Fraud Concerns Amp Up Scrutiny of Asbestos Victim Fund

The Trump administration has stepped up scrutiny of asbestos trust funds, concerned that the pots of money intended to help people exposed to the hazardous substance are being depleted by fraudulent claims, harming victims, businesses and the government.

The Justice Department in the last two months has demanded trust documents as part of a civil investigation, opposed the creation of another trust it said lacked sufficient safeguards, and argued against the appointment of a lawyer it said was too conflicted to represent victims.

The actions take aim at a system that over decades has paid out billions of dollars to the sick and cancer-stricken, but that critics say is opaque and prone to fraud and manipulation by well-connected lawyers. The government’s intervention aligns it with business groups who have long complained about the process.

“We have an interest in fraud and consumer protection, so if there is fraud happening out there that is cognizable under federal law, that’s the type of thing the Justice Department tends to get interested in,” acting Associate Attorney General Jesse Panuccio said in an interview.

But plaintiffs’ lawyers and asbestos victims’ advocates say there’s scant proof of widespread fraud, particularly for a system that has accommodated millions of claims. And University at Buffalo law professor S. Todd Brown said the additional government oversight, while not a bad idea, “could lead to money going to complying with this oversight rather than going to the victims.”

The trusts started emerging in the 1980s, formed by makers of asbestos-containing products who sought bankruptcy protection in the face of lawsuits from people who feared they had been exposed. The maneuvering enabled the companies to shield themselves from lawsuits while setting aside money to pay pending and future claims for asbestos, an environmental hazard once found in everyday products that can lead to the deadly mesothelioma cancer and other illnesses.

The model flourished. A 2011 Government Accountability Office report identified 60 trusts formed between 1988 and 2010 that it said had paid about 3.3 million claims valued at more than $17 billion.

Lawyers for asbestos victims say the process enables people to obtain compensation for catastrophic illness without drawn-out lawsuits.

“There is incredible irony in the fact that an industry that covered up the dangers of a known carcinogen for decades, leading to the ongoing deaths of 15,000 Americans a year, is now claiming that its victims are committing systemic fraud against the trusts – even though no court has ever found evidence of such fraud,” Peter Knudsen, spokesman for the plaintiffs’ lawyers group American Association for Justice, said in a statement.

Business groups and defense lawyers contend otherwise.

They say weak oversight allows people to collect payments with minimal evidence they were harmed by a particular company’s product, and for illnesses far less serious than mesothelioma and lung cancer. They argue trust overseers are often tied to well-connected plaintiffs’ firms, raising concerns of favoritism and cronyism.

And they say the meager amount of publicly available information makes it hard to know how decisions on payments are made, how much a given individual is receiving or whether the exposure evidence submitted to one trust is consistent with what’s submitted to others.

In 2014, a judge in the bankruptcy case of an asbestos gasket maker described a “startling pattern of misrepresentation” by alleged victims and their lawyers. The judge found that plaintiffs repeatedly told Garlock Sealing Technologies that it was responsible for their exposure and struck large settlement agreements with the company, only to later file claims with multiple other trusts over injuries and exposures they hadn’t previously disclosed.

Plaintiffs’ lawyers say asbestos victims are routinely sickened by multiple companies, often making it hard to pinpoint precisely who’s to blame and leaving them with no choice but to seek compensation from anyone who may have harmed them.

The Justice Department stepped up its oversight in the last few months.

In September, it challenged the creation of a new trust it said lacked details about how it would guard against fraud and abuse. The department said in a letter to state attorneys general that “it would object to plans for asbestos trusts that fail to include critical information on how asbestos claims will be evaluated, paid and reported” or that don’t do enough to prevent fraud.

It later challenged a different trust, Duro Dyne, over the appointment of a lawyer it said was too conflicted to represent interests of people who may later become ill. A judge rejected that request, and Jeffrey Prol, an attorney for the trust, said he was taken aback by what he called the department’s effort to make “this bankruptcy case a referendum on the asbestos trust system.”

At least one trust, DII Industries, has disclosed receiving an administrative subpoena, to produce records of settlements as part of an investigation into whether Medicare is being properly reimbursed for trust payments. A trust spokesman said it was complying.

Harold Kim, executive vice president of the U.S. Chamber Institute for Legal Reform, a pro-business legal organization, said the system has long been “broken.”

“Having more oversight and taking a closer look in terms of how these trusts operate and whether they’re violating federal law will hopefully keep these trusts honest.”