Bankrupt Grace Faces 65,656 Asbestos Cases ------------------------------------------ Published October 03, 2002 W.R. Grace & Co. reports that it was a defendant in 65,656 asbestos- related lawsuits on April 2, 2001, the date it filed for Chapter 11 bankruptcy. Sixteen of such lawsuits involve claims for property damage, eight relating to Grace's former attic insulation product (one of which has since been dismissed) and eight relating to a number of former asbestos-containing products (two of which also involve the attic insulation product). The remainder of such lawsuits involves 129,191 claims for bodily injury. At year-end 2000, Grace was a defendant in 61,395 lawsuits, 15 involving claims for property damage, and the remainder involving 124,907 claims for bodily injury. Through December 31, 2001, 141 asbestos property damage cases were dismissed without payment of any damages or settlement amounts; judgments were entered in favor of Grace in nine cases (excluding cases settled following appeals of judgments in favor of Grace); judgments were entered in favor of the plaintiffs in seven cases for a total of $60.3 million (none of which is on appeal); and 207 property damage cases were settled for a total of $696.8 million. On April 2, 2001, Grace and 61 of its United States subsidiaries and affiliates filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The filing was made in response to a sharply increasing number of asbestos-related bodily injury claims. Prior to 2000, Grace was able to settle asbestos-related claims through direct negotiations. The filing of claims had stabilized, and annual cash flows were manageable and fairly predictable. In 2000, the litigation environment changed with an unexpected 81% increase in bodily injury claims, which Grace believes was due to a surge in unmeritorious claims. Trends in claims filing and settlement demands showed no signs of returning to historic levels and were exacerbated by the Chapter 11 filings of several co-defendants in asbestos bodily injury litigation. These trends greatly increased the risk that Grace would not be able to resolve its pending and future asbestos claims under the state court system. Grace concluded that a federal court-supervised Chapter 11 filing provides the best forum available to achieve predictability and fairness in the claims settlement process. By filing under Chapter 11, Grace expects to be able both to obtain a comprehensive resolution of the claims against it and preserve the inherent value of its businesses. As a consequence of the filing, pending litigation against Grace is generally stayed (subject to certain exceptions in the case of governmental authorities), and no party may take any action to realize its pre-petition claims except pursuant to order of the Bankruptcy Court. Grace intends to address all of its pending and future asbestos-related claims and all other pre-petition claims in a plan of reorganization. The formulation and implementation of a plan of reorganization could take a significant period of time. Since the filing, all motions necessary to conduct normal business activities have been approved by the Bankruptcy Court. Purported Class Action In February 2000 a purported class action lawsuit was filed in the U.S. District Court for the Eastern District of Massachusetts against the Company (Lindholm v. W. R. Grace & Co.) on behalf of all owners of homes containing Zonolite(R) attic insulation, a product previously sold by Grace that may contain trace amounts of asbestos. The action seeks damages and equitable relief, including the removal, replacement or disposal of all such insulation. Since Lindholm was filed, nine additional purported class action lawsuits have been filed against Grace in various state and federal courts asserting similar claims and seeking damages similar to those in Lindholm. One of the purported federal class actions has been consolidated with Lindholm. As a result of the Chapter 11 filing, all of these cases have been transferred to the U.S. Bankruptcy Court for the District of Delaware. While Grace has not completed its investigation of the claims described in these lawsuits, Grace believes that this product was and continues to be safe for its intended purpose and poses little or no threat to human health. At this time, Grace is not able to assess the extent of any possible liability related to this matter. Cases Dismissal Cumulatively through April 2, 2001, 16,354 bodily injury lawsuits involving 35,720 claims were dismissed without payment of any damages or settlement amounts (primarily on the basis that Grace products were not involved), and 55,489 lawsuits involving 163,698 claims were disposed of for a total of $645.6 million. Based on Grace's experience and trends in asbestos bodily injury litigation, Grace has endeavored to reasonably forecast the number and ultimate cost of all present and future bodily injury claims expected to be asserted, based on measures governed by generally accepted accounting principles relating to probable and estimable liabilities. Grace has accrued $996.3 million at December 31, 2001 as its estimate of the cost to resolve all asbestos-related bodily injury cases and claims pending as well as those expected to be filed in the future, and all property damage cases for which sufficient information is available to form a reasonable estimate of the cost to resolve. This estimate has been made based on historical facts and circumstances prior to April 2, 2001. However, due to the Chapter 11 filing and the uncertainties of asbestos- related litigation, Grace's ultimate liability for asbestos-related litigation could differ materially from the recorded liability. Insurance Policies Grace previously purchased insurance policies with respect to its asbestos-related lawsuits and claims. Grace has settled with and has been paid by all of its primary insurance carriers with respect to both property damage and bodily injury cases and claims. Grace has also settled with its excess insurance carriers that wrote policies available for property damage cases; those settlements involve amounts paid and to be paid to Grace. Grace believes that certain of these settlements may cover attic insulation claims as well as other property damage claims. In addition, Grace believes that additional coverage for attic insulation claims may exist under excess insurance policies not subject to settlement agreements. Grace has settled with excess insurance carriers that wrote policies available for bodily injury claims in layers of insurance that Grace believes may be reached based on its current estimates. Insurance coverage for asbestos-related liabilities has not been commercially available since 1985. Pursuant to settlements with primary-level and excess-level insurance carriers with respect to asbestos-related claims, Grace received payments totaling $895.4 million prior to 1999, as well as payments totaling $73.1 million in 1999, $85.6 million in 2000, and $78.8 million in 2001. Under certain settlements, Grace expects to receive additional amounts from insurance carriers in the future and has recorded a receivable of $293.4 million to reflect the amounts expected to be recovered in the future, based on projected payments equal to the amount of the recorded asbestos-related liability. During 2000, the number of bodily injury claims made against Grace increased significantly compared with 1999 and prior year claim levels, with a total of 48,786 bodily injury claims being received in 2000, versus 26,941 claims in 1999. This trend continued in the first quarter of 2001, when Grace received 16,411 bodily injury claims. Also, costs to resolve asbestos litigation were higher than expected for bodily injury and certain property damage claims. In addition, five significant codefendant companies in bodily injury litigation had petitioned for reorganization under Chapter 11. These developments and events caused an environment that increased the risk of more claims being filed against Grace than previously projected, with higher settlement demands and trial risks. These developments and events also raised substantial doubt whether Grace would be able to manage its asbestos liabilities over the long term under the existing state court system. As a result, following a thorough review of the strategic and operating issues associated with continuing to defend asbestos litigation through the court system versus voluntarily seeking a resolution of such litigation through reorganization under Chapter 11, Grace filed for protection under Chapter 11 on April 2, 2001. Property Damage case activity for 2001 and 2000: 2001 2000 ----- ----- Cases outstanding, beginning of year 15 11 New cases filed 1 8 Settlements (4) Dismissals (1) -- Judgments -- -- Cases outstanding, end of year 15 15 Bodily injury claim activity for 2001 (through the Filing Date) and 2000: April 2, December 31, 2001 2000 -------- ------------ Claims outstanding, beginning of year 124,907 105,670 New claims 16,411 48,786 Settlements (11,841) (26,950) Dismissals (286) (2,598) Judgments -- (1) Claims outstanding, end of period 129,191 124,907 The total asbestos-related liability balances as of December 31, 2001 and 2000 were $996.3 million and $1,105.9 million, respectively. Grace adjusted its recorded insurance receivable in the fourth quarter of 2000 by $85.6 million to reflect the additional amounts expected to be recovered in respect of the adjusted asbestos-related liability. The net amount of the adjustments recorded during the fourth quarter of 2000 ($208 million after insurance recovery) reflects adverse experience in the latter part of 2000 versus certain underlying assumptions used to estimate Grace's liability for asbestos-related litigation. After the 2000 adjustment, Grace's recorded liability for asbestos-related litigation was $1,105.9 million gross and $733.9 million net of insurance recovery. Estimated Liability for Asbestos-Related Litigation 2001 2000 ----- ----- Asbestos-related liability expected to be satisfied within one year $5,100,000 $178,400,000 Asbestos-related liability expected to be satisfied after one year $991,200,000 $927,500,000 Total asbestos-related liability $996,300,000 $1,105,900,000 Asbestos Insurance Grace previously purchased insurance policies with respect to its asbestos-related lawsuits and claims. Grace has settled with and has been paid by all of its primary insurance carriers with respect to both property damage and bodily injury cases and claims. Grace has also settled with its excess insurance carriers that wrote policies available for property damage cases; those settlements involve amounts paid and to be paid to Grace. Grace believes that certain of these settlements may cover attic insulation claims as well as other property damage claims. In addition, Grace believes that additional coverage for attic insulation claims may exist under excess insurance policies not subject to settlement agreements. Grace has settled with excess insurance carriers that wrote policies available for bodily injury claims in layers of insurance that Grace believes may be reached based on its current estimates. Insurance coverage for asbestos-related liabilities has not been commercially available since 1985. The asbestos-related insurance asset represents amounts expected to be received from carriers under settlement agreements for defense and disposition costs to be paid by Grace. Estimated insurance reimbursements are based on the recorded amount of the liability and are considered by management to be collectible. Activity in Grace's notes receivable from insurance carriers and asbestos-related insurance receivable during 2001 and 2000: Estimated Insurance Recovery on Asbestos-Related Liabilities 2001 2000 (In millions) NOTES RECEIVABLE Notes receivable from insurance carriers, beginning of year, net of discount of $0.2 (2000 - $0.8) $2.7 $5.3 Proceeds received under asbestos-related insurance (2.9) (3.2) settlements ........................ Current year amortization of discount. 0.2 0.6 -------------------------------------------------------------- Notes receivable from insurance carriers, end of year, (2000 - net -- 2.7 of discount of $0.2)................ -------------------------------------------------------------- INSURANCE RECEIVABLE Asbestos-related insurance receivable, beginning of year ...... 369.3 366.1 Proceeds received under asbestos-related insurance (75.9) (82.4) settlements ........................ Increase in asbestos-related insurance receivable ............... -- 85.6 -------------------------------------------------------------- Asbestos-related insurance receivable, end of year ............ 293.4 369.3 -------------------------------------------------------------- Total amounts due from insurance carriers............................ 293.4 372.0 Expected to be realized within one year ............................... (9.7) (83.8) -------------------------------------------------------------- Expected to be realized after one year... $283.7 $288.2