Claims, Litigation, Settlements, and More Claims! Rossi Inc.


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I need an answer for this Case ? See the attachment Rossi Inc.docx Claims, Litigation, Settlements, and More Claims! Rossi Inc. (Rossi or "the Company") is a diversified manufacturer of industrial products. In 2008, Rossi updated its asbestos litigation liability, including the costs of settlement payments and defense costs relating to currently pending claims and future claims projected to be filed against the Company through 2017 for losses incurred to date. Before 2008, the Company’s previous estimate was for claims projected to be filed through 2011. As part of the 2008 update to the asbestos litigation liability, Rossi engaged Thompson and Associates (Thompson), a consulting firm, to serve as an external specialist to estimate the claims liability for December 31, 2008. As a result of the 2008 update and external specialist claims estimate, the Company significantly increased its recorded asbestos litigation liability by $586 million, arriving at a total liability estimate of$1,055 million as of December 31,2008 (which equals the external specialist’s estimate). During 2009, additional payments against the reserve reduced the recorded liability to $962 million. As of December 31, 2009, the Company performed an analysis of the asbestos litigation reserve and determined that the asbestos litigation liability should remain at $962 million. You are a member of the audit engagement team working on the Rossi audit of the December 31, 2009, financial statements. The engagement team has performed preliminary audit engagement planning activities including a review of Rossi’s management memo regarding the asbestos reserves. An excerpt from that memo is provided below. Excerpt From Rossi Management Memo During 2009, Rossi experienced higher mesothelioma (an asbestos-related form of cancer) settlement amounts when compared to the assumptions underlying its models. In 2008, Rossi’s estimated settlement amounts approximated $29,000 per mesothelioma claim, compared to an actual average settlement of approximately $34,000 per claim in 2009. The Company also incurred higher legal expenses in 2009 than what was anticipated, largely related to the following: Rossi is pursuing a more aggressive approach on mesothelioma trial experts and specifically, more extensive use of experts. Rossi experienced increased legal costs in 2009, but this defense strategy resulted in a number of positive verdicts. Martin claim – Unusually high legal. fees defending this claim that ultimately resulted in July 2009 in a $2.5 million adverse judgment, including interest and other costs; Rossi considered this unfavorable outcome, together with the incremental legal fees, to be atypical. Smith and Jones claims -Rossi dedicated six weeks in trial to defend what ultimately was an unfavorable Smith verdict in Detroit; similarly, Rossi dedicated six weeks in trial to defend what ultimately resulted in an unfavorable Jones verdict; the Company considered these unfavorable outcomes, which are currently on appeal, to be atypical. Other than the Smith and Jones cases, all trials started this year ended in settlement or dismissal; this higher-than-normal volume of trial activity also drove the defense costs higher (the Company commenced over 15 trials in2009). In correlation with the preceding point, Rossi incurred extensive appeal costs -the Smith and Jones claims, in particular, plus certain cases that resulted in favorable defense outcomes that have been appealed by plaintiffs; importantly, the Company had many successful summary judgment motions before trial/verdict. (The Company now has a compendium of over 60 key summary judgment decisions in its favor.) Group settlements caused an increase in Rossi’s settlement costs; however, in the long term, the Company expects overall defense costs to be favorably affected. Moreover, the risk of unfavorable trial outcomes, higher settlement costs per claim specific to these cases,

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