COMMITMENTS AND CONTINGENCIES

From time to time, we are involved in legal proceedings that are incidental to the operation of our businesses. Some of these proceedings allege damages relating to environmental exposures, intellectual property matters, copyright infringement, personal injury claims, employment and employee benefit matters, government contract issues and commercial or contractual disputes, sometimes related to acquisitions or divestitures. We will continue to defend vigorously against all claims. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information including our assessment of the merits of the particular claim, as well as our current reserves and insurance coverage, we do not expect that such legal proceedings will have any material adverse impact on our financial statements, unless otherwise noted below.

Asbestos Matters

ITT, including its subsidiary Goulds Pumps, Inc., has been sued, along with many other companies in product liability lawsuits alleging personal injury due to asbestos exposure. These claims generally allege that certain products sold by us or our subsidiaries prior to 1985 contained a part manufactured by a third party (e.g., a gasket) which contained asbestos. To the extent these third-party parts may have contained asbestos, it was encapsulated in the gasket (or other) material and was non-friable. As of December 31, 2015, there were 37 thousand pending active claims against ITT, including Goulds Pumps, filed in various state and federal courts alleging injury as a result of exposure to asbestos. Activity related to these asserted asbestos claims during the period was as follows:



(in thousands)	2015		2014		2013
Pending claims – Beginning	62		79		96
New claims	4		4		5
Settlements	(1	)	(2	)	(3	)
Dismissals	(28	)	(19	)	(19	)
Pending claims – Ending	37		62		79
Pending inactive claims^(a)	—		13		13
Pending active claims	37		49		66


(a)	Inactive claims represent pending claims in Mississippi filed in 2004 or prior, which have been excluded from our asbestos measurement because the plaintiffs cannot demonstrate a significant compensable loss. As of December 31, 2015, all inactive claims have been dismissed.

Frequently, plaintiffs are unable to identify any ITT or Goulds Pumps product as a source of asbestos exposure. Our experience to date is that a majority of resolved claims are dismissed without any payment from the Company. Management believes that a large majority of the pending claims have little or no value. In addition, because claims are sometimes dismissed in large groups, the average cost per resolved claim, as well as the number of open claims, can fluctuate significantly from period to period. ITT expects more asbestos-related suits will be filed in the future, and ITT will aggressively defend or seek a reasonable resolution, as appropriate.

Estimating the Liability and Related Asset

The Company records an asbestos liability, including legal fees, for costs estimated to be incurred to resolve all pending claims, as well as unasserted claims estimated to be filed against the Company over the next ten years. The asbestos liability has not been discounted to present value due to an inability to reliably forecast the timing of future cash flows. The methodology used to estimate our asbestos liability for pending claims and claims estimated to be filed over the next 10 years relies on and includes the following:


•	interpretation of a widely accepted forecast of the population likely to have been exposed to asbestos in the workplace;


•	widely accepted epidemiological studies estimating the number of people likely to develop mesothelioma and lung cancer from exposure to asbestos;


•	the Company’s historical experience with the filing of non-malignant claims against it and the historical relationship between non-malignant and malignant claims filed against the Company;


•	analysis of the number of likely asbestos personal injury claims to be filed against the Company based on such epidemiological and historical data and the Company’s recent claims experience;


•	analysis of the Company’s pending cases, by disease type;


•	analysis of the Company’s recent experience to determine the average settlement value of claims, by disease type;


•	analysis of the Company's recent experience in the ratio of settled claims to total resolved claims, by disease type;


•	analysis of the Company’s defense costs in relation to its indemnity costs and agreements in place with external counsel;


•	adjustment for inflation in the average settlement value of claims and defense costs estimated to be paid in the future; and


•	analysis of the Company’s recent experience with regard to the length of time to resolve asbestos claims.

Asbestos litigation is a unique form of litigation. Frequently, the plaintiff sues a large number of defendants and does not state a specific claim amount. After filing of the complaint, the plaintiff engages defendants in settlement negotiations to establish a settlement value based on certain criteria, including the number of defendants in the case. Rarely do the plaintiffs seek to collect all damages from one defendant. Rather, they seek to spread the liability, and thus the payments, among many defendants. As a result, the Company is unable to estimate the maximum potential exposure to pending claims and claims estimated to be filed over the next 10 years.

The forecast period used to estimate our potential liability to pending and projected asbestos claims is a judgment based on a number of factors, including the number and type of claims filed, recent experience with pending claims activity and whether that experience is expected to continue into the future, the jurisdictions where claims are filed, the effect of any legislative or judicial developments, and the likelihood of any comprehensive asbestos legislation at the federal level. These factors have both positive and negative effects on the dynamics of asbestos litigation in the tort system and, accordingly, our estimate of the asbestos exposure. Developments related to asbestos tend to be long-cycle, changing over multi-year periods. Accordingly, we monitor these and other factors and periodically assess whether an alternative forecast period is appropriate.

The Company retains a consulting firm to assist management in estimating the potential liability for pending asbestos claims and for claims estimated to be filed over the next 10 years based on the methodology described above. Our methodology determines a point estimate based on our assessment of the value of each underlying assumption, rather than a range of reasonably possible outcomes. Projecting future asbestos costs is subject to numerous variables and uncertainties that are inherently difficult to predict. In addition to the uncertainties surrounding the key assumptions discussed above, additional uncertainty related to asbestos claims and estimated costs arises from the long latency period prior to the manifestation of an asbestos-related disease, changes in available medical treatments and changes in medical costs, changes in plaintiff behavior resulting from bankruptcies of other companies that are or could be co-defendants, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential legislative or judicial changes. At December 31, 2015, approximately 28% of the recorded asbestos liability relates to pending claims, with the remainder relating to claims estimated to be filed over the next 10 years.

We record a corresponding undiscounted asbestos-related asset that represents our best estimate of probable recoveries from our insurers for the estimated asbestos liabilities. In developing this estimate, the Company considers coverage-in-place and other agreements with its insurers, as well as a number of additional factors. These additional factors reviewed include the financial viability of our insurance carriers and any related solvency issues, the method by which losses will be allocated to the various insurance policies and the years covered by those policies, the extent to which settlement and defense costs will be reimbursed by the insurance policies and interpretation of the various policy and contract terms and limits and their interrelationships, and various judicial determinations relevant to our insurance programs. The timing and amount of reimbursements will vary due to a time lag between when ITT pays an amount to defend or settle a claim and when a reimbursement is received from an insurer, differing policy terms and certain gaps in our insurance coverage as a result of uninsured periods, insurer insolvencies, and prior insurance settlements. Approximately 83% of our estimated receivables are due from insurers that had credit ratings of A- or better from A.M. Best as of December 31, 2015.

In addition, the Company retains an insurance consulting firm to assist management in estimating probable recoveries for pending asbestos claims and for claims estimated to be filed over the next 10 years based on the analysis of policy terms, the likelihood of recovery provided by external legal counsel, and incorporating risk mitigation judgments where policy terms or other factors are not certain. The aggregate amount of insurance available to the Company for asbestos-related claims was acquired over many years and from many different carriers. Amounts deemed not recoverable generally are due from insurers that are insolvent, or result from disagreements with the insurers over policy terms, coverage limits or coverage disputes. Such limitations in our insurance coverage are expected to result in projected payments to claimants substantially exceeding the probable insurance recovery.

The Company has negotiated with certain of its insurers to reimburse the Company for a portion of its indemnity and defense costs through "coverage-in-place" agreements or policy buyout agreements. The agreements are designed to facilitate the collection of ITT’s insurance portfolio, to mitigate issues that insurers may raise regarding their responsibility to respond to claims, and to promote an orderly exhaustion of the policies. As of December 31, 2015, approximately 53% of our asbestos-related assets were related to coverage-in-place agreements and buyout agreements with insurers.

After reviewing our portfolio of insurance policies, with consideration given to applicable deductibles, retentions and policy limits, the solvency and historical payment experience of various insurance carriers, existing insurance settlements, and the advice of outside counsel with respect to the applicable insurance coverage law relating to the terms and conditions of its insurance policies, ITT believes that its recorded receivable for insurance recoveries is probable of collection.

Estimating our exposure to pending asbestos claims and those that may be filed in the future is subject to significant uncertainty and risk as there are multiple variables that can affect the timing, severity, quality, quantity and resolution of claims. Any predictions with respect to the variables impacting the estimate of the asbestos liability and related asset are subject to even greater uncertainty as the projection period lengthens. In light of the uncertainties and variables inherent in the long-term projection of the Company’s asbestos exposures, although it is probable that the Company will incur additional costs for asbestos claims filed beyond the next 10 years which could be material to the financial statements, we do not believe there is a reasonable basis for estimating those costs at this time.

The asbestos liability and related receivables reflect management’s best estimate of future events. However, future events affecting the key factors and other variables for either the asbestos liability or the related receivables could cause actual costs or recoveries to be materially higher or lower than currently estimated. Due to these uncertainties, as well as our inability to reasonably estimate any additional asbestos liability for claims which may be filed beyond the next 10 years, it is difficult to predict the ultimate cost of resolving all pending and unasserted asbestos claims. We believe it is possible that future events affecting the key factors and other variables within the next 10 years, as well as the cost of asbestos claims filed beyond the next 10 years, net of expected recoveries, could have a material adverse effect on our financial statements.

Settlement Agreements

During 2015, ITT entered into settlement agreements with insurers to settle responsibility for certain insured claims through a series of payments into a Qualified Settlement Fund (QSF) to be paid over the next three years, resulting in a benefit of $8.9. During 2014, ITT executed a final settlement agreement with an insurer to settle responsibility for multiple insurance claims, resulting in a one-time lump sum payment to a QSF of $2.2 in 2015. During 2013, ITT executed a final settlement agreement (the 2013 Settlement) with an insurer to settle responsibility for multiple categories of insured claims, including pending and future product liability claims. Under the terms of the 2013 Settlement, the insurer agreed to a specified series of payments into a QSF over the course of the next five years, resulting in a one-time benefit of $31.0.

Defense Cost Adjustment

During 2015, the Company changed its asbestos defense strategy to retain a single firm to defend the Company in asbestos litigation. This long-term strategy streamlines the Company's management of cases and significantly reduces defense costs. Our agreement with the defense firm is currently limited to a certain set of claims and the remaining claims are expected to be transitioned to the firm within the next four years. Based on the terms of the agreement, the Company adjusted its asbestos liability and related assets and recognized a net benefit of $100.7 in 2015 for the revised estimate of the cost to defend pending claims and claims expected to be filed over the next 10 years.

Income Statement Charges

The table below summarizes the total net asbestos charge for the years ended December 31, 2015, 2014 and 2013.



	2015			2014			2013
Asbestos provision	$	63.0		$	64.9		$	63.3
Defense cost adjustment	(100.7		)	—			—
Asbestos remeasurement, net	(44.8		)	(58.8		)	0.5
Settlement agreements	(8.9		)	(2.2		)	(31.0		)
Net asbestos (benefit) charge, net	(91.4		)	3.9			32.8

Changes in Financial Position

The following table provides a rollforward of the estimated asbestos liability and related assets for the years ended December 31, 2015 and 2014.



	2015									2014
	Liability			Asset			Net			Liability			Asset			Net
Balance as of January 1	$	1,223.2		$	476.4		$	746.8		$	1,264.7		$	517.8		$	746.9
Changes in estimate	(103.6		)	(21.1		)	(82.5		)	32.4			26.3			6.1
Settlement agreements	—			8.9			(8.9		)	—			2.2			(2.2		)
Net cash activity and other	(76.8		)	(52.2		)	(24.6		)	(73.9		)	(69.9		)	(4.0		)
Balance as of December 31	$	1,042.8		$	412.0		$	630.8		$	1,223.2		$	476.4		$	746.8
Current portion	88.0			74.5						106.6			102.4
Noncurrent portion	954.8			337.5						1,116.6			374.0

Environmental

In the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and regulations. We are responsible, or are alleged to be responsible, for ongoing environmental investigation and site remediation. These sites are in various stages of investigation and/or remediation and in many of these proceedings our liability is considered de minimis. We have received notification from the U.S. Environmental Protection Agency, and from similar state and foreign environmental agencies, that a number of sites formerly or currently owned and/or operated by ITT, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation and/or remediation. These sites include instances where we have been identified as a potentially responsible party under federal and state environmental laws and regulations.

Accruals for environmental matters are recorded on a site-by-site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Environmental-related assets represent estimated recoveries from insurance providers and other third parties.

The following table provides a rollforward of the estimated environmental liability and related assets for the years ended December 31, 2015 and 2014.



	2015									2014
	Liability			Asset			Net			Liability			Asset			Net
Balance as of January 1	$	89.9		$	7.7		$	82.2		$	94.6		$	11.7		$	82.9
Changes in estimates for pre-existing accruals^(a):
Pre-existing accrual additions	11.0			6.7			4.3			11.2			(3.7		)	14.9
Pre-existing accrual reversals	(5.6		)	(0.9		)	(4.7		)	(2.9		)	—			(2.9		)
Accruals added during the period for new matters	—			—			—			0.1			—			0.1
Net cash activity	(12.1		)	(0.7		)	(11.4		)	(12.6		)	(0.3		)	(12.3		)
Foreign currency	(0.6		)	—			(0.6		)	(0.5		)	—			(0.5		)
Balance as of December 31	$	82.6		$	12.8		$	69.8		$	89.9		$	7.7		$	82.2


(a)	Changes in estimates for pre-existing accruals includes environmental-related costs of $0.1 and $2.7 reported within results of discontinued operations for the years ended December 31, 2015 and 2014, respectively.

In the fourth quarter of 2015, ITT entered into a settlement agreement with one of our insurance providers whereby the provider agreed to pay the net present value of the remaining limits of the policy amounting to approximately $34. Based on the terms of the agreement, substantially all of the settlement amount, which is expected to be received during the first quarter of 2016, will be deposited into a QSF which can be drawn upon only to pay future environmental expenses associated with remediation sites covered under the policy. As a result of the settlement agreement, we recorded income of $6.3 representing a previously established reserve for this insurance asset.

The following table illustrates the reasonably possible high range of estimated liability, and number of active sites for environmental matters.



	2015		2014
High end range	$	140.6	$	160.3
Number of active environmental investigation and remediation sites	49		54

As actual costs incurred at identified sites in future periods may vary from our current estimates given the inherent uncertainties in evaluating environmental exposures, management believes it is possible that the outcome of these uncertainties may have a material adverse effect on our financial statements.

Other Matters

The Company has received a civil subpoena from the Department of Defense, Office of the Inspector General requesting documents pertaining to certain products manufactured by the Company’s Interconnect Solutions segment that are purchased or used by the U.S. government. The Company is cooperating with the request. The Company is unable to estimate the timing or outcome of the matter.