Assessing the Merits of Reallocation under Joint and Several Liability: Evidence from Asbestos Litigation

Abstract

If two defendants share a joint and several liability and the first becomes insolvent, its unpaid liabilities are reallocated to the second. The upside is that the plaintiff is insured against the insolvency of the first defendant. The downside is that, if the second defendant’s assets cannot cover the first defendant’s liabilities, the second defendant may also go bankrupt. We quantify this insurance and externality in the context of asbestos-related torts. We choose this example because 61 companies with major asbestos liabilities have gone bankrupt since 1982. Using data from 10-K forms and asbestos trials, we estimate more than half of liability payments by currently solvent defendants can be attributed to the reallocation of liabilities owed by bankrupt defendants. Moreover, we estimate that each additional dollar of compensation that reallocation provides to plaintiffs costs 23 to 66 cents in bankruptcy-related expenses. We situate this finding in the broader debate over different policies designed to provide insurance against insolvency, including superpriority for tort claimants. ∗University of Virginia Law School and Bates White, LLC, respectively. We would like to thank Doug Lichtman, an anonymous referee, Ken Abraham, Rajesh Aggarwal, Michael Levine, Edward Morrison, Dan Ortiz, Ben Sacks, George Triantis, workshop participants at the University of Virginia Law School, and conference participants at the 2004 American Law and Economics Association Meetings for helpful comments. We are grateful to Micheal Snypes and Linda Fang for their outstanding research assistance and to the RAND Institute for Civil Justice — especially Stephen J. Carroll and Robert Reville — for sharing their data on asbestos judgments. We welcome readers’ comments, which should be addressed to amalani@virginia.edu.

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Cite this paper

@inproceedings{Malani2005AssessingTM, title={Assessing the Merits of Reallocation under Joint and Several Liability: Evidence from Asbestos Litigation}, author={Anup Malani and Charles H. Mullin and Ken Abraham and Rajesh Aggarwal and Michael Levine and Edward Morrison and Dan Ortiz and B. Sacks}, year={2005} }