This article is a sequel to the April 2003 Toxins-Are-Us article² that discussed developments on the legislative front for cleaning up the "elephantine mass"³ of litigation initiated by thousands of alleged victims of unlawful exposure to asbestos. Since the April article, asbestos legislation has remained very active in the Senate. However, while some progress has been made on the legislative front, the fate of asbestos legislation remains as tenuous as it was five months ago.

Background

The prior article detailed the global unhappiness among asbestos plaintiffs, defendants and the courts with the present state of the tort system. Plaintiffs are waiting years for their claims to be adjudicated. Furthermore, even those plaintiffs who ultimately win in the courtroom are sometimes left with a hollow victory because many defendants cannot afford to pay them. Even worse, true victims often die before their day in court. Meanwhile, the defendant businesses are faced with the overwhelming tasks of determining what their actual liability is and trying to create the revenue to pay for that liability. Many seek refuge in the bankruptcy courts. The court dockets are overcrowded, and they lack the manpower, resources and time to adjudicate the massive number of asbestos claims. In sum, one would be hard-pressed to find someone who is happy with the present environment of asbestos litigation.

In an attempt to address this universal disdain for the asbestos tort system, Sen. Don Nickles (R-Okla.) introduced the Asbestos Claims Criteria and Compensation Act of 2003⁴ on Feb. 14, 2003. While Nickles's asbestos bill was well-intended, it failed to gain popularity after being referred to the Senate Judiciary Committee. Now, Nickles's asbestos bill is all but forgotten as a new bill has become the focus of the Senate.

Recent Legislative Development: The FAIR Act

On May 22, 2003, Sen. Orrin Hatch (R-Utah) introduced the Fairness in Asbestos Injury Resolution Act of 2003, or the FAIR Act.⁵ In a nutshell, this legislation provides for the creation of a finite trust fund to pay for asbestos liability claims that asbestos victims will submit to a special court created by the FAIR Act.

Legislative History

On June 4, 2003, the committee heard testimony from a number of other senators, doctors and professors who are highly familiar with the asbestos litigation crisis. The FAIR Act was considered by the committee during executive business meetings in June. Various amendments and revisions were reviewed and considered by the committee. Finally, on July 10, 2003, the committee approved the FAIR Act by a roll call vote of 10-8 (with one abstaining).

Summary of the FAIR Act

The FAIR Act removes existing asbestos actions from the current tort system and allows them to be administered on a no-fault basis with the U.S. Court of Federal Claims through the Office of a Special Asbestos Master. If a claim examiner, under the direction of a Special Master, determines that a claim is eligible based on standardized medical criteria, then that claim is eventually paid by proceeds from a federal trust fund. Essentially, the fund functions in two parts: (1) it collects and manages contributions received from defendant businesses and their insurers, and from existing asbestos compensation trusts such as those established in confirmed chapter 11 plans of bankrupt asbestos defendants, and (2) the fund uses the aforementioned contributions to compensate claimants who can demonstrate eligibility according to standardized medical criteria.

The $108 Billion Question: Who Foots the Bill?

Capitalizing the fund has remained the most contentious issue surrounding the FAIR Act. Currently, the fund will be capitalized with four "layers," including a primary layer consisting of mandatory contributions and three back-up layers in case the primary layer runs dry prior to paying out all of the valid claims.

The primary layer requires $108 billion in mandatory contributions from participating defendants and insurers and from existing trusts.⁶ Four billion of the primary contributions will come from existing confirmed asbestos trusts, while the remaining $104 billion will be evenly divided among the defendant businesses and the insurers. The fund participants will make their portion of the $104 billion in mandatory contributions to the fund on an annual basis over a 27-year period.⁷

While the defendant businesses and the insurers will each be contributing $52 billion in the aggregate, the procedure for determining the amounts for each contributor within the two groups differs. The contribution of each participating defendant business depends on how the defendant is classified under a two-tiered system. This system assigns the defendant to certain tiers and sub-tiers that identify how much of an annual contribution the individual defendant must make into the fund.⁸ Factors that determine the individual defendant's tier classification primarily include its past asbestos expenditures and the defendant's revenues, although exceptions such as undue hardship or severe inequity are also considered.⁹ In contrast, the contribution of asbestos insurers are determined by a separately commissioned entity, the Asbestos Insurers Commission, rather than being classified under a tier system.¹⁰ The insurers have the option of reaching an agreement among themselves and submitting that agreement to the commission for approval.¹¹ If such an agreement is not reached or is not approved by the commission, then the commission will consider several factors to determine the contributions to be made by the insurers.¹² These factors include premiums collected from asbestos policies, losses paid, amounts in reserve and potential future liability.¹³

There are three secondary layers of funding. The first of these is the fund administrator's ability to access monies from three different sources.¹⁴ One source of money for the administrator is additional money in a guaranteed payment account.¹⁵ The funds in the guaranteed payment account are derived from mandatory surcharges collected from the defendants and insurers participating in the fund.¹⁶ The second source consists of funds in an orphan share account containing contributions paid in excess by the defendants and the insurers to cover certain foreseen losses such as those resulting from participants that go through chapter 11.¹⁷ The third source is the administrator's ability to borrow from banks in the event the fund is faced with certain short-term losses.¹⁸ The borrowing amount is capped based on the amount of anticipated contributions for the year subsequent to the borrowing year.¹⁹

The secondary funding allows the administrator to adjust the contributions to be made by the fund participants after five years in the event that the administrator determines that the fund is encountering difficulty paying claims.²⁰ The FAIR Act schedules a gradual reduction in the amount of the contributions paid by the fund participants after the first five years of the fund's existence.²¹ However, if the administrator certifies that the fund is struggling to pay claims, then the administrator may elect to freeze the scheduled reduction. This freeze in the reduction will bring in revenue that is in addition to the mandatory $108 billion.²²

The third layer of funding comes from "back-end payments" by fund participants.²³ After 27 years, the fund's participants will no longer be required to pay mandatory contributions to the fund. However, there is a chance that a certain number of claims may still be unresolved. In the event that unresolved claims still exist after 27 years, fund participants have the option of paying back-end payments into the fund to handle these claims, or they can elect to have the remaining claims resolved in federal court.²⁴

Benefits and Criticism Associated with the FAIR Act Benefits

If enacted into law, the FAIR Act may provide several benefits to all of its parties in interest. First, a federally administered trust fund will siphon existing claims from the present tort system into an administrative funding system that will likely compensate claimants more quickly. Second, defendants and insurers will likely benefit from the finality and pseudo-predictability established by the fund's scheduled contributions. Third, claimants may benefit because the FAIR Act replaces expensive and time-consuming tort litigation with a more efficient system that has fewer transaction costs. Fourth, claimants will also benefit because they will not be required to prove causation like they would in a traditional tort suit for negligence. Fifth, the participating defendants will benefit because the fund will be financed through a structured payment scheme involving defendants and insurers with asbestos liabilities. As long as these payments are made into the fund, these contributing participants are immune from the tort system with regard to asbestos personal injury claims and its inherent pitfalls. Sixth, overburdened courts will be relieved from their crowded dockets. Finally, this structure brings finality and certainty to all parties in interest.

Criticism

While criticism and concerns ranging from the FAIR Act's constitutionality to its tax implications remain unresolved, the single biggest threat to the FAIR Act's enactment into law involves criticism concerning its amount of funding. For months, supporters of the labor industry have argued that the fund should collect somewhere closer to $200 billion in mandatory contributions.²⁵ However, based on testimony given before the committee and other studies also used by the committee, supporters of the FAIR Act believe that the amount of the fund is adequate.²⁶ Both sides appear to be firmly entrenched in their view on the funding issue; consequently, it is unlikely that the amount of funding will be changed.²⁷

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While criticism and concerns ranging from the FAIR Act's constitutionality to its tax implications remain unresolved, the single biggest threat to the FAIR Act's enactment into law involves criticism concerning its amount of funding.

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Also, the once-strong support for the FAIR Act expressed by industry groups is now wavering. Prior versions of the FAIR Act called for the defendant businesses and insurers to give $45 billion in mandatory contributions to the fund.²⁸ However, shortly before its approval by the Senate Judiciary Committee, the amount of mandatory contributions to be made by the defendant businesses and insurers was increased by $7 billion each. As a result of this funding increase, support from the fund's primary contributors is now in question, as a spokeswoman for the insurance industry recently stated that the insurance industry could no longer back the bill because of the $7 billion increase.²⁹

Conclusion

Just as it was five months ago, the fate of much-needed asbestos litigation reform in the 108th Congress is still an unknown. On the one hand, much progress has been made as evidenced by the Senate Judiciary Committee's approval of the FAIR Act, a piece of legislation that seemingly offers many benefits that would improve the present asbestos tort systems. However, these foreseeable benefits may not be enough to get the FAIR Act passed into law if the parties affected by the FAIR Act cannot agree on the issue of capitalizing the fund. Therefore, barring an eleventh-hour surprise compromise, the fate of the FAIR Act will remain uncertain until it reaches the Senate floor after Congress's August recess.

Authors' Note: The full text of the FAIR Act can be viewed by accessing the Library of Congress's online search engine at http://thomas.loc.gov/. On this web page, enter "S 1125" as your search query for bill text of the 108th Congress. Then select the version of the bill that was "reported in the Senate." (emphasis added).

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Footnotes

¹ Board-certified in business bankruptcy by the American Board of Certification. Return to article

² Ames, John W. and Stosberg, Andrew D., "The Latest on Reform Efforts to Curtail Asbestos Tort Litigation," ABI Journal (Toxins-Are-Us), April 2003. Return to article

³ Ortiz v. Fibreboard Corp., 527 U.S. 815, 821, 119 S.Ct. 2295 (1999). Return to article

⁴ S. 413, 108th Cong. (2003). Return to article

⁵ S. 1125, 108th Cong. (2003). Return to article

⁶ Id., §§202 and 203. Return to article

⁷ Id. Return to article

⁸ Id. Return to article

⁹ Id. Return to article

¹⁰ Id., §212. Return to article

¹¹ Id. Return to article

¹² Id. Return to article

¹³ Id. Return to article

¹⁴ See §222 of the FAIR Act for a description of the fund administrator's powers and duties. Return to article

¹⁵ Id., §223. Return to article

¹⁶ Id. Return to article

¹⁷ Id. Return to article

¹⁸ Id. Return to article

¹⁹ Id. Return to article

²⁰ Id. Return to article

²¹ Id. Return to article

²² Id. Return to article

²³ Id. Return to article

²⁴ Id. Return to article

²⁵ ABI E-News Legislation Update, http://www.abiworld.org/e-news/05-23-03.html. Return to article

²⁶ See, e.g., Carroll, Stephen J., et al., Asbestos Litigation Costs and Compensation: An interim Report, Rand Institute for Civil Justice, 35 (2002). Return to article

²⁷ ABI E-News Legislation Update, http://www.abiworld.org/e-news/07-30-03.html (reporting that despite suggestions for changes to the Fair Act, Senator Hatch predicted that the FAIR Act would not see any more significant changes before going to the Senate floor). Return to article

²⁸ See FAIR Act (original version, since amended). Return to article

²⁹ ABI E-News Legislation Update, http://www.abiworld.org/e-news/07-30-03.html. Return to article