Insurance Matters In November 1995, International Paper and Masonite commenced a lawsuit in the Superior Court of the State of California against certain of their insurance carriers (the Indemnification Lawsuit) because of their refusal to indemnify International Paper and Masonite for, among other things, the settlement relating to the Hardboard Lawsuit and the refusal of one insurer, Employer’s Insurance of Wausau (Wausau), to provide a defense of that lawsuit. During the fall of 2001, a trial of Masonite’s claim that Wausau breached its duty to defend (the Breach of Duty Lawsuit) was conducted in a state court in California. The jury found that Wausau had breached its duty to defend Masonite and awarded Masonite $13 million for its expense to defend the Hardboard Lawsuit; an additional $12 million in attorneys’ fees and interest for Masonite’s expense to prosecute the Breach of Duty Lawsuit based on a finding that Wausau had acted in bad faith in refusing to defend the Hardboard Lawsuit and an additional $68 million in punitive damages. In a post-trial proceeding, the court awarded an additional $2 million in attorneys’ fees which Masonite had incurred in the trial of the Breach of Duty Lawsuit. The trial of the Indemnification Lawsuit against 22 insurers (the Defendants) began in April 2003 to recover $470 million paid to claimants pursuant to the settlement of the Hardboard Lawsuit through May 2003. In July 2003, the jury determined that $383 million of International Paper’s payments to settle these claims are covered by its insurance policies (the Phase I Verdict). In the current phase of the case the court will determine how much of the $383 million can be allocated to the policies of the Defendants. The Company anticipates that, before a judgment is entered, the California court will also make a determination about indemnification for future claims based on the Phase I Verdict. The court will also determine whether amounts paid and to be paid to the plaintiff class counsel pursuant to the settlement of the Hardboard Lawsuit, and administrative expenses that have been and will be incurred in connection with that settlement, are covered by insurance. A judgment has not yet been entered on the verdict in the Indemnification Lawsuit. It is difficult to predict when the judgment will be entered. This judgment will be subject to appeal when entered. Because of the uncertainties inherent in the litigation, including the outcome of any appeal, International Paper is unable to estimate the amount that it ultimately may recover against its insurance carriers. The Company is presently engaged in court-ordered mediation with several of the Defendants. During 2004, International Paper reached settlements with Wausau, with respect to both the Indemnification and the Breach of Duty Lawsuits, and with four other insurance companies under which International Paper received $164 million, including approximately $118 million received in 2004, and an additional payment of $46 million in January 2005. In addition, the Company has begun arbitration proceedings against American Excess Insurance Association and ACE Insurance Company, Ltd., to recover additional insurance proceeds. As of December 31, 2004, International Paper had received an aggregate of $223 million in settlement payments from certain of its insurance carriers which had been named as defendants in the Indemnification Lawsuit or which otherwise provided International Paper with insurance coverage for hardboard siding. Under an alternative risk-transfer agreement, International Paper contracted with a third party for payment in an amount up to $100 million for certain costs relating to the Indemnification Lawsuit if payments by International Paper with respect thereto exceeded a specified retention that was indexed to account for inflation over a several year period. The agreement with the third party was in excess of liability insurance recoveries obtained by International Paper, which are the subject of the separate litigation described above. Accordingly, International Paper believes that the obligation of the third party with respect to this agreement did not constitute “other valid and collectible insurance” that would either limit or otherwise affect the Company’s right to collect insurance available to it and Masonite under the insurance policies, which are the subject of the Indemnification Lawsuit. At December 31, 2001, International Paper had received the $100 million from the third party. A dispute between International Paper and the third party, concerning a number of issues, including the relationship of the contract funding obligation to insurance proceeds recovered in the Indemnification Lawsuit, was the subject of an arbitration commenced in 2002 by the third party in London, England and scheduled to begin in February 2004. Before the hearing started, the parties settled the dispute. Under the settlement, International Paper agreed to pay the third party a portion of insurance proceeds recovered by International Paper under its insurance policies, beginning on January 1, 2004 and thereafter, up to a maximum of $95 million. The precise amount that International Paper will pay to the third party under the settlement will depend upon, and will be a specified portion of insurance recoveries received by International Paper after January 1, 2004. As of December 31, 2004, approximately $32 million had been paid to the third party under this settlement.  63