The BP Escrow Fund: Chaos to Come

President Obama emerged from a meeting with BP executives Wednesday afternoon to announce that the company had tentatively agreed to put $20 billion into an escrow account to cover oil spill damages. If this promise holds, the account would go a long way toward mollifying Congress and the White House, who have both insisted that BP bear the full cost of the spill. But just how effective would an escrow fund be at distributing that $20 billion?

The Exxon Valdez disaster, America's worst environmental catastrophe before Deepwater Horizon, illustrates some of the complications in paying economic damage claims. After 11 million gallons of oil spilled into Alaska's Prince William Sound in 1989, locals filed damage claims with the Trans-Alaska Pipeline Liability Fund, which had been established when the pipeline was authorized in 1973. Oil companies operating in the area deposited money in the fund as a form of insurance -- a precursor to the Oil Spill Liability Trust Fund, created by the Oil Pollution Act of 1990 (itself prompted by the shock at the Exxon Valdez spill). The fund was authorized to distribute up to $100 million in damages, though according to John. J Gibbons, who administered it, only a fraction of this sum was handed out.

"Whatever they put in place in the Gulf will have to take into account a lot of complexities with respect to the claims process," Gibbons says.

"For example, an enormous number of vessel owners and crew members who were in the fishing business have been more or less laid up. On the other hand, as the clean-up progresses, those vessels of necessity are going to be hired to participate in the clean-up work -- and they'll get paid," Gibbons says. "Any claims process with respect to lost fishing income has to take into account that some of them will be making more money cleaning up than they would have made fishing."

Brian O'Neill, who represented Alaskans who lost income due to the Exxon Valdez spill in their 21-year battle with the courts, also fears the escrow fund could get bogged down in the process of divvying up $20 billion.

Processing a fisherman, hotel owner, or restaurateur's claim, O'Neill explains, has two phases: "The first thing is, he needs money now or he's going to go bankrupt, so there's an interim payment. But secondly, you also need to make a determination of how much business he's going to lose over time."

O'Neill cites an example from Exxon Valdez: salmon fishermen took a hit for one to three years but eventually managed to recover some business. Herring fishermen, on the other hand, could never fish again, but they didn't know this until five or six years later, when the scope of damage to local herring populations was confirmed. Keeping tabs of short-term and long-term damages in very specialized industries involves a lengthy roster of experts on local industries.

"This is going to be a political disaster when someone finally sits down to figure out a structure for how to pay people but then that structure doesn't start paying people for two or three years," O'Neill says.

The someone sitting down to that disaster will be Kenneth Feinberg, Obama's executive pay czar and the subject of a lively profile by Steven Brill. Feinberg administered the government fund to compensate the families of 9/11 victims. According to Brill:

He ended up persuading 98 percent of the 3,000 victims' families -- even those of janitors offered a tenth of what families of killed stockbrokers got -- to stay out of court and instead apply to his fund. And, while dispensing $7 billion in awards, he also got the support of an instinctively anti-plaintiff Republican administration.

BP is likely calculating that Feinberg may, in a similar fashion, discourage oil spill claimants from suing the company by granting them just-generous-enough escrow fund packages. If $20 billion up front prevents some of the 21 years' worth of legal fees Exxon shelled out, BP's settlement with Obama will probably be worth the sum.

And given the fate of the Exxon Valdez litigation--in 2008, after two decades of appeals, the Supreme Court cut Exxon's tab from $2.5 billion to $500 million--Gulf residents may also do better to file a claim with the escrow fund than to file a suit against BP.