liability

I've been critical in the past of Transocean, the company that owned the Deepwater Horizon rig that blew up in the Gulf Coast last year.  They have used whatever tools at their disposal to shed liability for their role in the Gulf accident and spill.   They have restructured their corporation to shed nearly all of their US federal income taxes, despite the US being a central part of their business.  So when I read that senior executives are donating their bonuses to the families of the victims, I was a bit skeptical.  Turns out there was reason to be.  The executives donated their bonuses after a little public relations mishap, when the firm claimed 2010 as their best safety record ever despite the worker deaths and rather large spill that put at risk key industries in the Gulf region.  The timing of the donation kind of works against their claim to have done this because it "was the right thing to do"; and frankly, I'm rather surprised that given the accident the executives earned bonuses at all.   Executives later announced it had not been their intent to "diminish the effect the Macondo tragedy has had on those who lost loved ones..."  How strange people took it that way.  The firm still denies any responsibility for the accident. 

Fortune Magazine's Roger Parloff, with assistence from insurance specialist Christopher Kende, provides a good rundown on liability for the Deepwater Horizon oil spill in the Gulf.  One important thing I took away from this review, though not explicitly mentioned in the article: even though accidents are an inevitable part of trying to do very difficult things, the liability rules to address damages remain (a) fiendishly complex and the domain of specialized experts; and (b) are full of gray areas such that many of the actual payments are not predictable in advance, and years (and sometimes decades) of litigation is the norm to resolve disagreements.   We can, and should, do better. 

Useful findings from the Parloff and Kende primer include:

• There are enough openings to waive the $75 million cap on oil spill liability set by the Oil Pollution Act (OPA) of 1990 that BP is unlikely to be limited to this level of payouts.  Rather, their payouts for a spill of this magnitude are likely to be much higher, and more in line with the actual damages the spill is causing.  These openings include the fact that there is include no cap on reimbursing state and federal cleanup costs, and that caps are waived in the case of gross negligence or non-compliance with the existing health and safety laws by any of the parties involved with the rig explosion.

• Current liability laws do allow for recovery of indirect damages, such as from lost tourism revenue, or associated tax collections from tourists.  The delineation of how far removed impacts can be before no compensation is paid is not particularly clear, and will likely be resovled via litigation over the coming years.

• The Limitation of Liability Act of 1851, invoked by Transocean (the rig operator) to cap their own liability at $27 million (see earlier blog posting on this issue), will not cap the firm's liability for oil spill pollution damages.  According to Kende, this portion of liability was superceded by the rules of the 1990 Oil Pollution Act.  However, the antiquated law will probably limit Trans Ocean's liability for personal liability and wrongful death, as the exemptions for negligence threshold under this law would be quite difficult to prove.  Given that 11 workers were killed in the blast and many more injured, the Transocean cap could well either result in quite low payouts to harmed parties, or shift the liability to other companies involved with the disaster but which are not protected by the 1851 law because they don't operate vessels.  

One final point not addressed in the Fortune article:  though the US liability laws leave much to be desired, they tend to be far better than what exists in other parts of the world. 

An article in The Wall Street Journal describes one of what will likely be many interesting gaps in how the US oversees offshore oil and gas drilling operations.  While computer speeds may double roughly every 18 months, the legal rules for core aspects of the country's minerals extraction regimes seem to last centuries.  Hardrock mining is governed by the  Mining Law of 1872, allowing widespread rights to claim public land and pay the government virtually nothing for the minerals extracted.  Percentage depletion tax subsidies were enacted almost a century ago, ostensibly to help stem feared materials shortages associated with World War I.  Both remain in effect today.

Transocean is the owner and operator of the rig that sunk in the Gulf of Mexico, threatening a large swathe of the US coastline.  They are looking to reduce their liability and gain control of the litigation venue by using the Limitation of Liability Act of 1851 for maritime vessels.  They are seeking a court order to cap their total liability to the spill at $27 million.

Mark Long and Angel Gonzalez write in the article:

Under the Limitation of Liability Act of 1851, a vessel owner is liable only for the post-accident value of the vessel and cargo, so long as the owner can show he or she had no knowledge of negligence in the accident, maritime lawyers say. The law was created in the days before modern insurance and communications technology, to help U.S. shipping businesses compete against foreign ship owners who were protected against claims. Drilling rigs count as vessels under U.S. maritime law, and since "the remains of the…Deepwater Horizon now lay sunken" about a mile deep in the federal waters of the Gulf of Mexico, the value of the rig and its cargo comes to no more than $26,764,083, Transocean claims in the filing. Before the accident, the rig was worth around $650 million.

Transocean is of course also claiming it had no knowledge of, or negligence for, the accident and spill.  The Journal article continues:

Maritime lawyers said the Act very rarely helps companies limit liability. It can, however, allow a defendant to gain some control over the legal process, since a judge could place a stay on all pending litigation, which would then have to be refiled in the federal court where the limitation of liability was sought. Vessel owners routinely seek protection under the act following accidents at sea, lawyers said.

With billions of dollars on the line and public wrath at extremely high levels, is it any surprise that every group involved with the BP drilling site are blaming everybody but themselves?  The benefits to the firms of deflecting responsibility and delaying payouts can be immense.  The 1989 Exxon Valdez spill was not finally paid until August 2008, nearly 20 years later -- and at amounts paid were far less than the original awards.  In games like this, even high-priced lawyers are cheap if you can get the damages reduced and hang on to the funds within the company for much longer.  

The greatest point of influence for dealing with catastrophic liabilities is in setting up appropriate insurance requirements before an accident, and ensuring government oversight agencies actually do their jobs on a recurring basis to flag poor safety practices before there is a large accident. 

It is not just about offshore oil and gas.  Adequate oversight seems to have been an issue in April's coal mine accident that killed 29 miners in West Virginia; and periodically in the nuclear power sector as well, as so clearly illustrated by the near breach of a reactor head at the Davis-Besse plant in Ohio. 

Unfortunately, our liability regimes are not well structured to deal with these types of incidents.  Indeed, the industry continually works to weaken them in order to reduce the operating costs of carrying higher levels of insurance. 

Consider nuclear accident risk.  Anybody carry $1,000 of coverage on their home, possessions, and bodily harm?  Unlikely, since aside from being far too low if there were a loss, the mortgage company wouldn't allow it.  But under the terms of the Price-Anderson Act, that is about the level of coverage anybody in the Baltimore Metropolitan Statistical Area would have were there to be an accident at Calvert Cliffs in Lusby, MD (see Table 4, p. 19).  And don't count on your existing policy filling in the gap:  all private homeowners and tenant policies explicitly exclude nuclear risks from their coverage. Price-Anderson is as good as it gets for third party nuclear liability; coverage levels in other countries are even lower.  Dam failures and problems from underground injection of CO2 from carbon sequestration are two other areas where the liability regime is, at present, not well structured to properly incent good safety behavior or protect the taxpayer.

Update, May 12th:  Big Oil Bailout Prevention Act, the first of what is likely to be many legislative efforts to increase oil spill liability levels appropriate for the type of damage that major spills can cause.  A less provocative title might increase the bill's chance of success.