British Petroleum or BP set up a $20 billion dollar fund for paying certain claims arising from the spill in the Gulf of Mexico. The fund is described on the BP Website. I was asked to visit the local Fox station in Dallas to discuss the BP fund. In the interview I pointed out the unprecedented nature of such a large fund and the negotiations in the White House.
The negotiations at the White House that led to the $20 billion fund raised interesting issues. Prior to the White House meeting, BP agreed to pay all legitimate claims for damages, defined under the Oil Pollution Act or OPA, without relying on the $75 million cap under the OPA. The cap does not apply if the responsible party engaged in gross negligence or willful misconduct. BP had set up a claims processing system to manage the claims.
After the White House meeting, BP had agreed to a third party fund managed by the same person who managed the 9-11 claims system. They had agreed to set up a fund to pay in $5 billion over 4 years, for a total of $20 billion. Prior to the meeting, BP had likely reserved certain funds for claims from the spill.
While setting up such a large fund is certainly unprecedented, some thought of public relations and political gain must have been considered in moving the claims system to a person considered an expert in compensation funds. In addition, the ability to put some level of funding around the claims that may exist may help the company's stock price. Setting up the fund may allow BP to begin again paying out dividends next year, which is very important to the company's individual and institutional shareholders. All of this may lead to a higher stock price in time.
Another important issue regarding the unprecedented nature of the BP Fund is that care has to be exercised by the executive branch, as there is a risk that a company's due process rights may be subsumed in the arm twisting that may go on in the White House or a governor's mansion, either in the United States or other countries when an event occurs and angry parties want a company to establish a fund prior to any adjudication on liability and damages.
