Management's discussion and analysis
Property-Liability Insurance
Environmental and Asbestos Claims
We continue to receive claims alleging injuries from environmental pollution or alleging covered property damages for the cost to clean up polluted sites. We also receive asbestos injury and property damage claims arising out of product liability coverages under general liability policies. The vast majority of these claims arise from policies written many years ago. Our alleged liability for both environmental and asbestos claims is complicated by significant legal issues, primarily pertaining to the scope of coverage. In our opinion, court decisions in certain jurisdictions have tended to broaden insurance coverage beyond the intent of original insurance policies.
Our ultimate liability for environmental claims is difficult to estimate because of these legal issues. Insured parties have submitted claims for losses not covered in their respective insurance policies, and the ultimate resolution of these claims may be subject to lengthy litigation, making it difficult to estimate our potential liability. In addition, variables, such as the length of time necessary to clean up a polluted site and controversies surrounding the identity of the responsible party and the degree of remediation deemed necessary, make it difficult to estimate the total cost of an environmental claim.
Estimating our ultimate liability for asbestos claims is equally difficult. The primary factors influencing our estimate of the total cost of these claims are case law and a history of prior claim development.
The following table represents a reconciliation of total gross and net environmental reserve development for each of the years in the three-year period ended Dec. 31, 1998. Amounts in the "net" column are reduced by reinsurance recoverables.
(In millions)
1998
1997
1996
Gross
Net
Gross
Net
Gross
Net
Enviromental
Beginning reserves
$867
$677
$889
$676
$840
$631
Northbrook reserves acquired
-
-
-
-
18
7
Incurred losses
(16)
26
44
58
87
92
Paid losses
(68)
(58)
(66)
(57)
(56)
(54)
Ending reserves
$783
$645
$867
$677
$889
$676
The following table represents a reconciliation of total gross and net reserve development for asbestos claims for each of the years in the three-year period ended Dec. 31, 1998.
(In millions)
1998
1997
1996
Gross
Net
Gross
Net
Gross
Net
Asbestos
Beginning reserves
$397
$279
$413
$304
$421
$294
Northbrook reserves acquired
-
-
-
-
6
6
Incurred losses
44
13
22
(5)
18
25
Paid losses
(39)
(15)
(38)
(20)
(32)
(21)
Ending reserves
$402
$277
$397
$279
$413
$304
USF&G's net reserves for environmental and asbestos claims at the time of the merger totaled $304 million and $126 million, respectively. USF&G's reserve development for the three-year period ended Dec. 31, 1998, is included in the foregoing tables. USF&G's customer base generally did not include large manufacturing companies, which tend to incur the majority of known environmental and asbestos claims. In addition, USF&G had traditionally been a primary coverage carrier, having written relatively little high-level excess coverage; therefore, liability exposures were generally restricted to primary coverage limits.
Our reserves for environmental and asbestos losses at Dec. 31, 1998 represent our best estimate of our ultimate liability for such losses, based on all information currently available to us. Because of the inherent difficulty in estimating such losses, however, we cannot give assurances that our ultimate liability for environmental and asbestos losses will, in fact, match our current reserves. We continue to evaluate new information and developing loss patterns, but we believe any future additional loss provisions for environmental and asbestos claims will not materially impact the results of our operations, liquidity or financial position.
Total gross environmental and asbestos reserves at Dec. 31, 1998, of $1.19 billion represented approximately 6% of gross consolidated reserves of $18.46 billion.