Protecting Future Claimants in the BP Oil Spill Matter

Nicolas A. McTyre, University of Miami School of Law

Abstract

PROTECTING FUTURE CLAIMANTS IN THE BP OIL SPILL MATTER

BY: NICOLAS ADRIAN MCTYRE

Abstract

On April 20, 2010, the Deepwater Horizon offshore oil platform, which was leased by British Petroleum Company, PLC (“BP”) and located fifty miles from the Mississippi River Delta, exploded causing the largest marine oil spill in history. On July 16 2010, the same day the oil leak officially ended, President Obama announced that BP would create a $20 billion dollar fund to pay people who were harmed by the spill. This fund has since been administered as the Gulf Coast Claims Facility (GCCF), and managed by Mr. Kenneth Feinberg (“Mr. Feinberg”).

While some commentators claim the GCCF is adequately capitalized to pay all claims in full, cursory estimates show that this assumption is incorrect. This article demonstrates that while the GCCF can adequately compensate claimants with known injuries, it is undercapitalized in the sense that it cannot pay all of BP’s potential claimants in full. Further, our nation’s leaders have at a minimum a moral obligation to assure that the Gulf is restored to its pre-spill status, and that all people adversely affected are made whole. Merely maintaining the status quo is morally unacceptable because future plaintiffs bear all the risk of BP’s insolvency, while current claimants are paid in full through the GCCF.

Future claimants bear the all the risk of insolvency because the current situation is akin to limited fund problem and that bankruptcy reorganization is possible because of significant underestimation of aggregate environmental claims. Further, if bankruptcy occurs it is unlikely that BP will pay future claims in full under a bankruptcy plan. Given this reality, it is argued that Mr. Feinberg should implement strategies used by successful limited-fund administrators to protect the compensation interests of future claimants.

The author claims that establishing a trust is insufficient to solve BP’s limited-fund problem. While trusts are useful because they would force BP to set aside assets for groups of different claimants, merely paying out claims in a “lump sum” manner is ineffective when the aggregate value of claims is very uncertain, as it is here. To supplement the GCCF limited-fund, it is argued that Mr. Feinberg should adopt a variable claims payout structure, which would equalize claims payouts between present and future claims.

The author argues that Mr. Feinberg could adopt an annuity approach where payments are dispersed in the form of a variable annuity. Alternatively, he could implement a capital-markets approach where claimants are issued securities whose value is indexed to fluctuations in the total number of claims against the limited fund. The annuity approach has the significant drawback of increasing payment bias against future claimants in comparison to the capital markets approach.

And so it is argued that the capital market markets approach is the superior choice. It would minimize liability estimation error, assure an allocation of the mass tort firm's value, and thus better protect future claimants than the annuity approach. By estimating total tort liability based on all publicly available information and creating a distribution structure that is difficult for interested parties to manipulate, the capital markets approach would result in a relatively unbiased distribution of scarce assets. The author concludes that this approach would ensure that the interests of future claimants are sufficiently protected.