Document jX4XrJrQnwBMKoLoaYJRMe7y

FILE NAME: General Motors (GM) DATE: 1982 DOC#: GM063 DOCUMENT DESCRIPTION: Newspaper Article and Correspondence with Paul MacAvoy I T H E N E W Y O R K TIM ES, SU N D A Y , F E B R U A R Y 14, 19.- Forum CQNOftftlC AFFAIRS / Paul W . MacAvoy You, Too, W ill Pay for Asbestosis Jt '.Yale University, is one of four icnorists who write regularly for the but cautious estimate of claim by the present caseload, and adding prospec tive future claims resultine in cases. have made with the insurance prem uns received in those earlier yon. from the asbestos companies. That completely out of the question at * present time, since the original prum urns were much too low to genero enough earnings to pay out cbir over the next few years as large ... those estimated. S Thus the insurance companies ha\ .the equivalent of a disaster on th-_. hands. The problem is similar to wr-.: mg earthquake insurance for Cali': , mans for a few cents a day, collect'. these premiums and investing the::: and then having California collapse : one huge earthquake. The premier, from this or even unrelated liability surance in the same pool would not : sufficient to pay a `the result!- claims. These insurance company-, `now do not have an average of $1 h: hon each in excess assets to liquids' so as to provide the cash required v cover the liability of asbestos-relate ; future claims. So who will pay? Other policyhok, ers. Premiums for insurance again.:- other liabilities will have to be used v pay these asbestos claims as in come in, thereby eliminating the vaT. of that other insurance. After all, if t;.. premiums on automobile, fire, the.: and other such policies are not used tc make investments to cover automo bile, fire and theft liabilities, but ab used to pay emerging asbestos claims then there is no protection provided U - the policyholders of this other insur ance. In the extreme, when current pre mium revenue sources are insufi: cient, the insurance company with billion or $3 billion of asbestos iiab; ities in one year would have to liq i. date, leaving its policyholders witho." claims on the liquidated assets. At tr other extreme, in order to provide current insurance protection and as bestos claims payments, current pre mium charges for all product liability ?.nd automobile insurance would have- todouble. The increased premiums of that magnitude might possibly be suffi cient to pay off future asbestos-related claims while still providing invest ment assets to protect against claim1, on other insurance. bestos industry in the 1950's and 1950's. In turn, the insurance companies are suonosed to dov the claims bills from Thus there are good self-interest reasons to work on the obscure pro:> lem of asbestos-related claims liabil ity. Another social disease has struck, and the bell tolls for thee at the insur ance office, as premiums go up to pay forit. ______ February 25 1982 Editor New York Times Dear Sir, . fn>-feral- flKacHvo^ ^^.lieofibfflTst Paul MacAvoy (You, Too, Will Pay for Asbestosis) makes several erroneous assertions about the social costs of asbestos disease. -- ----contends that industrial applications "such as automobile brake linings" have no substitutes. In fact, the leading producers of brake linings have plans to go asbestos-free as soon as possible. General Motors, whose current output of cars is mostly asbestos free, has writtem, "The objective of General Motors is to deliver, by 1984, ail cars with asbestos-free brake linings.'* The substitute materials are safer, longer lasting, and give improved performance -- at somewhat higher initial cost. Similarly, every major market for asbestos in the U.S. shows plummeting consumption and a turn toward substitutes. MacIvoyls economic model of a recognized hazard driving up asbestos workers* wages admittedly bears no relation to historical fact. The reaeon is that those at risk were simply not made aware of the insidious hazards of asbestosis and can cer that they faced. This is born out by the small number of compensation claims filed by workers with asbestos diseases in past decades. Fortune has reported that the asbestos industry leader began buying insurance for product liability suits starting in 194?. Warning labels were not placed on the sacks of asbestos from this company's mines until 1968. The company's accum ulated coverage in product liability insurance totaled $364 million by 1976, the last year such insurance was sold to Johns-Manville. This leads to the sain point of J?5r. MacEvoy*s piece, that a deluge of damage suits against the asbestos companies will cause a doubling of auto insurance rates and a loss of real protection as premiums are drained away and insurers struggle to maintain solvency. Nonsense. Just as insurance carriers set limits on the coverage of every auto insurance policy, they also have limited coverage for the asbestos industry's product liabil ity obligations. This coverage probably amounts to less than $1 billion in toto, not several billion dollars a year for the rest of this century and beyond. At this point, the insurers may be willing to write this off as a bad bet and be more care ful in the future. Will the public be intimidated into supporting changes in law to help out the asbestos companies, in fear of higher priced insurance or asbestos? Such changes in consumer protection law might amount to society's seal of approval, and send an ominous signal to the sellers of next year's version of asbestos insulation, defec tive Pinto cars and radial tires. March 23, 1982 Mr. Paul MacAvoy Dear Mr. MacAvoy, X have had little tine to analyze your report, but as I am busy I wanted to send some impressions in the hope that they will be helpful. The problem that has been given too little attention in your analysis is the limited nature of insurance coverage for the asbestos companies (which in cidentally includes defendants that no longer handle asbestos at all). I would guess that the coverage is no sore than $2 billion, arid if that is so the up shot of this litigation would far from the disaster you forecast for the insurers and those they insure. It would ba wall worth it, I suggest, to inquire what the probably limits of the insurance coverage is. I had heard that the insurers are ready, just about, to write this off as a bad bat -- which is a far cry from the scenario one can arrive at without taking liability limits into account. I would like to see more attention to the possible maneuvers the asbestos firms might employ to shield their assets in the event that the burden of com pensation becomes too great. This would require careful attention to the options available to publiely held, large, stock-exchange listed firms -- many of whom are diversified and none of whom is today primarily an asbestos company. Of course, one thing being attempted now with great intensity is a legislative change at the federal level that would stop more suits from being filed -- the deal her is to create an alternative compensation scheme that would stop the large in-toto payments assessed in trial and settlements, and substitute a lim ited system of payments. But the more interesting thing is, what could these asbestos defendants do under the current ^rules'* to avoid paying all the damages they aren't insured for, in the immediate years ahsad. Hoping these eerrsants are in some way helpful, and X would be glad to re ceive more refined editions of this working paper ho. 2? as you prepare it for publication. Yale University March 16, 1982 DEPARTMENT OF ECONOMICS 37 H i house Avenue B o x 1912 Yale Station N ew Haven, Connecticut 06520 PAUL W . M acAVOY Frederick W illiam Beinecke Professor o fEconomics Mr. Barry Castleman 1722 Linden Avenue Baltimore, Maryland 21217 Dear Mr. Castleman: Enclosed is my paper entitled "The Economic Consequences of Asbestos-Related Disease", as distributed in the Yale School of Organization and Management Working Paper series. While not complete by any means, it is being distributed as a working paper at this time due to the press of demand for substantiation of my New York Times article of February 14, 1982. As a working paper it can be revised prior to publication. Any comments or suggestions that you may have in preparation for publication would be appreciated. Sincerely, PWM: am Paul W. MacAvoy