Getting Fair Results From An Unfair Process

In nearly a year and a half, Ken Feinberg, the administrator of the Gulf Coast Claims Facility (GCCF), has managed to spend around $5.3 billion of BP’s money to compensate people who suffered, or said that they suffered, financial losses because of the Deepwater Horizon oil spill.

That money has been paid out of the $20 billion fund the Obama administration bullied BP into establishing in the wake of the spill. Of the more than 500,000 claimants whose requests the GCCF has received thus far, only 211,579 have been paid. BP will also have to pay court judgments from those who choose not to use Feinberg’s claims process, as well as any damages assessed by the federal government under environmental or oil development laws.

As far as I can tell, Feinberg has done his best to balance fairness and efficiency. In the immediate aftermath of the disaster, he dedicated around $2.6 billion to Emergency Advance Payments to offset losses incurred in the first six months. Since then, claimants have had three options. As a first option, they can accept a “quick payment” of $5,000 for individuals or $25,000 for businesses. The quick payments require no additional documentation beyond what was used to determine the Emergency Advance Payments. However, claimants who accept a quick payment are required to waive their right to make any other claims against BP in the future.

Alternatively, those who believe their losses were greater than the quick payment amounts can submit thorough documentation and receive a final payment offer based on the specific information they provide. Claimants then can choose either to accept the offered amount as full compensation for past and future losses and to waive their right to make additional claims, or they can request interim payments based on the damages that can currently be ascertained while waiting to get a clearer idea of actual future losses before agreeing to a final settlement.

The third option is to reject the claims settlement process completely and go to court. It will be some time before we know how many residents and businesses choose that path, how much money they demand and how successful they will ultimately be. Litigation stretched on for decades after the 1989 Exxon Valdez oil spill in Alaska.

Critics of the Gulf claims process have argued that many claimants, especially fishermen, have been pressured by financial necessity to accept the quick payments despite having larger documented losses. An independent audit will soon investigate those claims. There is also a great deal of discussion over the methodology that should be used to determine losses for oyster fishers, since the oyster season does not align with the calendar year, making comparisons between 2010 and other years misleading. Meanwhile, longer-term trends toward lower fishing yields have made the effects of the spill difficult to isolate.

Overall, however, it seems that most people who suffered damages will be fully compensated. Because of the limited documentation required to receive quick payments, more than a few who did not suffer damages, or who suffered only minimal damages, will likely be paid as well. But that may be a necessary cost of getting payments made as quickly as possible for the benefit of those who need them.

None of this, unfortunately, helps much to determine the amount of damage BP was actually responsible for, or to ensure that its costs end up being reasonably in line with its real liability.

BP was not the only party involved in the goings-on at Deepwater Horizon, and it was likely not the only one that made mistakes in drilling the Macondo oil well, whose gusher triggered the disaster on April 20, 2010. Investigators pointed fingers at BP for the decisions it made in drilling the well, but also at Halliburton, which was responsible for the cement that should have safely sealed the well, and at Transocean, which operated the Deepwater Horizon and was responsible for maintaining the rig’s safety systems. It will likely be a long time before blame is apportioned among the companies. In the meantime, it is only BP’s money that provides relief and compensation for victims.

Furthermore, the $20 billion does not provide a full settlement for BP. In an ordinary settlement, companies are able to make a rational choice between the costs of settling and the costs of litigation. When BP agreed to lay down the $20 billion, however, it had no way of knowing what portion of its costs that money would cover.

In the aftermath of the spill, rapid action was required. Individuals and businesses needed money to restore their property and to weather the lengthy clean-up period. Establishing the GCCF accomplished that, but it also accomplished other less savory objectives, such as directing responsibility onto a conveniently non-American target and allowing President Obama to show he was doing something about the spill, even if he had no authority to do it.

It would have been more reasonable to let BP administer its own claims process, without arbitrarily tying up $20 billion in escrow, or to have the government use its own money to review and pay claims, seeking compensation later from all the responsible companies once their liability is established. Or BP could have been released from all other liability in exchange for its $20 billion, which would have least bought the oil company some financial certainty, albeit at what seems certain to prove an excessive price.

The waters of the Gulf are returning to normalcy. The handling of the spill, however, has shown American regulatory waters can also be a dangerous place.

For more articles on financial, business, and other topics, view the Palisades Hudson newsletter, Sentinel, or subscribe to my daily opinion column, Current Commentary.

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