In Search of Asbestos Solutions: A Look at Lessons from the U.K.
by Frances Berger, Forensic Risk Alliance LLC; Toby Duthie, Forensic Risk Alliance LLC and Lorenzo Mendizabal, LM Consulting
During the last five years, the United States has experienced a rash of bankruptcy filings. Asbestos manufacturers, contractors, product manufacturers and others companies saddled with massive asbestos liabilities have looked to the bankruptcy courts as a last resort solution to address their mounting liabilities. The courts have flexed mightily to address the divergent needs of the asbestos defendants as evident by the various noticing, claim acceptance and balloting procedures approved in various cases to permit these cases to move. To date, however, obtaining finality and exiting the process continues to be frustratingly slow for debtors and the asbestos claimants and their representatives.
While the debtors and most of their creditor constituencies work to reach an agreement on a consensual plan that can meet the stringent voting requirements of §524(g), insurance carriers and certain asbestos defendants are pursuing a legislative solution. The legislative process has been reenergized after the reelection of President George Bush and the prospect of a legislative solution is as good as ever. Nevertheless, the roadblocks to a legislative solution continue to be numerous. Outstanding issues with current proposals include the fairness of the claims process, funding and finality.
As we continue to seek solutions to the asbestos conundrum down very different paths, we thought it would be informative and helpful to consider some of the lessons that we can take away from the U.K. asbestos experience—the more so if the Hatch bill ever becomes more than just a proposal.
The reason the U.K. is such an interesting case, is that back in 1996 British Coal was taken to court by miners in two mass actions: one regarding respiratory diseases and the other to do with vibration-related injuries. Relevant “dates of guilty knowledge” were set according to which injury type was suffered. Anyone proven to have been injured after the appropriate injury date would, in theory, be entitled to compensation. The government (via the Department of Trade and Industry (DTI)) assumed the costs of the program due to the fact that British Coal per se no longer existed and that it had been publicly held for much of the period in question.
At this point it is worth mentioning two aspects of the English legal system:
- Loser pays all legal costs—if a plaintiff case is thrown out, he/she may be liable for the both sides’ legal costs
- In these sorts of cases, it is typically not possible to aggregate claims in the U.S. sense (by forming a class action) and as such each case requires an individual hearing.
The DTI estimated that if it went down the established route:
- it would take 20 years before all the cases were heard;
- that many people would be too sick or risk-averse to pursue eligible claims;
- these cases would congest the courts; and
- that the whole administrative cost of the program would become too burdensome.
Sensibly, the government allocated GBP £8 billion (USD $15 billion) to handle and resolve some 780,000 applications, which also included legal and medical examination costs. They set up standard framework agreements with specialist law firms and obtained a buy-in from the trade unions. Compensation guidelines were set, as was a deadline for submitting claims under this scheme (March 31, 2004).
This all sounds very sensible and pragmatic. In our view, the reality did not match the vision. In practicality, the scheme turned out to be flawed as it was still essentially adversarial. As such there were some fundamentally negative consequences:
- With the DTI acting in lieu of the defendant, traditional legal process was taken out of the context of the court but, in our view, not streamlined in terms of time or cost—i.e., no advantage was derived by taking into account the economies of scale that could have been applied by looking at the group as a whole and applying a common approach to like cases. Nor was the same rigor encouraged as would have been the case under independent court supervision.
- Lawyers in the United Kingdom are in most cases not allowed to work on a contingency basis. They are, however, allowed enter into “no win–no fee” agreements. The basis of these is that the plaintiff is not liable for fees except in the event he/she loses. In the event of success, the lawyer is able to increase his/her costs by up to 100 percent which in most cases can be reclaimed in full from the defendant. This left claimants with two choices:
- If they were union members they could turn to their trade union. Some trade unions were therefore put in a difficult position as they felt ethically and often constitutionally committed to legally representing their members for free, but did not necessarily have the resource to do so. Take for example the National Union of Miners whose membership in the late 1990s had fallen from over half a million members post-war to a few thousand. This in turn meant they needed to look at how they could raise the funds to do so, often resulting in extremely negative PR—e.g. referral fees, one-off upfront administration fees etc.
- If they were not union members and could not afford to fund the legal fees themselves, claimants needed to turn to independent law firms. As mentioned above, these law firms were allowed to charge a significant success premium calculated on the time they spent working up and resolving each claim—even if the work for those claims was essentially very similar. As such, the commercial interests of the law firms were therefore not aligned with those of their claimants. Furthermore, legal fees were significantly increased and perhaps out of proportion to the risks that the law firms were assuming. N.B. Lawyers have already been paid an estimated GBP700 million ($130 million) while, as at June 2004, only 138,000 claims have been settled.
- The administration costs—especially medical examinations—proved more expensive than anticipated. Wanting to cap their exposure, the DTI outsourced the contract 1½ years ago at a cost of GBP £125 million ($234 million).
- There was no independent party assessing the performance of this process.
To our mind, it would have made sense from the outset to put in place an independent tribunal that would operate according to pre-agreed standard operating procedures and would be supervised by representatives of both sides. Claimants would have been encouraged to submit claims directly (with the assistance of their own legal counsel and medical reports if they so wanted). This would have made the process fully transparent and cooperative while also putting in place a system with clear audit trails. This would also have allowed in-built controls to identify fraudulent filings so that related penalties could be developed that were significant enough to become deterrents. This system would have had the additional benefit of both speed and the reduction of legal costs.
Considering the potential emergence of several debtors from the bankruptcy process in the next few months and the current legislative activity in the United States, 2005 may be the year that brings some certainty to asbestos claimants and defendants and begins to eliminate the huge transaction costs currently being experienced this side of the Atlantic.