Far from fireproof

The news from Europe that Swedish-Swiss construction and engineering firm ABB Group had issued a profit warning, largely as a result of lawsuits against its U.S. unit, Combustion Engineering, is another lesson in how the litigious culture is a danger to the functioning economy.

ABB (ASEA-Brown Boveri, for the traditionalists among us) bought Connecticut-based Combustion Engineering (CE) in 1990. The company’s principal products were boilers and pressure vessels; the acquisition fit with ABB’s core business of power generation, turbine construction, and power transmission products.

Now CE (whose Tyler sieves are familiar to anyone who has ever had to do a grain size analysis) faces the peril of large civil judgments against it in lawsuits over the use of asbestos. Since ABB bought the company, it has paid out US$865 million in settlements to claimants in asbestos lawsuits; now, the projected value of future settlements exceeds US$1 billion, which would wipe out the US$812-million book value of CE’s assets.

Condign justice, indeed, for a selfish corporation that put profits ahead of peoples’ safety? Hardly: in fact that’s nowhere near the truth. CE, like any other heavy-construction company that operated in the first eighty years of the last century, used asbestos insulation on its works.

And like a number of those other construction companies, CE has been caught by a legal dragnet searching for somebody, anybody, to shake down over society’s use of asbestos. Asbestos exposure lawsuits, principally in plaintiff-coddling jurisdictions in the United States, have now bankrupted twenty companies since the beginning of 2001.

Some of the claimants had no symptoms of asbestos-related illness, and are being compensated for the potential of damage, rather than actual damage, a legal construction that runs counter to long-established principles of common law. Plaintiffs have received judgments for the emotional distress over having worked around asbestos.

And the defendants in these cases are rarely, if ever, asbestos producers, most of which folded long ago. Rather, they are end-users with two things: money and some tenuous connection to the plaintiffs.

Actuaries have been hunched over their spreadsheets and now estimate that these lawsuits will generate between US$250 billion and US$350 billion in settlements, which will be paid out by the defendants and by their insurers. General Electric, Ford Motor, Shell, and Ericsson have all been named in asbestos lawsuits.

ABB said it might counter the suits by putting its subsidiary into creditor protection. It maintained that claimants could not name the parent company or other companies in the ABB group — and indeed, in cases that have been heard, that view has been correct. But the search for deep pockets knows no bounds, and sympathetic judges have come to be very flexible about the law when the opportunity to chase and bankrupt another corporate villain comes along.

CE’s problems chopped about 60% of the value from ABB’s European share price in the space of a single trading day. (It recovered, somewhat, in later New York trading.) This is an otherwise solvent, well-managed company, in a business that is trying to ride out a worldwide slowdown in economic growth. Admitted to the balance sheet, the CE liabilities could be disastrous for ABB’s ability to take on debt — a fact underlined by revisions to the company’s credit rating by both Moody’s and Standard & Poor’s. (Both rating services have put ABB on the bottom rung of the investment-grade ladder, “with negative implications.”)

At the same time, fears about the results of the CE lawsuits have effectively halved the amount ABB could raise in an equity issue.

It is a curious irony that the search for the guilty in asbestos litigation may do severe harm to the books of a company that offers waste management services to owners of old industrial sites. Unlike providing legal services to claimants in asbestos litigation, though, actually handling asbestos waste is a pretty low-margin business.

The unhappy truth is that the lawyers can sport with the financial future of companies that have little or nothing to do with the tort in question; and that the legal system, especially in the U.S., is abetting that injustice.