NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Asbestos and the Future of Mass Litigation

"Of the $54 billion already spent on asbestos litigation, about $34 billion went to lawyers. If litigation costs eventually reach $200 billion, lawyers could collect an additional $88 billion."

Legal claims for injuries from asbestos involve more plaintiffs, more defendants, and higher costs than any other type of personal injury litigation in U.S. history. As the litigation bankrupts more and more firms and continues to enrich tort lawyers, the issue has reached Congress, where legislation has been under consideration to establish a compensation fund to resolve the issue. In Asbestos and the Future of Mass Torts (NBER Working Paper No. 10308), NBER Research Associate Michelle J. White reviews the history of the litigation mess and the lessons it provides that may be applicable to other mass torts.

Asbestos was once referred to as a "miracle mineral" for its ability to withstand heat. As a result, it was used in thousands of products, including fireproofing and insulating material in ships, buildings, and consumer products, and in wallboard, flooring, cement, automobiles, clothing, home appliances, and even children's toys. But exposure to asbestos causes cancer and other diseases, including asbestosis and mesothelioma; these diseases take 20 to 40 years after exposure to develop.

Physicians recognized some of these dangers as early as the 1920s. In the United States in the 1930s, asbestos producers and insurers lobbied to make asbestos-related claims for workers' compensation subject to highly restrictive eligibility rules. Asbestos producers such as Johns-Manville Corporation conducted physical examinations of their workers, but did not inform them if they had asbestosis in order to keep down the number of compensation claims. A number of firms engaged in cover-ups and political pressure to hide their behavior. This opened them up to litigation.

By the beginning of 2001, 600,000 individuals had filed lawsuits against more than 6,000 defendants. The total amount that defendants and insurers had spent on resolving claims - including all legal costs - has been estimated at $54 billion. Eighty-five corporations have filed for bankruptcy because of asbestos liabilities and several insurance companies have either failed or are in financial distress. Estimates of the total number of people who eventually will file claims range from 1.1 million to 3 million. Estimates of the eventual cost of asbestos litigation range from $200 billion to $265 billion.

White writes of a number of bad decisions exacerbating the problem. Companies prevented workers with asbestos-related diseases from collecting workers' compensation. Washington did not regulate workplace exposure to asbestos until the 1970s and did little to reduce consumers' exposure to asbestos in products. White argues it was legal liability rather than regulation that eventually caused producers to eliminate asbestos from the marketplace. Yet asbestos litigation continues to grow. Courts allowed uninjured claimants to collect damages and allowed asbestos liability to spread to defendants with little asbestos involvement. Also, in effect they rewrote old insurance policies to increase insurers' liability.

Plaintiffs' lawyers shopped for the most favorable courts, in places such as Texas, West Virginia, and Mississippi. In such jurisdictions, judges are usually elected and plaintiffs' lawyers contribute generously to their campaign funds. Further, high-stake trials attract many out-of-state lawyers, providing extra income for local hotels and restaurants, and increasing the number of courthouse jobs. Lawyers also developed new techniques for mass processing of claims, and substituted new defendants when old ones went bankrupt.

Representing asbestos victims has proved extremely profitable for lawyers. It is estimated that legal expenses consumed about 66 percent of asbestos compensation paid during the 1980s and about 60 percent during the 1990s. Based on these figures, of the $54 billion already spent on asbestos litigation, about $34 billion went to lawyers. If litigation costs eventually reach $200 billion, lawyers could collect an additional $88 billion.

White notes that, "regulation and liability are related in the sense that, the worse is the regulators' failure, the stronger the courts' reaction is likely to be." Judges and juries respond to attempts to cover up the impact of highly dangerous products by punishing producers with massive compensatory and punitive damages. Asbestos is very unusual as a mass tort because it was used in thousands of products, exposing millions of plaintiffs to harm. Moreover, thousands of defendants and hundreds of insurers were potentially liable. So once the litigation got started, it spiraled out of control. The same scenario is unlikely to happen for other mass torts, suggests White, though plaintiffs' lawyers have been searching for the next asbestos for years now.

The two methods that the U.S. legal system has developed to collectively resolve mass torts - bankruptcies of defendant firms and class action settlements -- have not worked for asbestos litigation. This is because when one asbestos defendant went bankrupt, plaintiffs' lawyers found other non-bankrupt defendants to sue, thus shifting the litigation pressure to new sectors of the economy. Also, the large numbers of asbestos plaintiffs, defendants and insurers make it nearly impossible to reach a voluntary agreement on a class action settlement.

This suggests that Congress eventually will have to pass legislation to resolve the asbestos crisis, White writes. But the current bill is stalled over the same issues: deciding on how much compensation asbestos victims will receive and how much individual defendants' and insurers' must pay.

The legal techniques and precedents that lawyers developed for asbestos litigation are likely to be applied to other mass torts in the future, making them more common and more expensive, White warns. But because managers tend not to look far into the future, if they can increase profits for 20 or more years by using dangerous substances, "they are likely to ignore the high price that their firms and society will eventually pay," she writes.

-- David R. Francis


The Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.
 
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