February 18, 2015 Articles

Mass Tort Claims Administration and Handling: Lessons from Deepwater Horizon

A process intended to control costs and limit exposure has resulted in an unintended surplus of both.

Peter Knight and Alex Judd

In mass-casualty and toxic-tort litigation, an effective means of providing efficient compensation to victims can benefit all stakeholders. Claimants receive prompt payment for lost property or business expenses, courts are spared from individual litigants crowding their dockets, and responsible parties (RPs) can begin to cap their exposure and liability risk. A fast and fair claims process can provide an alternative to costly, protracted, and uncertain tort litigation. The 2010 Deepwater Horizon spill in the Gulf of Mexico was a good candidate for such a process. Thousands of businesses and individuals along the gulf were seriously affected by the spill, and both British Petroleum (BP) and the Plaintiffs’ Steering Committee (PSC) moved quickly to get a claims process in place.

To date, the Deepwater Horizon spill claims process has resulted in thousands of payments by BP, the RP for the spill under the Oil Pollution Act (OPA), totaling billions of dollars; however, despite voluntarily initiating a claims process and negotiating its terms, BP now vigorously disputes the program’s implementation. The claims-handling process, including who qualifies to receive payment and the standard for recovery, has been the subject of substantial litigation—the very disputes the process was intended to avoid. The courts that have considered BP’s requests for intervention have not provided any relief to the RP, based in large part on the fact that the claims process was one of BP’s own making. Over BP’s repeated objections, Deepwater Horizon claims continue to be processed. Although the scale of the Deepwater Horizon claims process provides an extreme case, it offers important considerations for parties managing claims following an oil spill or other mass casualty.

Shortly after the April 2010 Deepwater Horizon oil spill and prior to the initiation of claims-based litigation, BP established the Gulf Coast Claims Facility (GCCF). BP selected Kenneth Feinberg, the architect and administrator of the September 11 fund, among other large, high-profile mass-tort settlements, to design, implement, and administer the GCCF. The process went into immediate effect, and for 16 months, Feinberg processed over one million claims and authorized payments totaling about $6.2 billion to over 220,000 individual and business claimants. Despite the thousands of claims Feinberg processed, costing BP billions of dollars, the PSC, believing Feinberg’s administration was biased in favor of the RP, successfully challenged his neutrality, and on March 2, 2011, Judge Carl Barbier determined that the GCCF and Feinberg “are not completely ‘neutral’ or independent from BP. For example, Mr. Feinberg was appointed by BP, without input from opposing claimants or the [PSC], and without an order from the Court.”

Toward the end of Feinberg’s tenure, in February 2011, settlement negotiations between BP and the PSC began in earnest for the proposed economic and property damages settlement. Unlike the GCCF, the settlement was placed under the court’s direct supervision and ongoing jurisdiction. This was a fundamental structural and functional difference. On December 21, 2012, Judge Barbier issued an order that certified the economic and property settlement class and, at both parties’ urging, granted approval of the economic and property damages settlement agreement, which had been negotiated by BP and the PSC. Consideration between the parties was stated simply: In exchange for the remedies provided to the claimants, BP would obtain a broad classwide release as well as a signed individual release from each claimant that accepts a payment. In this way, BP would begin to resolve its staggering potential liability for certain property and economic damages resulting from the spill. However, the order noted that “[a]n unusual feature of the Settlement Agreement [ ] is that class members [were] able to submit claims and receive payments prior to the Court’s grant of final approval, provided that they sign[ed] an individual release.” In addition, whereas the seafood compensation program was capped at $2.3 billion, there was no cap on the amounts that could be paid under the settlement agreement.

The claims process soon moved from the informal precertification process administered by Feinberg to the district court’s supervision under a new claims administrator. On March 8, 2012, at the parties’ request, the court entered an order creating a process to facilitate the transition from the GCCF to the court-supervised settlement program envisioned by the settlement. As part of the settlement agreement, the PSC negotiated Feinberg’s removal as claims administrator. The court-supervised settlement program commenced on June 4, 2012, headed by claims administrator Patrick Juneau, who previously served as the mediator in over 2,000 cases and as a special master or claims administrator in various federal and state court cases. Prior to his appointment, Juneau was vetted and approved by both BP and the PSC. Under his administration, as of December 2014, BP has made more than 73,000 claim payments to over 54,000 unique claimants totaling over $4.3 billion, in addition to payments made under Feinberg’s administration. With no cap on the settlement fund and limited rights of appeal, BP is required to pay all claims that Juneau deems eligible.

The settlement agreement outlines the basic process for making claims. Economic and property settlement class members must submit claims forms to participate in the settlement program. For business economic loss claims, claimants must include information about the compensation period and a benchmark period ranging from 2007 to 2009 as well as certain monthly and annual profit-and-loss statements. Additional documentation may be required depending on the type of business and certain causation provisions, as discussed below. If an Economic and Property Settlement Class member submits a claim and qualifies for a settlement program, prior to receiving any payment, that class member must execute an individual release, which provides a “final, complete, and exclusive agreement and understanding” between that class member and BP. However, despite negotiating and implementing a clear and consistent policy, BP has raised a number of objections.

Juneau’s interpretation of the settlement agreement and his administration of the claims process have been the source of much litigation and debate, and despite BP’s initial approval of Juneau and the terms of the agreement, the RP is now contesting critical aspects of the claims process, most significantly its treatment of causation. The settlement administrator’s interpretation of the causation element is best exemplified by a policy statement issued on October 10, 2012, and approved by the district court on April 9, 2013. The policy statement was developed to answer questions relating to causation that arose after the settlement agreement was agreed to. Again, BP provided input on and agreed to the statement, which is embodied in Exhibit 4B of the settlement agreement. The section titled “Causation Requirements for Business Economic Loss Claims” describes four geographic zones, several types of businesses, formulae for presenting economic losses, and various presumptions regarding causation that apply to specific combinations of those criteria. The policy statement also describes Juneau’s very limited role in determining issues of causation: “The Settlement Agreement does not contemplate that the Claims Administrator will undertake additional analysis of causation issues beyond those criteria that are specifically set out in the Settlement Agreement.” While this formulaic approach was meant to limit disputes, it has proven contentious.

BP appealed directly to the Fifth Circuit and also sought an injunction to prevent additional claims from being processed. BP claimed that it never intended to do away with the causation requirement, citing a series of examples involving claimants whose damages were extremely attenuated, if even tangentially related to the Deepwater Horizon spill. On March 3, 2014, the Fifth Circuit ruled 2–1 in In re Deepwater Horizon, 744 F. 3d 370 (5th Cir. 2014), to uphold Judge Barbier’s judgment that the settlement BP agreed to in 2012 did not require businesses to present direct evidence of causation tying their losses to the oil spill. BP filed a petition for an en bancrehearing before a full panel of the Fifth Circuit, arguing that such an interpretation “effectively permit[s] the expansion of class membership during the claims-processing stage, resulting in awards to claimants whose injuries lack any causal nexus to the defendant’s conduct.”

On May 19, 2014, by an 8–5 vote, the Fifth Circuit denied BP’s request for an en bancrehearing to review Judge Barbier’s decision that the settlement BP agreed to in 2012 did not require businesses to present direct evidence of causation tying their losses to the oil spill. In its denial, the court specifically addressed Exhibit 4B, which discusses the causation factor. According to the Fifth Circuit, the policy statement was developed to address the situation where a claimant meets every evidentiary standard in Exhibit 4B but lacks an actual causal nexus to the oil spill. The Fifth Circuit concluded that the causation element still exists but is “under the specific criteria and formulae that BP and Class Counsel agreed would be utilized for that purpose.” In other words, causation is established by certain factors set out in Exhibit 4B that the parties agreed were a sufficient, albeit indirect, way to satisfy the goal of connecting a claim to the Deepwater Horizon spill. But once causation is established through the formula, the policy statement provides that “the Claims Administrator will not be concerned with the possibility that a particular claimed injury might have been caused in whole or part by other events.”

The Fifth Circuit articulated a basis for BP to adopt the policy statement in the first place. “The parties did not reject the need to establish a [causal] connection. Instead, they agreed to a means for doing so that sufficiently satisfied each party’s litigation interests.” In other words, the court read into BP’s accedence to the lower causation standard a priority on capping its exposure and avoiding protracted litigation or disputes over individual claims.

In a May 21, 2014, press release, BP said that the Fifth Circuit ruling was “erroneous” and that it would seek review by the Supreme Court. In its press release, BP claimed that “[n]o company would agree to pay for losses that it did not cause, and BP certainly did not when it entered into this settlement.” In addition, BP ran full-page advertisements in major newspapers. The ads contained the tag line “Would you pay these claims” and detailed such claims awards as $173,000 to an adult escort service and $8 million to a celebrity chef. On June 27, 2014, BP took additional legal action and filed a motion in the district court for restitution, plus interest, for those claimants who have been overpaid, totaling 793 claims. BP provided four specific examples of erroneous payments, with estimated overpayments ranging from $2 million to $14 million. On September 24, 2014, Judge Barbier denied BP’s motion for restitution, which BP appealed to the Fifth Circuit on October 7, 2014. As of the date of this publication, the Fifth Circuit has not yet issued a decision on BP’s appeal.

On August 1, 2014, BP filed a formal petition to the Supreme Court appealing the Fifth Circuit’s May 19, 2014, ruling on the causation element. In its petition, BP argued that four other appellate courts—the Second, Seventh, Eighth, and D.C. Circuits—require a direct link between damages and payment, and only one other appellate court, the Third Circuit, has, like the Fifth Circuit, allowed claims to proceed in the absence of direct causation. On December 8, the U.S. Supreme Court, without comment, denied BP’s petition. The Court’s decision means that Deepwater Horizon claims will continue to be processed. Furthermore, Juneau’s interpretation of the Settlement Agreement and his handling of the claims process have, in effect, been validated.

BP is fighting the claims-handling process on other fronts as well. The company recently filed a motion seeking the removal of Juneau as claims administrator of the court-supervised settlement program, alleging a previously undisclosed conflict of interest. According to BP, “[r]ecently disclosed evidence reveals that as counsel for the State of Louisiana, Mr. Juneau advocated vigorously on behalf of individual and business claimants seeking compensation from BP for alleged spill-related injuries.” A September 2, 2014, memorandum issued by BP in support of its motion to remove the claims administrator alleged that “Mr. Juneau also did not implement at the outset the necessary systems to prevent and detect the payment of fraudulent and potentially fraudulent claims.” On November 10, 2014, Judge Barbier denied BP’s motion. BP subsequently appealed Judge Barbier’s decision to the Fifth Circuit. Oral arguments have been calendared for February 3, 2015.

A process intended to control costs and limit exposure has resulted in an unintended surplus of both. Despite the issues that have arisen in the Deepwater Horizon case, claims handing will continue to be an integral part of resolving mass casualties. These incidents, and particularly oil spills, can result in hundreds, if not thousands, of individual claims from unique claimants. Having a tool to address potential litigants’ claims early in the case can benefit both plaintiffs and defendants alike. The claims process in the Deepwater Horizonspill, however, provides an important caution. Such agreements, though most often voluntary, are binding. Their terms should be negotiated and understood as would any final settlement agreement. The key issue in most administrative settlements is the one that BP is now disputing: What evidence of causation will be required to submit a claim and receive payment? In establishing the requisite claims protocols, RPs and other defendants will need to balance the competing interests of efficiency in having a simple, direct process, and accuracy in ensuring that only deserving claimants are compensated. This is especially so where, as here, there is no cap on the settlement fund.

Keywords: environmental litigation, claims administration, claims handling, mass tort, Deepwater Horizon, oil spill, BP

Peter Knight is a partner and Alex Judd is an associate in the Hartford, Connecticut, office of Robinson + Cole LLP.

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