this document was designed for discussion purposes only. it is incomplete, and not intended to be...

This document was designed for discussion purposes only. It is incomplete, and not intended to be used,without the accompanying oral presentation and discussion.

Philip D. Miller

November 13, 2000

Measurement of US Tobacco Liabilities:A Burning Issue or Just Smoke?

New Classes of Claims / Megatort Update

CAS Annual Meeting

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Background - Usage

Usage in America dates back to 1 BC introduced in Europe during the 17th century

Usage grew despite early concerns about potential health risks King James: “Smoking is a custom loathsome to the eye, hateful to

the nose, harmful to the brain, dangerous to the lungs…” Economic importance also grew – along with government tax

revenues

Following the invention of the cigarette, usage increased rapidly and became more socially acceptable during the 19th century


Total and Per Capita Consumption of Manufactured Cigarettes for SelectedYears from 1900-1998

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1900 1910 1920 1930 1940 1950 1960 1965 1970 1975 1980 1985 1990 1994 1998

Pe

r C

apti

a C

on

su

mp

tion

0

100

200

300

400

500

600

700

To

tal C

on

sum

ed

(Bill

ion

s)

Per Capita Consumption Total Cigarettes Consumed (Billions)

Source: CDC’s Mortality and Morbidity Weekly Report (MMWR), Vol. 43/No. SS-3

Background - Usage

Fueled by 2 world wars, cigarette consumption grew from 2.5 billion/year in 1900 to 524 billion in 1963, or from 54 to 4,345 per year per capita


Tobacco-Related Diseases

1964 Surgeon General’s report confirmed long term suspicions about cigarette smoking and its impact on health Associated with a 70% increase in death rates of men “Causally” related to lung cancer in men Relationships exist with other diseases and illnesses

1989 report summarized subsequent findings including “Causes” lung cancer in women It is a “cause” of stroke It is a major “cause” of coronary heart disease There is a dose-response relationship with # smoked per day, degree

of inhalation, and age at initiation

Definition of Cause as used by the Surgeon General “The notion of a significant, effectual relationship between agent and

an associated disease in the host” Does not exclude other agents as causes Significant to litigation: no “signature disease”



Per Capita Cigarette Consumption and Male Lung Cancer DeathRates for Selected Years from 1900-1997

0

10

20

30

40

50

60

70

80

1900 1910 1920 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1991 1992 1993 1994 1997

Ma

le L

un

g C

an

cer

De

ath

Ra

tes

(pe

r 1

00,0

00)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Pe

r C

ap

ita

Cig

are

tte

Co

nsu

mp

tio

n

Male Lung Cancer Death Rates (per 100,000) Per Capita Cigarette Consumption

Source: National Center for Health Statistics

Association between lung cancer and smoking is one of the strongest: over 90% of men with lung cancer are smokers



Despite statistical association between lung cancer and smoking, it is not easy to prove that an individual’s lung cancer was due solely to smoking Certain types of cancer (e.g., large cell) are not associated with

smoking as strongly as others (e.g., small cell) Other factors can increase risk including

family history other lung diseases occupational exposure air pollution diet

Difficulty of making the case increases for other diseases due to Lower degree of association More potential intervening factors, e.g., lack of exercise


Litigation History - Issues

Key manufacturer defenses Preemption under the Federal Cigarette Labeling and Advertising Act Assumption of risks Lack of proximate cause Lack of defect Statute of limitations

Manufacturers have generally mounted strong defenses, refusing to pay any settlements and pursued all possible appeals Motions and court rulings litigated until satisfactory result or no

further recourse Frequently won the war of attrition

Early pattern established was that even when plaintiff successfully convinced jurors that smoking causes lung cancer, they could not get past the assumption of risk argument


Litigation History - Cases

First suit filed in 1954 Began the first wave Mostly standard product liability

negligence, failure to warn, design defect

< 10 suits per year As manufacturers win, suits filed

trickles

Second wave triggered by 1964 SG report 17 suits in ‘64, average of 10

per year Ended by 1972 as

manufacturers won all verdicts and key rulings

Third wave triggered in 1983 by adverse rulings in Cipollone case Eighty five cases at the peak Appealed Eventually won by manufacturer

Score - 300 filed cases, no sustained verdicts or paid indemnity

Number of Cases Filed Against Tobacco Companies 1951-1989

0

10

20

30

40

50

60

70

80

90

Num

ber o

f Cas

es F

iled

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989



Fourth wave began in 1994 Plaintiff verdict in Kent filter case Momentum grew in AG health care

recovery suits First settlements occurred

in the Broin case $349M for research

and with AGs for $246B

More than 1,500 suits were filed in the 1990s with 1,225 still pending as of 12/31/99

Will the next wave be a tidal wave? There have been several plaintiff

verdicts, but most cases continue to be won by the defendants

No individual smoker case with a plaintiff verdict has been sustained on appeal – yet

AG cases somewhat unique, due to special legislation taking away assumption of risk and weakening causation defenses

Lawsuits Pending Against the Tobacco Industry 1993-1999

0

200

400

600

800

1000

1200

1400

1993 1994 1995 1996 1997 1998 1999



Engle case Florida smoker class action Phase I concluded in July 1999 that cigarettes

cause 20 diseases are addictive manufacturers conduct rose to a level that would permit punitive

damages Phase II concluded in April 2000 with compensatory damages of

$6.9M awarded to 2 of the 3 named plaintiffs (the 3rd was barred by statute of limitations) and determined that punitive damages for the entire class should be $144B

Phase III requires individual trials for each class member to determine liability. Punitive damages can’t be determined for any individual until all cases are tried

The manufacturers are appealing Most other class actions won by manufacturers because of “diversity”

Main takeaway It ain’t over until it’s over


Insurer Involvement

Limited to date Prior to 1996 no reported lawsuits by manufacturers seeking coverage 1/96 Imperial Tobacco filed in Quebec against 2 insurers

still pending 3/97 Louisiana AG attempted to include more than 100 insurers

Only 3 states have direct action statutes Included foreign insurers Jurisdiction removed to London and dismissed prior to significant

litigation 3/98 individual smoker case in Louisiana

dismissed in August 1999 A limited number of public reports of claims filed reported by AM Best

1999 report by Schroder Securities on BAT stock Identifies what they consider to be substantial evidence of coverage Reviewed policies in La. AG suit CGL and explicit tobacco health

liability Claims exclusions are of dubious value, some have no exclusions,

poor definitions and ambiguous terms


Insurer Involvement

1999 report by Schroder Securities on BAT stock (continued) Claims that senior policyholder attorneys are keen to litigate Says that it is clearly in the best interest of shareholders for

manufacturers to sue for coverage

Insurers identified in Schroder report vehemently deny coverage exists Explicit health liability policies are claims made

allowable reporting period has lapsed without a claim CGL policies have

explicit tobacco exclusions numerous other provisions that bar such claims

February 2000 Liggett Group filed suit Against 33 insurers Seeking DJ of coverage for defense costs and payments from

primary, excess and umbrella, and advertising liability policies 1970 - 1999


Insurer Involvement

Potential coverage issues identified by insurers or other observers include Specific tobacco exclusions

started to include in late 1950s prevalence of use and strength of wording increased over time not likely to be in policies of potential secondary defendants such

as suppliers, distributors, advertisers, and law firms Pollution exclusions in ETS cases

introduced in early 1970s, strengthened in 1986 is smoke discharged into enclosed interior spaces discharged into

the atmosphere? Was it sudden and accidental? Is this exclusion applicable to product liability?

Occurrence definition do the liabilities result from “an accident…which results in bodily

injury…that was neither expected nor intended” what did the manufacturers know and when covered damages

is health care reimbursement bodily injury or equitable relief


Insurer Involvement

Potential coverage issues (continued) Late notice

was notice provided “as soon as practicable” if not, was failure to do so prejudicial

Coverage trigger exposure manifestation continuous

Extensive issues must be resolved by the courts, most likely state-by-state

Potential future involvement Except for Liggett no propensity to file claim notices or initiate DJ

actions May be affected by

shareholder pressure ala Schroder report Liggett suit outcome significant plaintiff verdicts sustained on appeal


Quantifying the Potential Liability

Categories of potential liability include Individual smoker injuries Class actions involving groups of individual smoker injuries Addiction only suits, individual and class Secondhand smoke suits, individual and class Health care reimbursement – federal government, native american

governments among other public and private providers Other tobacco products (e.g., pipes, cigars, and smokeless)

Quantification techniques are described briefly in my paper published in the CAS Forum, Fall 2000.

The paper describes a seven step exposure-based simulation model and includes references to potential data sources for various parameter estimates

FAS 5 & 60 provide the principle accounting rules that govern whether disclosure, reserves or neither is required


Quantifying the Potential Liability

Issues of materiality, probability of incurral and reasonable estimability May differ by component of reserve

DJ, defense,adjusting, indemnity, etc. Status may change over time Facts and circumstances of each insurer will govern

Liggett DJ action Could trigger an accounting obligation for an involved insurer, if

material litigation expenses are involved But, prior to determining that there is a coverage obligation as a

result of a DJ action there may not be a reserving obligation for indemnity amounts

Quantification at this time may simply be a useful tool for internal contingency planning purposes

this document was designed for discussion purposes only. it is incomplete, and not intended to be...

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