invalid diagnoses in the tort system, serve no legitimate public policy purpose and can only result in the payment of claims that should never be allowed, thereby rewarding vast numbers of unimpaired claimants and dissipating the assets of the Fund.
With respect to certainty about the amount of dollars paid into the Fund, again, there is none. First, notwithstanding repeated requests for public transparency of the funding process and particularly with respect to which defendant is in which tier and subtier, no such information has been forthcoming. It is inconceivable that the funding for at least $90 billion of a $140 billion government-created Trust Fund is a virtual mystery. Without identification of which companies are in which tier and subtier there is no opportunity to challenge the economic forecasts, no basis to believe that such funding exists and no basis to believe that the Trust Fund has any real chance to sustain itself for a few, let alone, 30 years. Second, this violation of the core principle of viability is exacerbated further by the looming constitutional challenges to the Act, the assumption that all defendants will be in business for the next 30 years and able to make their payments for all 30 years - an assumption that ignores the business reality in the global economy - and that the payment obligations of insurers and reinsurers beyond the jurisdiction of United States courts can be enforced. Well-managed and well-reserved companies simply cannot trade their future - and their policyholders' future - for the uncertainty of S.3274.
In the end, the Trust Fund lacks fundamental fairness, no longer provides an exclusive remedy and is not economically sustainable and viable. Because S.3274 fails to meet these three basic tests, Liberty Mutual, the members of PCI and the members of CAR do not support S.3274 - particularly when there are viable alternatives that have been tested and proven to work, alternatives that Liberty Mutual, PCI and CAR very much do support.
In 2003, in the absence of reforms in key states, the seminal silica MDL decision issued by Judge Janis Jack in Texas and the willingness of judges to reject manufactured claims, the Trust Fund was a creative concept that showed great potential. But, we are in 2006. Over the last three years, no doubt motivated by the hard work of this very Committee, there has been a sea change in asbestos litigation which has begun to yield profound results. It is because of (i) the successes at the state level, (ii) the influx of case management orders and inactive dockets in countless jurisdictions, (iii) the changes in case law in, for example, Mississippi and (iv) the impact of Judge Jack's ruling that we have concluded that, while the Trust Fund is now the wrong fix at the wrong time, medical criteria, coupled with venue and case-consolidation reform, are the right fix in the current litigation environment.
Texas is not an isolated situation. To the contrary, no less than 16 states have tackled asbestos litigation abuses, many through legislation, many through inactive dockets and yet others through case law. In addition to Texas, Georgia, Ohio, Florida, Kansas and South Carolina have each passed legislation that imposes medical criteria to guarantee that physical impairment is a predicate to filing an asbestos claim. The following state courts have also reached the same result through either inactive dockets or case management orders that preclude prosecution of a claim without physical impairment: Syracuse, NY; New York City, NY; Baltimore City, MD; Chicago, IL; Boston, MA; St. Clair County, IL; Portsmouth, VA.; King County (Seattle), WA; Madison County, IL; Cuyahoga County (Cleveland) OH; Minnesota (coordinated litigation). The states of Pennsylvania, Maine, Maryland and Mississippi have each resolved the abuses associated with forum shopping or unimpaired claimants through case law.
The beneficial impact of these efforts cannot be overstated. Historically Texas, Ohio and Mississippi have been the leading states to generate claims filed against Liberty Mutual's policyholders, collectively accounting for approximately 80% of the asbestos claims filed against Liberty Mutual's insureds. Since the statutory and judicial reforms in those three key states, the decrease in the volume of claims has been truly remarkable. In Mississippi, the decrease has been 90%, in Texas nearly 65% and, in Ohio, approximately 35%. Across all states, from 2004 to 2005 we have seen over a 50% decrease in the number of new claims filed, a trend that has continued in 2006. These numbers are the best evidence that state-driven initiatives are working and should not be negated by the passage of S. 3274. To the contrary, these efforts should be replicated at the federal level. Rep. Cannon's pending legislation, H.R. 1957: Asbestos Compensation Fairness Act of 2005, with over sixty sponsors, is the model that should be followed. Forum-shopping, case consolidation and ineffective medical criteria cannot be tolerated, especially at the expense of the truly sick. Federal legislation that mirrors these successful models, with conforming changes to the Bankruptcy Code, would eliminate once and for all the historic abuses that have plagued the truly sick, the courts and the global business community.
In conclusion, Liberty Mutual very much supports asbestos litigation reform. However, we believe the Trust Fund embodied in S.3274 is not the solution, as it fails to meet the tests of fairness, exclusive remedy, and sustainability. There is a better solution, one that is proving itself in numerous states - medical criteria and venue and case consolidation reform.