MDR vs. RAY (Post 4 of 4): Excerpt from MDR's most recent Q...
NOTE 2 - PRODUCTS LIABILITY
As a result of asbestos-containing commercial boilers and other products sold or
installed in prior decades by B&W and certain of its subsidiaries, B&W is
subject to a substantial volume of non-employee products liability claims. All
of these claims are similar in nature, the primary difference being the type of
alleged injury or illness suffered by the plaintiff as a result of the exposure
to asbestos fibers (e.g., mesothelioma, lung cancer, other types of cancer,
asbestosis or plueral changes).
McDermott has insurance coverage for these asbestos products liability claims
against B&W, which coverage is subject to varying insurance limits that are
dependent upon the year involved. Pursuant to agreements with the majority of
our principal insurers concerning the method of allocation of claim payments to
the years of coverage, we negotiate and settle these claims and bill the
appropriate amounts to the insurers. Since these claims began in the early
1980s, we have engaged in a strategy of grouping claims that meet certain basic
criteria and settling them at the lowest average cost per claim possible. While
we have rejected claims that we deemed invalid, as a general practice we do not
litigate asbestos liability claims. We believe that this settlement strategy has
allowed us to use our available insurance to discharge B&W's asbestos liability
claims efficiently by minimizing associated legal and administrative costs.
McDermott has recognized provisions in its financial statements to the extent
that settled claim payments are not recoverable from insurers.
At September 30 and March 31, 1999, McDermott had recorded the following with
respect to asbestos products liability claims and related insurance recoveries:
September 30, March 31,
1999 1999
---- ----
(Unaudited)
(In thousands)
<S> <C> <C>
Asbestos products liability:
Current $ 278,500 $ 240,000
Non-current 1,097,539 1,322,363
------------ ------------
Total $ 1,376,039 $ 1,562,363
============ ============
Asbestos products liability insurance recoverable:
Current $ 240,400 $ 199,750
Non-current 972,274 1,167,113
------------ ------------
Total $ 1,212,674 $ 1,366,863
============ ============
Estimated liabilities for pending and future non-employee products liability
asbestos claims are derived from B&W's prior claims history and constitute
management's best estimate of such future cost, including recoverability from
insurers. Estimates of insurance recoveries are based upon management's analysis
of insurance coverage and insurer solvency. Inherent in the estimate of these
liabilities are expected trend claim severity and frequency and other factors,
which may vary significantly as claims are filed and settled. Such estimates are
based upon management's expectation that new claims will conclude within the
next 12 1/2 years, that there will be a significant decline in new claims
received after 3 1/2 years, and that the average cost per claim will continue to
increase only moderately.
Future costs to settle claims, as well as the number of claims, could be
adversely affected by changes in judicial rulings and other influences beyond
our control. Any changes in the estimates of future asbestos products liability
and insurance recoverables or differences between the proportion of any
additional asbestos products liabilities covered by insurance and that
experienced in the past could result in material changes to the results of
operations for any fiscal quarter or year. Consequently, B&W's ultimate loss for
non-employee asbestos liability claims may differ materially from amounts
provided in the consolidated financial statements and may have a material
adverse effect on McDermott's and B&W's results of operations and financial
position.
Recently, B&W has experienced an increase in the amounts demanded by certain
plaintiff's attorneys to settle mesothelioma, lung cancer and asbestosis claims.
The demanded amounts significantly exceed the average amount of B&W's historical
settlement payments for these types of claims. We are evaluating this
development to determine if it is representative of the amounts required to
settle these types of claims in the future and its overall impact on the
estimates and forecasts of B&W's ultimate exposure for non-employee asbestos
claims. If we are unsuccessful in negotiating the demanded amounts down to
historical levels, which typically have included moderate annual increases, B&W
may be forced to accept higher settlement amounts, begin litigating such claims
or take other available courses of action. Any of these actions could have a
material adverse impact on B&W's ultimate exposure for asbestos liability claims
and McDermott's (including B&W's) consolidated financial position, results of
operations and business prospects. |
