Terminix Settles Alabama Termite Damage Claim
Terminix has announced a settlement with Alabama’s Attorney General in relation to historic claims made against its Formosan business in the Mobile Bay area for termite damage.
The settlement provides for various immediate remediation measures to be provided directly to current and former customers. Under Alabama law, this settlement is expected to mitigate future punitive damage awards from legacy termite damage by Mobile Bay area consumers, reducing the Company’s potential exposure to termite damage claims filed after the date of the settlement. As a result, including all costs associated with the settlement, which are detailed below, the Company expects future termite damage claim expenses above historical norms to be between US $140 and US $150 million from 2020 to 2029 (a range previously forecast for future ringfencing by Terminix).
Termite Damage Claim Ringfence Estimate Impact
The Company has reviewed the relevant change in facts with its external actuarial advisors to estimate future termite damage claims expense. Including all costs associated with the settlement, the Company expects future termite damage claim expenses above historical norms to be $140 to $150 million from 2020 to 2029, remaining within the previously communicated ringfence estimate. The estimate uses Company assumptions for a lower litigated claims rate due to the consumer fund, the settlement’s effect on damage awards in future litigated cases, and the impact of reinstated customers. The actuarial assessment has been updated to reflect current termite damage claims rates and costs in both the Mobile Bay area and the country at large.
In conjunction with the settlement, Terminix has agreed to establish a $25 million consumer fund. The fund will be managed by an appointed facilitator and will be used to settle customer refunds and other remediation efforts, as well as to provide a more efficient termite damage claims dispute settlement process. This process will provide customers with a state-sponsored and expedient avenue to resolve damage claim disputes, and shorten the time needed to settle claims. This new consumer fund will only apply to future customer disputes and does not impact pending litigation.
Customer Remediation Actions and State Compensation
The settlement provides for various immediate remediation measures directly to current and former customers, including refunds of certain price increases; the opportunity for certain cancelled customers in the Mobile Bay area to have service reinstated with a bait station retreatment; and the retreatment of certain customer locations. In addition, the settlement provides for the reimbursement of certain investigative and monitoring costs incurred by the Attorney General’s office and the Department of Agriculture and Industries; and a university endowment intended to support termite and pest control research with an emphasis on Formosan termite control. Revenue and expenses related to potential ongoing services are expected to be negligible in total and will be recorded as the costs are incurred.
The Company has also agreed to pay the State of Alabama $19 million. As indicated above, under Alabama law, this settlement is expected to mitigate the risk of punitive awards related to Terminix’s historical termite operations in the Mobile Bay area, reducing the Company’s potential exposure to termite damage claims.
In the third quarter of 2020, Terminix recorded a charge of $49 million and a reduction of termite renewal revenue of $3 million related to the execution of the settlement. The resulting liability was recorded in accrued liabilities, other on the balance sheet. We have excluded the financial impact of the charge and the prior period portion of the revenue associated with this settlement from Adjusted Net Income and Adjusted EBITDA as management believes they do not reflect our ongoing operations. For additional details about how the settlement impacted the financial statements please refer to the third-quarter 2020 earnings press release issued on November 5, 2020 and our subsequently filed Form 10-Q for the period ended September 30, 2020.
Commenting, President and CEO, Brett Ponton, said: “We appreciate the cooperation of the Alabama Attorney General’s office to reach what we believe is a fair resolution that is in the best interests of our customers in the Mobile Bay area.
“We have made substantial improvements in our operations, claims management processes, governance structure, and quality assurance to enhance our ability to treat Formosan termites. Leveraging these improvements, we are better positioned to serve our Mobile Bay customers for years to come.
“The resolution fits within the total damage claim ringfence estimate we discussed in the fourth quarter of 2019, and will help reduce claims volatility in the future.”
Chief Financial Officer, Tony DiLucente, added: “A state-sponsored, non-litigated avenue more quickly resolves damage claim disputes, which will provide immediate benefits to our impacted customers and reduce future litigated claims.
“Today’s settlement is expected to limit the ongoing P&L impact from termite damage claims, providing for a clearer picture of underlying performance in the base business.”