Current Developments in Tort Claims

Claire Louis - PricewaterhouseCoopers LLP

November 14, 2005

Casualty Actuarial Society

Baltimore, Maryland

Key Topics

• Tort claim drivers

• Major areas of tort liability– Asbestos– Securities litigation– Medical malpractice– Drug products and medical devices

• Status of federal and state tort reform

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Key Topics

• Tort claim drivers

• Major areas of tort liability– Asbestos– Securities litigation– Medical malpractice– Drug products and devices

• Status of federal and state tort reform

2

Tort claim drivers

• U.S.– Culture of blame– Contingency fees– Plaintiffs bar and judiciary– Promotion of attorney services– Technology– Expanded bases of liability– Tort reform erosion– Media– Medical advances and medical cost inflation

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Tort claim drivers• International

– Differences in legal and structural systems– Loser pays winner’s attorney fees: After the Event insurance– European social insurance: greater medical and financial benefits– Traditionally, contingency fees not allowed

• Maintenance and champerty– England and Wales: “success fee” arrangements

• Courts and Legal Services Act of 1990 and related legislation• Allowed in all civil proceedings except family cases• Still exception rather than the rule• Based on solicitor’s costs, not damages

– EC• Move to harmonize different legal systems• Elements of civil and common law system• Strict liability still new

– New Zealand and Switzerland have abolished tort law system

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Key Topics

• Tort claim drivers

• Major areas of tort liability– Asbestos– Securities litigation– Medical malpractice– Drug products and medical devices

• Status of federal and state tort reform

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Asbestos

• More than 8,400 businesses affected

• Original projected costs - $8 bn– Total projected costs - $300 bn

• Original projected claims – 60 mm– Total claims to date – 770 mm– Total projected claims – 3.3 bn

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Asbestos

• Since 1981, ten attempts to pass federal asbestos legislation

• S.852 – Fairness in Asbestos Injury Resolution Act of 2005– $140 bn over 30 years– Would eliminate virtually all existing and future cases– Lacks support from insurers, certain defendants, and

other interest groups– Insurance industry concerns include lack of finality,

exigent claim issues, and orphan share funding7

Asbestos

• State asbestos reform– Legislative

• Ohio Asbestos Reform Bill (Sept 2004)– Intent is to give priority to the truly sick– First state to require actual impairment under objective

medical criteria– Already there are attempts to circumvent

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Asbestos

• State asbestos reform– Legislative

• Texas (Sept 2005)– Requires a report from a qualified physician stating a

diagnosis of mesothelioma or other cancer– Specific X-ray and PFT criteria must be met– Expedites malignancy cases for trial– Prohibits reliance on reports or opinions produced by

labs linked with law firms

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Asbestos

• State asbestos reform– Legislative

• Florida (July 2005)– Sets minimum medical criteria– Requires that qualified doctors read X-rays– Protects the rights of those who become sick in the

future

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Asbestos

• State asbestos reform– Judicial

• Inactive dockets (IL, NY, WA; Baltimore, Boston, Chicago)

– Favorable experience– Defer and protect unimpaired claims until individual

develops an impairment– Must meet medical criteria– Sick receive priority– Relieves docket congestion– Preserves scarce financial resources

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Asbestos

• Federal asbestos reform– Federal MDL

• Thousands of unimpaired claims dismissed• 20,000 Jones Act cases dismissed (1996)

– Few claims reinstated– Evidence of “manifest injury”

• Administrative dismissal of mass screening cases (2002)

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Asbestos

• International– Focus is serious disease cases: escalating

mesothelioma rate in the UK (3.8 X higher than U.S)– Claimants fearful of judicial system– Burden of proof difficult to satisfy– Claimants were socially marginalized– Possible national solution sought in UK– European Asbestos Conference Sept 2005– 2005-2006 EU Year of Action on Asbestos

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Asbestos

• U.S. insurance issues– Dramatic decrease in new filings; increase in severe case filings– Few surviving matrix agreements

• Battles fought case-by-case• Stricter proof requirements • More trials

– Insurers looking for finality: • Push for buy-outs of Tier Two and Three players• CSAs for relatively minor defendants

– Bankruptcies: in general, has not caused the acceleration in insurance pay-outs once feared

– Silica• Plaintiffs bar repackaging asbestos cases as silica cases• Rate of filings jumped 2002-2003• Favorable developments in Texas

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Key Topics

• Tort claim drivers

• Major areas of tort liability– Asbestos– Securities litigation– Medical malpractice– Drug products and medical devices

• Status of federal and state tort reform

15

Securities litigation

• In 2004, securities litigation became global: securities litigation, securities regulatory investigations, and enforcement actions increased substantially around the world

• U.S. private securities actions increased• More litigation, investigation, enforcement

activity against foreign private issuers than ever before

• Skyrocketing settlement costs• Regulation, regulatory enforcement, and

securities litigation

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Globalization of securities litigation

• In 2004, 29 foreign filers listed on foreign exchanges—the highest number in one year--were sued in U.S. private securities class actions: a 90% increase from 2003

• 22 of the cases involved allegations of accounting irregularities and financial fraud– Parmalat– Ahold– Royal Dutch Shell

• Adoption of IFRS and SOx 404 compliance

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U.S. private securities actions

• 203 private securities actions filed in 2004: 16% increase

• Drivers– New SEC rules and regulations– New PCAOB rules– Effects of private class actions and court

decisions: Enron, WorldCom, HealthSouth

• Effects of SOx still to be felt

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2004 settlement trends in U.S. private securities class actions

• Increasing trend in high-dollar settlements

• 104 cases settled for $5.4 bn ($2.8 bn excluding WorldCom)

• Average settlement value: $27.6 mm (up 18% from 2003)

• Median settlement value: $7mm (up 25% from 2003)

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Drivers of U.S. private securities class action settlements

• High level of market capitalization

• Role of retirement fund and pension fund fiduciaries and institutional investors as lead plaintiffs in class actions

• Intersection of private securities class action claims with financial restatements

• Severity of accounting scandals and financial frauds

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Regulation, enforcement, and securities litigation

• Securities class action litigation not just a U.S. phenomenon, e.g., France and Netherlands

• Reach of regulatory enforcement crosses borders• Convergence of generally accepted accounting

principles: IFRS and US GAAP• Greater coordination among securities regulators

worldwide• International cooperation agreements to facilitate

enforcement and prosecution• Joint investigation protocol between U.S. and other

countries• Adoption of SOx-like regulations and reforms by

international regulators 21

Future securities litigation trends

• Steady increase in number of private securities class actions and regulatory enforcement actions

• Continuing significant increase in dollar values of private securities class action settlements

• Significant increase in Section 10(a), SEC (and others) investigations, internal corporate investigations leading to more restatements, more regulatory enforcement actions, more private securities litigation

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Key Topics

• Tort claim drivers

• Major areas of tort liability– Asbestos– Securities litigation– Medical malpractice– Drug products and medical devices

• Status of federal and state tort reform

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Medical malpractice

• Trend toward higher verdicts and median awards

• Severity increasing in serious injury cases• Sharp rise in defense and administration costs• Nursing home litigation continues strong

– MS, FL, AL still “hot spots”– Wilkes & McHugh may be moving on– Fewer trials, more settlements– Operator financial difficulty increasing insurer risk

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Medical malpractice

• Drivers of med mal claims– Not just a tort system issue– Other factors

• Sicker, older population• Greater expectations for medical care• Breakdown in doctor-patient relationship• Incidence of medical error

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Medical malpractice

• Prospects for reducing med mal claims– Increased diagnostic testing– Peer review and disciplining– Improved communications with patients– Technology

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Medical malpractice

• Reform– National med mal reform defeated in 2005– Certain recent reforms appear to be working:

caps on awards appear the most effective– Not infrequently, medical mal reforms are

challenged and overturned or circumvented

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Medical malpractice

• State approaches to med mal reform– Advance notice of claim– Statute of limitations– Joint and several limitations– Compulsory ADR– Expert affidavit– Limited attorney fees– Modification of collateral source rules– Damages caps: pain and suffering, punitive, total– Periodic payments

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Key Topics

• Tort claim drivers

• Major areas of tort liability– Asbestos– Securities litigation– Medical malpractice– Drug products and medical devices

• Status of federal and state tort reform

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Drug products and medical devices

• Current claim drivers– Fast-track FDA approval– Direct to consumer marketing: erosion of learned

intermediary defense– Off-label promotion of drugs– New drug delivery technologies– Clinical trials– Product counterfeiting– Quality control (Ortho-Evra patch)– Aging of population

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Drug products and medical devices

• Limiting drug and medical devices product liability– Proposed federal legislation

• Pre-emption of punitive damages against manufacturers of FDA-approved drug products

• Healthcare providers shielded from liability

– Federal pre-emption of state tort claims• FDA intervention in private lawsuits involving drugs

or medical devices

– State tort reform initiatives

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Key Topics

• Tort claim drivers

• Major areas of tort liability– Asbestos– Securities litigation– Medical malpractice– Drug products and medical devices

• Status of federal and state tort reform

32

Tort reform: current efforts– Federal

• Intent is to address lack of uniformity at the state level• Class Action Fairness Act of 2005 – Feb 2005• Lawsuit Abuse Reduction Act

– State• Extent of reform varies by state• Current focus is on damages caps, joint and several,

punitive damages, collateral source rule

– Tort reform effectiveness• No single reform offers the perfect solution• Damages caps appear to be the most effective means to

reduce the number of lawsuits and the value of awards• In the end, what matters most for insurers is predictability

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