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Trade-Offs in Designing Mass Tort Settlement Structures:
The Gulf Coast Claims Facility Experience
Authored by
In April 2010, the Deep Water Horizon drilling rig explosion and ensuing oil spill
resulted in multiple deaths, closed areas to fishing and harvesting of shrimp, oysters and
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other seafood and significantly disrupted the economy of the Gulf region. This
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unprecedented oil spill disaster played out as live headline news night after night on
local, national and international media. Individuals, business owners, local officials
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and politicians representing their constituents were becoming increasingly frustrated
Managing Director
and vocal about the need for immediate financial and environmental relief.
Clean-up activities and programs to compensate victims were established by BP Plc and
Federal and State agencies were working toward providing relief and preventing further
damage. One key component of BP’s effort was the funding of the Gulf Coast Claims
Facility (GCCF) that was established to compensate victims of the disaster. The GCCF
was funded with $20 billion to begin compensating the thousands of businesses and
individuals throughout the Gulf Coast region from Texas to Florida who were negatively
affected by the oil spill.
It was immediately clear that the GCCF would need to address what has now been
labeled the “trilema” - the three contradictory goals faced by all mass torts:
1.
The amount paid is reasonably precise in the calculation of damages and there is a reasonable level of proof that the alleged damages were caused by the oil spill;
2.
Payments to claimants are timely, and
3.
The payment and resolution of claims is completed in a cost effective manner.
The conflict is clear. A structure that requires no proof of causality and relies solely
on the damage alleged by the plaintiff minimizes transaction costs, provides funds
to injured parties quickly, but has little (if any) precision in estimating damages and
proving causality. A structure that emphasizes precision in estimating damages and
proving causality requires documentation and proof and likely litigation which
increases transaction costs and lengthens the time to paying injured parties. A
structure that minimizes transaction costs likely shortens time to payment, but provides
little precision.
The appropriate balance among the three goals varies by the specific characteristics of
the mass tort. The resolution structure is generally dictated by the size of the tort (e.g.
number of claims and estimated damage), the type of injury (e.g. bodily injury vs. solely
financial damage), funds available to claimants relative to the total amount of damage,
and the type of defendant (e.g. high asset private company, government fund, insurance
coverage).
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The GCCF Experience
It was immediately clear that damages from the oil spill were massive and that it was
likely that hundreds of thousands of individuals and businesses were affected by the
oil spill. Indeed, while the GCCF operated for less than two years, over one million
claims were filed by approximately 580,000 claimants and approximately $6.5 billion
were paid to approximately 230,000 claimants.
The GCCF decided to balance the contradictory goals by implementing a number of
disparate programs and techniques:
•
Implementation of a three month program to provide emergency relief. A
program that required less than complete proof of damage or causality and did not affect the claimants ability to pursue further compensation;
•
Implementation of a program to limit causality proof for the overwhelming
number of claimants (over 95% of claimants);
•
Development of an algorithm to facilitate the early resolution of claims.
Emergency Advanced Payments
It was very clear that claimants were facing severe hardship and needed compensation
immediately. The GCCF provided funds under its Emergency Advanced Payment (EAP)
program that was started in August 2010 and lasted for 90 days. Under the program,
170,000 claimants (or approximately 75% of paid claimants) were paid approximately
$2.6 billion. The program provided for a payment to individuals and businesses equal
to six months of losses due to the oil spill. Any and all claimants with documented
proof would be paid without the requirement of signing a release – and would be able
to petition for even more compensation later.
However, because of the emergency nature of these payments and that they were
not final amounts; the EAP causality and proof of damage requirements were not as
rigorous as the eventual final payment scheme. The EAP was primarily a mechanism
to get compensation to entities – there were limited requirements to receive payment
and claimants were not required to abandon any rights to future claims against BP. The
EAP was viewed as a partial, advanced payment, not a full resolution of the claim.
Final Payments That Demanded Little Documentation
Faced with resolving the claims of more than a half million entities, the GCCF
provided for a de minimis final payment – the Quick Pay program. Under the
program, individual claimants were offered $5,000 and business claimants were
offered $25,000. The claimants were not required to submit any further
documentation to the GCCF in support of their claim, but were required to sign a
release. Approximately 135,000 claimants elected this alternative and were paid
approximately $1.4 billion dollars.
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Final Payments That Required Documentation
The Quick Pay program provided only a very limited solution to the overwhelming
problem of the sheer number of claimants. At the time the GCCF was closed, there
were approximately 180,000 claims still open. It was still not possible (or desirable)
to subject all the remaining (and yet to be filed) claimants to rigorous discovery to
establish their claim. In response, the GCCF developed a procedure to limit proof of
causality for the majority of claimants and developed an algorithm to approximate past
and estimated future damages for the majority of claimants.
Determination of Causality
The GCCF split the claimant population into two parts – (1) fishermen and (2) the rest
of the economy. There was little controversy over whether the damage incurred by
fishermen was caused by the oil spill – fishing was precluded for a significant time in
vast areas of the Gulf and oysters, oyster beds, shrimp, crabs, clams and other seafood
was severely affected by the oil spill.
There was a great deal of controversy over the causation of damage for claimants in the
general economy. It was clear that the oil spill affected tourism, but who is affected by
tourism? Hotels on the beach are likely affected, but what if the hotel is inland or in a
major city that caters to business conventions, not tourism? Restaurants near the beach
are likely affected (especially if their menu is focused on Gulf seafood), but what if the
restaurant caters to locals and is a steak house? Personal service companies, employees
of tourism based businesses; souvenir shops all have the same or similar issues. Is the
lost revenue due to the oil spill or the lingering recession? Is the job loss due to the oil
spill or incompetence of the worker? Documenting and litigating these issues would
take years.
Instead, the GCCF adopted a set of presumptive rules that dramatically limited the
required proof of causality. Claimants were categorized into one of three groups, each
with a different “presumption” about causality and therefore a different level of proof of
causality. The three groups were defined geographically:
•
Category 1: Businesses with addresses in zip codes (and individuals working for such businesses) directly on the Gulf. Claimants in Category 1 were not required to provide proof that their damage resulted from the oil spill. The GCCF presumed that if an entity was in that geographical region that its damage was from the oil spill.
•
Category 2: Businesses with addresses in counties adjacent to the Gulf (and
individuals working for such businesses), but not in Category 1. The GCCF did not impose any presumption of the cause of damage to the claimant. The claimant was required to satisfy a simple financial test – the claimant’s income had to have
significantly deteriorated after April 10, 2010 the date of the Deep Water Horizon explosion and oil spill.
•
Category 3: All other businesses and individuals. The GCCF presumed that
damage incurred by claimants in this category was not caused by the oil spill.
To be eligible for payment, these claimants had to satisfy the financial test for Category 2, but also had to provide additional proof in the form of cancelled contracts, invoices or other documentation linking their damage to the oil spill.
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The establishment of presumed causality for Category 1 and the simple financial test
for Category 2 was very important. Approximately 95% of all payments were made to
claimants in these two categories. The overwhelming percent of claimants were not
required to submit documented evidence of causality.
Estimation of Damages
The GCCF was intent on resolving all valid claims within a few years. As such, the
GCCF could not simply observe historical losses since losses were likely to continue
into the future – losses would continue until tourism rebounded and the economy fully
recovered. To resolve claims now, the GCCF had to make an offer that included two
components: (1) actual damages from the date of the oil spill to the end of 2010 and (2)
estimated post 2010 damages (future damages).
The first component certainly involved a number of complex issues – given the
recession and the usual volatility of year over year income estimating the “but for the
oil spill” income of the claimant may be very problematic. But these problems were
solvable. The effect of the recession could be separated by looking the other geographic
areas that had similar characteristics (reliance on tourism, beach areas, similar mix of
visitor characteristics, etc.) but were at a great enough distance from the oil spill that
their economy would be unaffected.
Estimating future losses was more difficult. The GCCF relied on the experience of other
areas to estimate the pace of the recovery of tourism in the Gulf region. The economic
recovery after events such as the September 11 attacks in New York, the recovery rate
from natural disasters such as tsunamis and other events showed similar recovery
periods. On average these other events showed that future losses are expected to be
approximately equal to actual losses in the first nine months after the event.
Summary Conclusions
The work of the Gulf Coast Claims Facility provides a modern paradigm for organizing
and delivering financial relief to economic victims of extraordinary environmental
disasters. In these situations, acting quickly offers the benefits of:
•
Getting relief to victims before their situations become worse
•
Settling claims for reasonable sums and avoiding long-term litigation costs
•
Demonstrating leadership in a highly-charged situation
The tradeoffs of speed can of course include issues of making payments for illegitimate
claims, or paying more than necessary on any given claim.
Differentiating the claims based on characteristics that help achieve the goal of speed
while also providing for the ability to address significant variations in the underlying
facts of the claims is key to achieving the right level of precision with respect to
damages and causality. The payment algorithms developed by GCCF provided for
quick payments to settle the vast majority of smaller but legitimate claims, emergency
advanced payments to bring short term relief to injured parties while further assessment
of damages and causality are made, and final payments to settle these claims on the
basis of more traditional evaluations of the merits of each claim.
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The specific application of the payment algorithms developed in the GCCF case can be
applied as a framework for other similar situations, and they offer the flexibility to alter
the relationship between speed and precision based on the specific circumstances of
the event.
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the authors
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About the Authors
Thomas Vasquez, PhD, a Partner with ARPC, is a pioneer in the development of
quantitative and economic models aimed at solving complex business and legal issues.
He has provided expert testimony and analytical support for a broad spectrum of issues
and industries. Dr. Vasquez has consulted on such cases as National Gypsum,
Fireboard Corporation, Reynolds Tobacco, CSX Inc., Owens Corning, Tyson Foods,
Halliburton, AstraZeneca, Foster Wheeler, Gulf Coast Claims Facility, and Oracle.
t.vasquez@arpc.com
Ilan Guedj, PhD, a Managing Director at ARPC, has provided expert consulting and testimony in securities class actions, investment management, and valuation disputes. Dr.
Guedj consults with clients and supports experts in a wide range of finance and economics cases. He is an expert in corporate finance, securities, and the securities industry, and has provided testimony regarding financial analysis, financial statements, and
financial securities. He has also participated in large class action lawsuits that involved
various financial securities, mutual funds, ETFs, and structured products.
i.guedj@arpc.com
The opinions expressed herein do not necessarily represent the views of ARPC or any
other ARPC consultant. Please do not cite without explicit permission from the author.
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