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Contingencies | 3 Months Ended
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Mar. 31, 2017
Commitments and Contingencies Disclosure [Abstract] |
Contingencies | Contingencies Product Liability The Company categorizes the product liability claims of its subsidiary MSA LLC into two main categories: single incident and cumulative trauma. Single incident claims. Single incident product liability claims involve incidents of short duration that are typically known to us when they occur and involve observable injuries, which provide an objective basis for quantifying damages. MSA LLC works with an outside valuation consultant to review its single incident product liability exposure on an annual basis, or more frequently if changing circumstances or developments in existing cases make an interim review appropriate. The review process takes into account the number and composition of pending claims, expected settlement costs for reported claims, and an estimate of costs for unreported claims (claims incurred but not reported or "IBNR"). The estimate for IBNR claims is based on experience, sales volumes, and other relevant information. Adjustments are made to the reserve as appropriate. The reserve for single incident product liability claims, which includes reported and IBNR claims, was $3.4 million at both March 31, 2017 and December 31, 2016. Single incident product liability expense was insignificant during both the three months ended March 31, 2017 and 2016. Cumulative trauma claims. Cumulative trauma product liability claims involve exposures to harmful substances (e.g., silica, asbestos and coal dust) that occurred many years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, mesothelioma, or coal worker’s pneumoconiosis. MSA LLC is presently named as a defendant in 1,572 lawsuits comprised of 2,797 claims. These lawsuits mainly involve respiratory protection products allegedly manufactured and sold by MSA LLC or its predecessors. The products at issue were manufactured many years ago and are not currently offered by MSA LLC. Although there is year over year variability in the number and quality of claims defended and resolved, MSA LLC’s aggregate spend for cumulative trauma product liability claims (inclusive of settlements and defense costs) for the three years ended December 31, 2016, totaled approximately $150.9 million, substantially all of which was recorded as insurance receivables or notes receivable, insurance companies because the amounts are believed to be recoverable under insurance. A summary of cumulative trauma product liability lawsuit and pending claims activity follows:
|  | Three Months Ended March 31, 2017 |  | Year Ended December 31, 2016
Open lawsuits, beginning of period |  | 1,794 |  |  | 1,988 |
New lawsuits |  | 97 |  |  | 379 |
Settled and dismissed lawsuits |  | (319 | ) |  | (573 | )
Open lawsuits, end of period |  | 1,572 |  |  | 1,794 |
|  | Three Months Ended March 31, 2017 |  | Year Ended December 31, 2016
Pending claims, beginning of period |  | 3,023 |  |  | 3,779 |
New claims |  | 120 |  |  | 843 |
Settled and dismissed claims |  | (346 | ) |  | (1,599 | )
Pending claims, end of period |  | 2,797 |  |  | 3,023 |
More than half of the open lawsuits at March 31, 2017 have had a de minimis level of activity over the last 5 years. It is possible that these cases could become active again at any point due to changes in circumstances. Management works with an outside valuation consultant and outside legal counsel to review its cumulative trauma product liability exposure on an annual basis, or more frequently if changing circumstances or developments in existing cases make an interim review appropriate. The review process takes into account the number and composition of pending claims, outcomes of matters resolved during current and prior periods, and variances associated with different plaintiffs’ counsel and venues as well as other information known about the current docket. Cumulative trauma product liability litigation is inherently unpredictable. Factors that can limit our ability to estimate potential liability include the lack of claims experience with applicable plaintiffs’ counsel, as claims experience can vary significantly among different counsel, low volume of resolution, lack of confidence with the consistency of claims composition, or other factors. With respect to the risk associated with any particular case, it has typically not been until very late in the legal process that it can be reasonably determined whether it is probable that any such case will ultimately result in a liability. This uncertainty is caused by many factors, including consideration of the applicable statute of limitations, the sufficiency of product identification and other defenses. Complaints generally do not provide information sufficient to determine if a lawsuit will develop into an actively litigated case. Even when a case is actively litigated, it is often difficult to determine if the lawsuit will be dismissed or otherwise resolved until late in the lawsuit. Moreover, even if it is probable that such a lawsuit will result in a loss, it is often difficult to estimate the amount of actual loss that will be incurred. These actual loss amounts are highly variable and turn on a case by case analysis of the relevant facts, including the nature of the injury, the jurisdiction in which the claim is filed, the plaintiffs' counsel and the number of parties in the lawsuit. In addition, there are uncertainties concerning the impact of bankruptcies of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and case to case. Consequently, MSA LLC is unable to comprehensively estimate its cumulative trauma product liability exposure. Currently management, in consultation with its outside valuation consultant and outside legal counsel, has been unable to estimate, and therefore has not recorded any liability, for MSA LLC’s IBNR claims as well as for certain of its existing coal dust claims, including those coal dust claims that arose subsequent to the Couch verdict described below. Total cumulative trauma product liability reserve, including the estimated reserve for reported claims and settlements that have not yet been paid totaled $9.2 million and $11.1 million at March 31, 2017 and December 31, 2016, respectively. This reserve is recorded in the insurance and product liability line within other current liabilities section of the Condensed Consolidated Balance Sheet. To arrive at the estimated reserve, it was necessary to employ significant assumptions. In addition, the reserve does not include amounts which will be spent to defend the claims covered by the reserve. These costs are recognized as incurred. As noted above, the liability recorded does not take into account any IBNR claims and certain of the currently pending coal dust claims against MSA LLC. These claims have not been included in the reserve due to a lack of claims experience with the applicable plaintiffs’ counsel, low volume of resolution, or lack of confidence in the consistency of claims composition, or other factors, which have rendered us unable to reasonably assess the probability and estimate the magnitude of potential losses. Because litigation is subject to inherent uncertainties, and unfavorable rulings or developments could occur, there can be no certainty that MSA LLC may not ultimately incur charges in excess of presently recorded liabilities with respect to claims included within the existing reserve or related to claims not included in the reserve. We will adjust the reserve for our liability relating to cumulative trauma claims from time to time based on the maturation of claims, developing facts and circumstances, and if actual experience is worse than previously projected. These adjustments may reflect changes in estimates for claims currently covered by the reserve, as well as estimated liabilities for claims not presently covered by the reserve and IBNR claims, in the event we become able to reasonably assess the probability and estimate the magnitude of potential losses. These adjustments may be material and could increase the year over year variability of our financial results. On February 26, 2016, a Kentucky state court jury in the James Couch claim rendered a verdict against MSA LLC of $7.2 million dollars (comprised of $3.2 million of an apportioned share of compensatory damages and $4.0 million in punitive damages). The Couch claim is a cumulative trauma product liability lawsuit involving exposure to coal dust. Management believes that the verdict against MSA LLC is inconsistent with Kentucky law and many issues have been raised on appeal, including the statute of limitations, failure to meet the standard of causation and the appropriate application of punitive damages. The Company and its outside legal counsel have concluded that, based on their assessment of the appellate issues, a reversal of the adverse judgment is reasonably possible and, consequently, a loss contingency is not probable at this time and is not included in the $9.2 million product liability reserve as of March 31, 2017. In the future, if the Company determines that losses with respect to this matter are probable, MSA LLC, consistent with its existing practices, will record an accrual and provide appropriate disclosures as required by ASC 450-20-50, Contingencies. In the event that MSA LLC’s appeal of the adverse verdict is unsuccessful or not fully successful, the loss could total the full amount of the verdict, plus additional amounts for post-judgment interest. If so, the $3.2 million compensatory portion of the verdict (and associated interest) would be added to the product liability reserve and the insurance receivable, to the extent insurance is available. The $4.0 million punitive portion of the verdict (and associated interest) would be expensed because we do not have insurance to cover punitive damages in this case. Insurance Receivable and Notes Receivable, Insurance Companies MSA LLC purchased insurance policies for the policy years from 1952-1986 from over 20 different insurance carriers that, subject to some common contract exclusions, provide coverage for cumulative trauma product liability losses and, in many instances, related defense costs (the "Occurrence-Based Policies"). After 1986, MSA LLC’s insurance policies have significant per claim retentions. Based on this, the Company does not expect to be materially reimbursed for any claims alleging exposures that occurred entirely after this date. In the normal course of business, MSA LLC makes payments to settle product liability claims and for related defense costs and records receivables for the amounts that are covered by insurance. The available limits of the applicable Occurrence-Based Policies exceed the recorded insurance receivable balance. Various factors could affect the timing and amount of recovery of the insurance receivable, including the outcome of negotiations with insurers and the outcome of the coverage litigation with respect to the Occurrence-Based Policies, and the extent to which the issuing insurers may become insolvent in the future. Insurance receivables at March 31, 2017 totaled $58.5 million, of which, $2.0 million is reported in prepaid expenses and other current assets and $56.5 million is reported in insurance receivable and other non-current assets. Insurance receivables at December 31, 2016 totaled $159.9 million, of which $2.0 million is reported in prepaid expenses and other current assets and $157.9 million is reported in insurance receivable and other non-current assets. A summary of insurance receivable balances and activity related to cumulative trauma product liability losses follows:
(In millions) |  | Three Months Ended March 31, 2017 |  | Year Ended December 31, 2016
Balance beginning of period |  | $ | 159.9 |  |  | $ | 229.5 |
Additions |  | 1.7 |  |  | 29.2 |
Collections and settlements converted to notes receivable |  | (103.1 | ) |  | (98.8 | )
Balance end of period |  | $ | 58.5 |  |  | $ | 159.9 |
Additions to insurance receivables in the above table represent insured cumulative trauma product liability losses and related defense costs. Collections and settlements primarily represent agreements with insurance companies to pay amounts due that are applicable to cumulative trauma claims. When there are contingencies embedded in these agreements, we apply payments to the undiscounted receivable in the period when the contingency is met. In some cases, settlements are converted to formal notes receivable from insurance companies. The notes receivable are recorded as a transfer from the insurance receivable balance to the note receivable, insurance companies (current and noncurrent) in the Condensed Consolidated Balance Sheet. In cases where the payment stream covers multiple years and there are no contingencies, the present value of the payments is recorded as a transfer from the insurance receivable balance to the note receivable, insurance companies (current and long-term) in the Condensed Consolidated Balance Sheet. Provided the remaining insurance receivable is recoverable through the insurance carriers, no gain or loss is recognized at the time of transfer from insurance receivable to notes receivable from insurance companies. Notes receivable from insurance companies at March 31, 2017 totaled $83.1 million, of which $19.7 million is reported in Notes receivable, insurance companies, current and $63.4 million is reported in Notes receivable, insurance companies, noncurrent. Notes receivable from insurance companies at December 31, 2016 totaled $67.3 million, of which $4.2 million is reported in Notes receivable, insurance companies, current and $63.1 million is reported in Notes receivable, insurance companies, noncurrent. A summary of notes receivable balances from insurance companies is as follows:
(In millions) |  | Three Months Ended March 31, 2017 |  | Year Ended December 31, 2016
Balance beginning of period |  | $ | 67.3 |  |  | $ | 8.7 |
Additions |  | 19.8 |  |  | 95.6 |
Collections |  | (4.0 | ) |  | (37.0 | )
Balance end of period |  | $ | 83.1 |  |  | $ | 67.3 |
The collectibility of MSA LLC's insurance receivables is regularly evaluated and we believe that the amounts recorded are probable of collection. These determinations are based on analysis of the terms of the underlying insurance policies, experience in successfully recovering cumulative trauma product liability claims from our insurers under other policies, the financial ability of the insurance carriers to pay the claims, understanding and interpretation of the relevant facts and applicable law and the advice of MSA LLC's outside legal counsel. We believe that successful resolution of insurance litigation with various insurance carriers over the years, as well as the recent trial verdict against North River, which resulted in a favorable outcome, demonstrate that we have strong legal positions concerning MSA LLC's rights to coverage. The trial verdict is described below. Uninsured cumulative trauma product liability losses were $0.2 million for the three months ended March 31, 2017 and insignificant for three months ended March 31, 2016. Insurance Litigation MSA LLC is currently involved in insurance coverage litigation with a number of its insurance carriers regarding its Occurrence-Based Policies. In 2009, MSA LLC (as Mine Safety Appliances Company) sued The North River Insurance Company (North River) in the United States District Court for the Western District of Pennsylvania, alleging that North River breached one of its insurance policies by failing to pay amounts owed to MSA LLC and that it engaged in bad-faith claims handling. MSA LLC believes that North River’s refusal to indemnify it under the policy for product liability losses and legal fees paid by MSA LLC is wholly contrary to Pennsylvania law and MSA LLC is vigorously pursuing the legal actions necessary to collect all due amounts. A trial date has not yet been scheduled. In 2010, North River sued MSA LLC (as Mine Safety Appliances Company) in the Court of Common Pleas of Allegheny County, Pennsylvania seeking a declaratory judgment concerning their responsibilities under three additional policies. MSA LLC asserted claims against North River for breaches of contract for failures to pay amounts owed to MSA LLC. MSA LLC also alleged that North River engaged in bad-faith claims handling. On October 6, 2016, a Pennsylvania state court jury found that North River breached the three contracts at issue in the case, and that North River also violated common law standards of bad faith in handling MSA LLC's clams. As a result of the jury's findings, the court entered a verdict in favor of MSA LLC and against North River for $10.9 million, the full amount of the contractual damages at issue in the case. The $10.9 million, which is comprised of previously recorded payments to settle product liability claims and related defense costs, is part of MSA LLC's insurance receivable. In addition to the claims decided by the jury, MSA LLC also presented a claim under Pennsylvania's bad faith statue, which is decided by the court. Following the jury verdict, the court also issued a verdict finding that North River had acted in bad faith. In December 2016 and January 2017, the Pennsylvania state court heard evidence regarding the extent of damages awardable as a result of the statutory bad faith claim. In an order dated February 9, 2017, the Court of Common Pleas of Allegheny County awarded MSA LLC an additional $46.9 million in damages related to this statutory bad faith claim. The $46.9 million award was comprised of $30.0 million in punitive damages, $11.8 million in attorneys' fees, and $5.1 million in pre-judgment interest, each of which is authorized by a Pennsylvania statute covering bad faith claims handling matters. In April 2017, the court denied North River’s motions for post-trial relief. In the first quarter, MSA LLC received payments of approximately $80.9 million (the "Payment") pursuant to insurance policies issued by North River. The Payment reflects amounts previously invoiced to North River for reimbursement on cumulative trauma product liability claims and therefore was recorded as a reduction from the insurance receivable. North River has reserved its rights to recover from MSA LLC any portion of the Payment that may later be judicially determined is not owed MSA LLC under the relevant policies. The Payment does not constitute a full and final settlement from North River regarding its coverage obligations owed to MSA LLC. MSA LLC continues to seek additional amounts due from North River, including those amounts relating to the awards referenced above, which were not part of the Payment. In July 2010, MSA LLC (as Mine Safety Appliances Company) filed a lawsuit in the Superior Court of the State of Delaware seeking declaratory and other relief from the majority of its excess insurance carriers concerning the future rights and obligations of MSA LLC and its excess insurance carriers under various insurance policies. The reason for this insurance coverage action is to secure a comprehensive resolution of MSA LLC's rights under the insurance policies issued by the insurers. Due to the settlements referenced below, and by mutual agreement of the remaining, unsettled parties, the trial previously set for April 24, 2017 did not occur. In the second and third quarters of 2017, the remaining unsettled parties, including North River, will ask the court to decide outstanding disputed legal issues. During April 2017, MSA LLC resolved through negotiated settlements its coverage litigation with Travelers Insurance Company ("Travelers") and Wausau Indemnity Company ("Wausau"). Travelers and Wausau have agreed to make cash payments in 2018; those amounts will be recorded as a transfer from the insurance receivable balance to the note receivable, insurance companies (current) in the second quarter of 2017. Travelers also has agreed to pay a percentage of future cumulative trauma product liability settlements as incurred on a claim-by-claim basis. As part of both settlements, MSA LLC dismissed all claims against Travelers and Wausau in the above-referenced coverage litigation in the Superior Court of the State of Delaware. Through negotiated settlements, MSA LLC has reached resolution with many of its insurance carriers regarding its Occurrence-Based Policies. Assuming satisfactory resolution, once disputes are resolved with each of the three remaining carriers, including North River, MSA LLC anticipates having commitments to provide future payment streams which should be sufficient to satisfy its presently recorded insurance receivables due from insurance carriers. Even if insurance coverage litigation is generally successful, we have determined that at some point in the next 18 months, MSA LLC will become largely self-insured for costs associated with cumulative trauma product liability claims. The exact point when this transition will happen is difficult to predict and subject to a number of variables, including the pace at which future cumulative trauma product liability costs are incurred and the results of litigation and negotiations with insurance carriers. After it becomes largely self-insured, MSA LLC expects to still obtain some limited insurance reimbursement from negotiated coverage-in-place agreements (although that coverage may not be immediately triggered or accessible) or from other sources of coverage. The precise amount of insurance reimbursement available at that time cannot be determined with specificity at this time.

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