Honeywell 2003 Annual Report Download - page 405

claimants representative. In light of the uncertainties inherent in making
long-term projections we do not believe that we have a reasonable basis for
estimating asbestos claims beyond 2018 under SFAS No. 5. Honeywell retained the
expert services of Hamilton, Rabinovitz and Alschuler, Inc. (HR&A) to project
the probable number and value, including trust claim handling costs, of asbestos
related future liabilities based upon historical experience with similar trusts.
The methodology used to estimate the liability for future claims has been
commonly accepted by numerous courts and is the same methodology that is
utilized by an expert who is routinely retained by the asbestos claimants
committee in asbestos related bankruptcies. The valuation methodology includes
an analysis of the population likely to have been exposed to asbestos containing
products, epidemiological studies to estimate the number of people likely to
develop asbestos related diseases, NARCO claims filing history, the pending
inventory of NARCO asbestos related claims and payment rates expected to be
established by the NARCO trust.
Honeywell has substantial insurance that reimburses it for portions of the costs
incurred to settle NARCO related claims and court judgments as well as defense
costs. This coverage is provided by a large number of insurance policies written
by dozens of insurance companies in both the domestic insurance market and the
London excess market. At December 31, 2003, a significant portion of this
coverage is with London-based insurance companies under a coverage-in-place
agreement. Coverage-in-place agreements are settlement agreements between
policyholders and the insurers specifying the terms and conditions under which
coverage will be applied as claims are presented for payment. These agreements
govern such things as what events will be deemed to trigger coverage, how
liability for a claim will be allocated among insurers and what procedures the
policyholder must follow in order to obligate the insurer to pay claims. We
conducted an analysis to determine the amount of insurance that we estimate is
probable that we will recover in relation to payment of current and projected
future claims. While the substantial majority of our insurance carriers are
solvent, some of our individual carriers are insolvent, which has been
considered in our analysis of probable recoveries. Some of our insurance
carriers have challenged our right to enter into settlement agreements resolving
all NARCO related asbestos claims against Honeywell. However, we believe there
is no factual or legal basis for such challenges and we believe that it is
probable that we will prevail in the resolution of, or in any litigation that is
brought regarding these disputes and, as of December 31, 2003, we have
recognized approximately $100 million in probable insurance recoveries from
these carriers. We are in advanced ongoing settlement discussions with these
carriers and while we cannot predict the outcome of these discussions we expect
that a substantial majority of the carriers will participate in the settlement
agreement that is being negotiated. The amounts that we expect to realize
through the settlement process are consistent with our reserves. We made
judgments concerning insurance coverage that we believe are reasonable and
consistent with our historical dealings with our insurers, our knowledge of any
pertinent solvency issues surrounding insurers and various judicial
determinations relevant to our insurance programs. Based on our analysis, during
the fourth quarter of 2002 we recorded insurance recoveries that were deemed
probable through 2018 of $1.8 billion. A portion of this insurance has been
received, as discussed below.
Projecting future events is subject to many uncertainties that could cause the
NARCO related asbestos liabilities to be higher or lower than those projected
and recorded. There is no assurance that a plan of reorganization will be
proposed or confirmed, that insurance recoveries will be timely or whether there
will be any NARCO related asbestos claims beyond 2018. Given the inherent
uncertainty in predicting future events, we review our estimates periodically,
and update them based on our experience and other relevant factors. Similarly we
will reevaluate our projections concerning our probable insurance recoveries in
light of any changes to the projected liability or other developments that may
impact insurance recoveries.
Friction Products
Honeywell's Bendix Friction Materials (Bendix) business manufactured automotive
brake pads that contained chrysotile asbestos in an encapsulated form. There is
a group of existing and potential claimants consisting largely of individuals
that allege to have performed brake replacements.
From 1981 through December 31, 2003, we have resolved about 64,000 Bendix
related asbestos claims including trials, covering 120 plaintiffs, which
resulted in 115 favorable verdicts. Trials covering five individuals resulted in
adverse verdicts; however, two of these verdicts were reversed on appeal and the
remaining three claims were settled.
Through the second quarter of 2002, Honeywell had no out-of-pocket costs for
Bendix related asbestos claims since its insurance deductible was satisfied many
years ago. Beginning with claim payments made in the third quarter of 2002,
Honeywell began advancing indemnity and defense claim costs. During the years
ended December 31, 2003 and 2002, those indemnity and defense costs amounted to
approximately