CAS Seminar on RatemakingMegatort Update

Alison Drill, FIAA, MAAATrevar Withers, ACAS, MAAATILLINGHAST – TOWERS PERRIN

Tampa, FloridaMarch 7-8, 2002

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Current and Potential “Megatorts”

Excluding asbestos, mold, pollution, terrorism and tobacco

What factors cause or contribute to a “megatort”? How have these factors changed in recent years? What impact will these changes have on future costs?

Current status and the outlook for: Silicone Breast Implants (SBI) Lead Drugs and medical devices Electromagnetic Fields (EMF) Other emerging megatorts

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Most costly megatorts include some or all of these factors...

Large exposed population

Substantial bodily injury (BI) or property damage (PD), often with long latency periods

Causation of BI or PD relies on expert testimony

Signature diseases (e.g., asbestosis)

Injured parties’ propensity to sue

Contingency legal fees & class action lawsuits

Many exposed policies

Favorable judicial and legislative climate

Large indemnity and/or defense expenses to insurers

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Changes for plaintiffs and corporations?

Potential plaintiffs Technology and the internet have improved

identification & information sharing Propensity to sue stable (or increasing?)

Corporations Better risk management may speed identification

of potential injuries and mitigation Increasing cost of insurance Higher levels of risk retention & self-insurance Wider product distribution, but better safety

standards

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Changes for legal system?

Tort reform Stricter standards for technical evidence and use

of expert witnesses (e.g., Daubert rules in 1995) Limitations on damage awards

Shift towards continuous triggers for coverage (e.g., Montrose decision)

Class actions more common Multi District Litigation (MDL) Large contingent fees for attorneys Greater motivation for defendants to settle May increase size of plaintiff pool

Alternative dispute resolution

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Changes for insurers?

Underwriting standards Coverage wording tightened (e.g. “loss in

progress” exclusions, occurrence definitions) Aggregate coverage limits Requiring insureds to retain more risk (e.g. SIRs or

experience rating)

Higher defense expenses Shift to expense within policy limits

Improved claims management with toxic tort specialists

Declaratory judgement actions on coverage issues

Reinsurance availability and cost

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What is the impact of these changes?

Plaintiffs and legal system increasingly looks to class action litigation to tort damage

Corporations and insurers attempt to respond more quickly with better risk management

Most other megatorts in litigation involve limited number of plaintiffs and insurers

Lower likelihood of another “asbestos” sized megatort

Examples of current and emerging megatorts on following pages, none of which are likely to be as costly as asbestos

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Silicone Breast Implants (SBI)

Manufactured 1962 to 1991

Alleged bodily injuries: fatigue, cancer, auto-immune disorders

Defendants: limited number of manufacturers

Recent scientific studies doubt causation, but many insurance settlements already done

Settlements by Dow Corning ($3.2 billion) and other major manufacturers

Dow Corning in bankruptcy; joint reorganization plan approved 1/2002. (few outstanding appeals remain)

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Lead

Lead paint and other lead products (e.g., water pipes, lead-containing gasoline, ceramics)

Defendants are landlords, housing authorities & municipalities and pigment/paint manufacturers

Mitigation costs and bodily injury to exposed children, building occupants, construction workers

Legislation & courts driving lead abatement EPA “pre-renovation” rule in place Market-share laws State/city suits versus lead paint industry

Lead exclusions included sporadically by insurers

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Drugs & Medical Devices

DES litigation continues with 2nd & 3rd generation claims

Norplant settlement proposed

Fen-Phen & Redux diet drugs manufactured by American Home Products: class action settlement of $3.75 billion

Contaminated blood products (HIV and Hepatitis C): US hemophiliac exposures now generally settled

Anti-diabetes drug Rezulin

Heartburn medication Propulsid

Anti-depressant Prozac

Anti-cholesterol drug Baycol

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Other megatorts already in litigation..

Chemical exposure claims continue but are generally limited to few insureds, (e.g., benzene, Agent Orange)

MTBE: widespread contamination of groundwater

Latex gloves: plaintiffs mostly medical profession; exposure concentrated with glove manufacturers, MDL underway in Pennsylvania

Gun manufacturers: increasingly sued by individuals and cities/counties; federal judge ruled in 11/2000 case that insurers have no duty to defend or indemnify

Chromate Copper Arsenate: chemical used in pressure treated wood, including playground equipment, which contains arsenic, a known carcinogen

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Potential megatorts with litigation looming...

Diet drugs: Metabolife complaints

EMF: Studies continue regarding effects (e.g., cell phones). Causation difficult to prove, litigation less likely

Genetically modified food: political issues versus scientific evidence

Gulf War Syndrome: studies validate veterans’ concerns

HMO: claims under RICO and ERISA

Intellectual capital: Napster litigation settled, but Supreme Court to review copyright laws