Commentary

The Costly World of Litigation

The big guns are being dusted off for the coming congressional battle to rein in runaway lawsuits. Any reform will have to blast past the American Trial Lawyers Association, which donated $2.4 million to candidates this last election. But a new study on asbestos shows why reform is desperately needed.

Asbestos was once a wonder product, used to insulate everything from buildings to wire. Unfortunately, it turns out that breathing asbestos can cause conditions ranging from relatively harmless pleural plaques on the lungs to mesothelioma, a deadly cancer. At least 600,000 people have filed suit against 6,000 companies. Although the number of cases was expected to peak a decade or more ago, they continue to accelerate. The number of cases filed against the Manville Trust nearly trebled from 1999 to 2001, hitting 91,000 cases.

Asbestos has killed and will continue to kill some people. But the dying are not filing the bulk of the new suits.

Mesothelioma and other cancer cases continue to arrive at a roughly constant rate, about 4,000 annually. In contrast, reports a new study by economists Joseph Stiglitz, Jonathan Orszag, and Peter Orszag for the American Insurance Association, “the share of total new claimants who are unimpaired has increased sharply.” Their share has risen from about 4 percent to 75 percent over the last two decades.

Moreover, with most of the original asbestos producers ruined, creative lawyers keep finding ever less likely defendants. Over the last two years, filings against food and beverage companies have risen 284 percent, pulp and paper firms 296 percent, and textile producers 721 percent.

Litigation has already cost $54 billion and total costs could eventually hit $200 billion to $275 billion, according to actuarial consulting firms. No surprise, then, Stiglitz and his co-authors report that “the staggering costs of asbestos liabilities have pushed many defendant companies into bankruptcy or to the brink thereof.”

Through 1998, 26 companies went Chapter 11; another 35 did so in the last four years. Fifteen of the latter filed in the first 10 months of this year.

Every new bankruptcy places increasing pressure on other firms, because joint and”several liability” means that a smaller number of companies are liable for all potential damages in an expanding number of cases. Concludes the insurance association report: “Such a structure creates a number of perverse effects, including the incentive for firms to declare bankruptcy in order to shift liabilities to other firms (which in turn raises the probability that the other firms will be forced into bankruptcy) and the incentive for claimants to sue as many defendants as possible.”

The bankrupt are not just the obvious candidates, the miners and manufacturers, like Johns Manville. The RAND Corp. figured that the bankrupt enterprises were involved in 75 different industrial categories.

A study by Prudential Financial notes that “Defendants are increasingly ‘peripheral” ’; asbestos “was more or less ‘incidental’ in their products or facilities; if it was in their products, it was enclosed and therefore, only a minimal number of fibers were released into the air.”

The costs of litigation are obvious, and fall on companies and insurers alike. But bankruptcy, too, is costly.

Shareholders lose investments and workers lose jobs and pensions. Stiglitz, Orszag and Orszag estimate that so far the asbestos bankruptcies have destroyed between 52,000 and 60,000 jobs.

Those employees are likely to lose between $25,000 and $50,000, depending upon the time they are unemployed and the kind of new work they find. Those with 401(k) accounts lost an average of 96 percent of the value of their companies’ stock, which ran about a quarter of their accounts’ overall value.

The rising flood of suits has created another expensive anomaly: as ever more cases are filed driving ever more companies into bankruptcy, less money is available to pay real victims. Notes Julie Rochman of the association: “Those people who are sick and dying are getting in some cases five or 10 cents on the dollar because money is being shifted instead to people who are not sick.”

Only legislation can stop this litigious overflow. Evidence of actual illness should be required to win compensation; those who are healthy today could sue later if they become ill later.

Requiring evidence of harm reflects the purpose of tort law. Indeed, unlike some controversial “tort reform” measures, this approach would concentrate rewards on those most severely harmed rather than limit damages.

“Citizens who have suffered from asbestos-related illnesses deserve appropriate compensation,” note the association researchers, but, they add in dry economists’ language; “The current system does not appear to be an optimal mechanism for doing so.”

No, it is not optimal. Judges are overwhelmed, companies are unfairly charged and victims are left uncompensated. Fixing the asbestos imbroglio should be near the top of the new Congress’ agenda.

Doug Bandow is a senior fellow at the Cato Institute and a nationally syndicated columnist.