Critical Summary of Asbestos Trust Fund Bill S. 1125

The following summary is provided by my good friend and colleague Matt Bergman, Esq. of Seattle, Washington}

On Thursday, May 22, Senator Orrin G. Hatch, Chairman of the Senate Judiciary Committee, introduced S. 1125 (the "Fairness in Asbestos Injury Resolution Act of 2003" or "FAIR Act of 2003"), which would substitute an administrative compensation scheme for the "tort system." This memorandum is a very summary description of the major provisions of the bill.

Administration

The bill would establish

• a United States Court of Asbestos Claims to determine claimants' eligibility for monetary awards and medical monitoring reimbursement and
• an Office of Asbestos Injury Claims Resolution to administer the Asbestos Injury Claims Resolution Fund and to pay claims.

Court of Asbestos Claims

The Court of Asbestos Claims would be a specialized "Article I" court, consisting of 5 judges appointed by the President and confirmed by the Senate. § 101(a) (amending Title 28, U.S. Code, by inserting § 201(a)). These judges would serve 15-year terms and would be removable only for cause. Id. (inserting § 201(b)).

All "asbestos claims" would be submitted to the Court. §§ 111(a), 403(b). "Asbestos claims" include all claims for personal injury based, in whole or in part, on exposure to asbestos, including loss of consortium and wrongful death, but not including claims for benefits under workers' compensation or veterans' benefits programs (or subrogation actions brought by employers or insurers by virtue of the payment of workers compensation benefits). § 3(3). In effect, the bill would completely displace the tort system with respect to asbestos claims.

The Court of Asbestos Claims would refer the case to a magistrate, who in turn would refer it to a claims examiner for an initial review to determine whether all necessary information was provided. § 114. The magistrate would be required to render a recommended decision on a claim within 60 days after all required information is received, and a judge of the Court would in turn be required to render a final decision on the magistrate's recommendation within 30 days. Id. If the claimant disagrees with the judge's decision, he is entitled to de novo review by a 3-judge panel of the Court of Asbestos Claims. Id. The panel's decision would be subject to review by the U.S. Court of Appeals for the District of Columbia on an "arbitrary and capricious" standard. § 301.

Office of Asbestos Injury Claims Resolution

The Office of Asbestos Injury Claims Resolution is responsible for administering the Fund and for providing awards from the Fund to claimants who are determined to be eligible. § 221. It would be managed by an Administrator who would be appointed by the President with the advice and consent of the Senate. Id. As explained below, the Administrator would, among other things, be responsible for resolving administrative issues regarding the obligations of defendant participants to the Fund.

Who Gets What?

The compensation system would be "no-fault" - i.e., it would not be necessary to trace exposure to a responsible defendant. § 112.

Awards would be based on eligibility categories defined by diagnostic, medical, exposure, and latency criteria. §§ 121-25. These eligibility criteria are generally based upon the criteria for claims submitted to the Manville Personal Injury Trust, as reformed in 2002. (The eligibility criteria for each category are summarized in Appendix A.) The amount of awards provided to people in each eligibility category is set forth in Table 1. Claimants in Classes III and higher - who would generally be regarded as "impaired" - would receive cash awards. People in the "bottom" two classes - the unimpaired -- would not receive cash awards but would receive reimbursement for medical monitoring costs not covered by health insurance. These medical monitoring costs would cover chest x-rays and pulmonary function (breathing) tests every 3 years. § 131(b)(2).

Awards would be reduced by the amount of collateral source compensation that a claimant has received, or is entitled to receive. § 134. Collateral sources include (among other things) health insurance, disability benefits, death benefits, and payments received from defendants in the tort system. § 3(7). However, workers compensation, veterans benefits, and life insurance are not collateral sources under the bill. § 3(7), § 134.

The bill includes a statute of limitations that requires claimants to file a claim within two years of receiving a diagnosis of an eligible condition or having information that should have led them to obtain such a diagnosis. People who have timely filed pending claims as of the date of enactment have two years to file their claims with the Court. § 111(c).

Who Pays How Much?

The program would be funded by equal contributions from the insurance industry and from participating defendants. The aggregate initial contributions of insurers and defendants, respectively, would be $45 billion. §§ 202(a)(2), § 212(a)(3)(A). In addition, the aggregate contribution of mandatory participants is capped at $5 billion per year. § 223(b). The bill would also establish minimum aggregate annual contributions for defendant participants equal to $2.5 billion in the first 5 years, stepping down to $250 million in year 27. § 204(h).

Defendant Participants

For defendants, the allocation scheme would be fixed in the statute. There would be seven tiers. Tier I would consist of asbestos defendants currently in bankruptcy, § 202(b), and Tier VII would consist of railroads, with respect to their liabilities under the Federal Employers' Liability Act (FELA), § 203(h). The remaining tiers would be determined on the basis of "prior asbestos expenditures" (including costs covered by insurance) for both defense and indemnity. § 202(d). Within each tier there would be subtiers based on the defendant's revenues. § 203. Defendants would be assigned to tiers and subtiers in a proceeding before the Administrator § 204(i).

For the first 5 years, each defendant would be required to pay an amount fixed for defendants in its tier and subtier. § 204(a). The initial contributions for Tiers II through VI (the solvent, non-FELA tiers) are summarized in Appendix B. Thereafter, the payment obligation of defendants in Tiers II-VII would be reduced over time in proportion to the reduction in the annual aggregate contribution for all defendant companies together. Id. That aggregate minimum contribution would be $5 billion per year for the first five years and would step down to zero in the 28 ^th year as shown in Table 2. § 204(h).

There would be exceptions to this general scheme. First, small businesses as defined in the Small Business Act would be exempt from making any contribution. § 204(b). Second, the statute would authorize administrative reductions in an individual defendant's allocation in cases of severe financial hardship and demonstrated inequity. § 204(d). The hardship adjustment would have a term of 3 years and would be renewable if it remained justified. § 204(d)(2). The total of all hardship allocations could not exceed 3% of all defendant contributions. Id. Inequity adjustments would be based on a showing that a defendant's allocation is "exceptionally inequitable when measured against the amount of the likely cost to the defendant of its future liability in the tort system in the absence of the Fund." § 204(d)(3)(A). An inequity adjustment would remain in effect for the life of the program. § 204(d)(3)(B). The total amount of equity adjustments could not exceed 2% of all defendants' contributions. § 204(d)(3)(C).

Except for corporate affiliates who elect to be treated as a single entity, defendants would be liable for their own allocations only, and would not be liable for the obligation of any other defendant participant. § 204(e). In essence, liability would be several and not joint and several.

Insurer Participants

The draft bill does not work out the allocation scheme for insurer participants. The insurer allocation would be a percentage of the overall initial liability of $45 billion as determined by an "Asbestos Insurers Commission." §§ 211-217

How To Be Sure the Account Balances

The scheme set forth in the FAIR Act would be both a defined-benefit plan - i.e., all claimants would be entitled to awards without regard to the funds available - and a defined-contribution plan - i.e., participants' obligation to fund the program would be fixed by the statute. There is a risk, therefore, that the defined benefits will not match the defined contributions.

The bill would deal with this problem in several ways. First, the Administrator would have borrowing authority, which will enable him or her to deal with a surge in claims in any given year. § 223(c).

Second, the Administrator is directed to impose a reasonable surcharge on the amount of each participant's contribution to the fund. § 223(d). That surcharge would go to a guaranteed payment account to insure against the risk of non-payment of required contributions. The guaranteed payment account may only be used if the amounts in the Fund are insufficient to pay claims due to non-payment by any participant.

Third, the bill would create an "Orphan Share Reserve Account." § 223(e). This account would be funded by the excess of funds actually collected by the Fund in any year over the annual target amount. This reserve may be used only (a) to the extent that a participant files a Chapter 11 petition and cannot meet its obligations under the Act and (b) to the extent that the Administrator grants a participant relief from paying its full allocation because of severe hardship or inequity.

The borrowing authority addresses liquidity risk, and the guaranteed payment account and Orphan Share Reserve Fund address shortfalls due to the non-payment by participants - i.e., credit risk. None of these provisions fully addresses the problem that would occur if a mismatch between funds and award obligations were due to higher-than-expected obligations in the long run. How to address this type of risk will be the subject of further discussions.

Appendix A: Summary of Medical Criteria

Level I: Asymptomatic Exposure

• Diagnosis of bilateral asbestos-related non-malignant disease (based on chest x-ray of at least 1/0 on the ILO scale or an x-ray showing bilateral pleural changes) or diagnosis of asbestos related malignancy (except mesothelioma);
• Meaningful and credible evidence of 6 months of occupational exposure to asbestos before December 31, 1982; and
• 10 years' latency.

Level II: Asbestosis/Pleural A

• Diagnosis of a bilateral asbestos-related non-malignant disease (based on chest x-ray of at least 1/0 on the ILO scale or an x-ray showing bilateral pleural changes) by B-reader certified chest x-rays;
• Meaningful and credible evidence of -
• • 6 months of occupational exposure to asbestos before December 31, 1982, and
  • significant occupational exposure; and
• 10 years' latency.

Level III: Asbestosis/Pleural Disease B

• Diagnosis of asbestosis by B-reader certified chest x-ray showing bilateral pleural disease of B2 or greater, or pathological evidence of asbestosis;
• Pulmonary function testing that shows
  • TLC<80% of predicted
  • FVC<80% of predicted and FEV ₁/FVC>=65%;
• Meaningful and credible evidence of -
  • 6 months of occupational exposure to asbestos before December 31, 1982, and
  • significant occupational exposure;
• Supporting medical documentation establishing asbestos exposure as a contributing factor in causing the pulmonary condition in question; and
• 10 years' latency.

Level IV: Severe Asbestosis

• Diagnosis of asbestosis by B-reader certified chest x-rays of ILO Grade 2/1 or greater, or pathological evidence of asbestosis;
• Pulmonary function testing that shows
  • TLC<65% of predicted
  • FVC<65% of predicted and FEV ₁/FVC>=65%;
• Meaningful and credible evidence of -
  • 6 months of occupational exposure to asbestos before December 31, 1982, and
  • significant occupational exposure;
• Supporting medical documentation establishing asbestos exposure as a contributing factor in causing the pulmonary condition in question; and
• 10 years' latency.

Level V: Other Cancer

• Diagnosis of primary laryngeal, esophageal, pharyngeal, or stomach cancer;
• Evidence of underlying bilateral asbestos-related nonmalignant disease;
• Meaningful and credible evidence of -
• • 6 months of occupational exposure to asbestos before December 31, 1982, and
  • significant occupational exposure;
• Supporting medical documentation establishing asbestos exposure as a contributing factor in causing the pulmonary condition in question; and
• 10 years' latency.

Level VI: Lung Cancer One

• Diagnosis of primary lung cancer;
• Meaningful and credible evidence of 6 months occupational exposure to asbestos before December 31, 1982;
• Supporting medical documentation establishing asbestos exposure as a contributing factor in causing the pulmonary condition in question; and
• 10 years' latency.

Level VII: Lung Cancer Two

• Diagnosis of primary lung cancer;
• Evidence of underlying bilateral asbestos-related nonmalignant disease;
• Meaningful and credible evidence of -
• • 6 months of occupational exposure to asbestos before December 31, 1982, and
  • significant occupational exposure;

• Supporting medical documentation and certification by or on behalf of the claimant establishing asbestos exposure as a contributing factor causing the relevant lung cancer; and
• 10 years' latency.

Level VIII: Mesothelioma

• Diagnosis of mesothelioma; and
• Meaningful and credible evidence of exposure to asbestos before December 31, 1982.

Appendix B: Defendants' Tiering

Solvent, Non-FELA Tiers (II through VI)