An asbestos case to be heard in the House of Lords may affect the future viability of many insurers. Andrew Parkhurst reportsthe House of Lords has said it wants to hear an appeal which could decide the future of many insurance companies. In a move this week, insurers attempted to reach an eleventh-hour settlement with claimants in a landmark asbestos case. But one of the claimants rejected the insurers' offer, putting the appeal back on track.

The appeal revolved around a single fibre of asbestos. If asbestosis can be caused by a single fibre then, it was argued, how can a claimant who worked for several asbestos-linked employers, prove which of the companies was liable? The Court of Appeal had ruled that an employer was not liable for damages if there was any doubt about where the claimant had received doses of asbestos exposure.

The Lords judgment will be crucial because the scale of the problem is huge. So far, over £21bn in compensation has been paid out worldwide, with insurers footing the bill for around 60% of this. Analysts predict the total compensation bill could rise to over £150bn. The question is: how many insurers (and reinsurers) can continue to afford to pay the spiralling litigation and compensation costs?

The numbers are huge. When US car parts giant Federal-Mogul took over the British firm Turner & Newell (T&N) in 1998, it set up a reserve of £1.5bn to handle the estimated asbestos liability. Within just three years it had used up £420m of this fund. The firm estimated it would have spent another £250m in 2001 had it not obtained a High Court Administration Order under the Insolvency Act [1986].

Although T&N had employers' liability insurance, its insurers excluded the asbestos risk. Following its insolvency - which will restrict claimants' rights of recovery against the firm - asbestos victims' lawyers are challenging the validity of this exclusion.

If the lawyers win the argument, T&N's insurers could be saddled with a claims bill of over £1bn.

More defendants
It is not only asbestos processors, such as T&N, who face massive claims. As most of these firms have now been sued into insolvency, claimants are favouring the so-called "second generation lawsuits" against ancillary industries, such as those that used, sold or transported asbestos.

Because asbestos was so widely used - in products ranging from adhesives, brake linings and ceiling tiles to insulating cement, roofing products and vinyl floor tiles - there are a huge number of industries exposed to compensation claims. In the US, non-traditional defendants now account for over 60% of asbestos claims, spanning more than half of all industries in the economy.

The past 18 months have seen a big increase in lawsuits by garage mechanics against motor manufacturers, who used asbestos in brake linings, clutches and gaskets. Asbestos brake linings were legal in the UK until November 1999, despite white asbestos being classified as a category 1carcinogen (the worst kind).

The building trade is also facing huge claims. A quarter of the 5,000 people dying each year in the UK from asbestos-related diseases are plumbers, carpenters, joiners, electricians and shopfitters. Asbestos insulation and lagging could contain up to 85% blue asbestos, and much of it still remains in situ.

Asbestos is still widely used in developing countries, as well as in Japan and parts of Europe. Global production in 2000 exceeded 2 million tons, with Canada being one of the largest producers. The recent Cape plc settlement - which will benefit thousands of South African asbestos victims - establishes that multinationals are accountable for their actions overseas. This could open up another source of claims for western companies and their insurers.

In the US, most of the new claims are by the so-called "worried well" - those who have been exposed to asbestos, but are not yet showing any major symptoms. In some states such as Mississippi and Texas, plaintiffs have won multi-million dollar settlements on the grounds that they have an increased fear of cancer as a result of exposure. The Rand Institute for Civil Justice estimates that more than 21 million Americans have had significant exposure to asbestos, but only half of these have, so far, made claims.

The situation for insurers with a heavy US exposure is therefore dire. Ex-Equitas chief actuary Paul Jardine predicts that US insurers can afford to pay out claims at the current rate only for another four years before exhausting their reserves. AM Best has suggested that commercial insurers' reserves are almost 50% below what they should be, while Morgan Stanley Dean Witter estimates reinsurers may be under-reserved by as much as £3.5bn.

Tony Prichard, head of workplace litigation at Weightmans, said that in the UK, the "worried well" would have little chance of being awarded damages. The only exceptions, he said, were cases of pleural plaque, which have a 2% - 3% chance of developing into mesothelioma, although this can increase if the claimant is a smoker. He also said that the huge awards seen in the US were unlikely in the UK, as general damages here follow judicial guidelines.

Time exposed
Pending the outcome of the case before the Lords virtually all outstanding mesothelioma claims have been put on hold. Whatever the outcome of the appeals, though, Prichard says asbestos claims will not go away. The likely scenarios are that either insurers will revert to settling mesothelioma claims on a time exposed basis or the government will intervene and pass the costs to the whole industry by the creation of a body similar to the Motor Insurers' Bureau.

He also says that the proposed Civil Liability and Asbestos (Scotland) Bill, which would allow employees to sue any employer who had exposed them to asbestos, could result in increased claims for insurers in Scotland. However, he says it is too early to jump to conclusions, as the Bill may not proceed.

What is clear is that asbestos has a vicious sting in its tail, with the potential to sink a number of insurers and reinsurers. Some companies are trying to "trade through" on a "pay-as-you-go" basis, while others such as US insurer CNA and the UK's Royal and SunAlliance (R&SA), have gone public by dramatically increasing their reserves - CNA by $2.1bn (£1.5bn) and R&SA by £330m.

"Trading through" might be viable for large, well capitalised firms with a diverse spread of business, and not cause a significant drag on earnings. Others, however, risk going under or becoming takeover targets.

Morgan Stanley has pointed out that the playing field is far from even, in that the huge cost of asbestos claims is likely to be borne disproportionately by a few companies.

Strong insurers with modest exposures will emerge from the hardening market even stronger. Others could go to the wall.