Crude Processes and Deepwater Questions: Compensation on the Horizon

Written By: John Hemenway and Bob Bivins

On April 22, 2010, the drilling rig Deepwater Horizon sank in the Gulf of Mexico following a blowout explosion two days earlier. The sinking of the rig severed the riser pipe that connected the well-head to the rig, causing the release of an estimated 4.9 million barrels of oil into the Gulf of Mexico. Over the course of months, the uncontrolled leakage resulted in an unprecedented environmental incident.

Although the environmental impact may take decades to fully appreciate, the economic impact on coastal and Gulf-based businesses has already begun to set in, prompting the filing of numerous suits and the establishment of a claims fund to compensate economically impacted parties. Despite the publicity of the spill itself, in the weeks since the flow of oil was halted, attention has drifted away from the claims process and available remedies.

The Players

Deepwater Horizon was an ultra-deepwater, semi-submersible offshore oil drilling rig owned by Triton Asset Leasing GmbH, an asset arm of Transocean Ltd., and leased to BP plc. BP Exploration & Production, Inc., was conducting exploratory drilling approximately 41 miles off the coast of Louisiana in the Macondo Prospect, a large gulf oil field which ominously shares its common name with the fictional, cursed town in García Márquez’s novel One Hundred Years of Solitude. In the hours leading up to the April 20th explosion, contractor Halliburton Energy Services had been cementing the well casing and placing the cement plug to close off the well pending later production.

The details from that point are the subject of disagreement and investigation, but it is generally understood that a series of missteps by various parties led to the blowout. For example, BP had authorized changes in the original well design that reduced the barriers to gas escaping up the riser to the rig, ignored the recommendations of Halliburton to increase the number of stabilizers used when cementing the well in light of the design, and failed to test the integrity of the cement plug. Ultimately, the fail safe mechanism, a 300 ton Cameron International Corporation manufactured “blowout preventer,” failed to close off the well and allowed the free flow of oil into the Gulf once the riser sheared from the rig.

The list of potential defendants reads like a Who’s Who of modern oil production: Transocean, which is estimated to own more than half of all deepwater rigs in service around the world; BP, one of the world’s largest oil producers; Halliburton, one of the world’s largest oilfield services corporations; and Cameron, a Fortune 500 provider of pressure and flow control systems for the oil and gas industries.

Not surprisingly, a number of lawsuits have been initiated against—and by—the various parties to the disaster, including hundreds of claims against BP from fishermen, hotel owners, and others which are being consolidated into the U.S. District Court for the Eastern District of Louisiana, and a declaratory action brought by Transocean in the U.S. District Court for the Southern District of Texas seeking to proactively and prospectively limit its liability for the disaster. Governmental investigations promise additional claims and liability.

Applicable Federal Acts

Although the formal investigations continue and the parties begin to posture for position, three fundamental questions remain for mainstream businesses affected by the disaster: (1) whether to pursue litigation, (2) whether to file a claim with the recently formed Gulf Coast Claims Facility (the “GCCF”), or (3) whether to pursue a combination of both. Filing with the GCCF promises near term payment, but ultimately carries uncertainty as to eligibility and award determinations and whether making a GCCF claim will waive any right to seek larger payments through the court system.

On the other hand, pursuing greater compensation though litigation in the current confused environment necessitates that the plaintiff navigate a patchwork of federal and state laws, incur huge litigation costs and bear the uncertainty of success, and undoubtedly suffer an extended delay in receiving any recovery.

When analyzing legal liability in the context of off shore oil spills and wellhead blowouts, two principal federal acts are primarily invoked. The first of those statutes, the Limitation of Liability Act, 46 U.S.C. 30501 et seq. (the “LLA”), provides a mechanism by which the owner of a seaworthy vessel lost to a casualty may petition a district court for limitation of such owner’s liability, capping general liability to the value of the vessel and pending freight, or up to 420 times the tonnage of the vessel in the case of personal injury or death. Famously, the LLA was used by the owner of the RMS Titanic to limit their liability arising from its 1912 sinking. In the case of Deepwater Horizon, Triton Asset Leasing GmbH, the arm of Transocean that owned the rig, went to court at the purported urging of its insurance carriers seeking a determination that the LLA limited the company’s liability exposure to no more than $27 million.

As a practical matter, however, the utility of the LLA as a means of limiting liability is almost always diminished where an accident resulting in major environmental impacts is involved. Although the LLA allows Transocean to limit its liability for the personal injury and wrongful death claims, and to consolidate those claims into a single U.S. District Court, the LLA does not limit claims under environmental acts such as the Oil Pollution Act of 1990, the second of the two principal federal statutes relevant to off shore spills. The environmental damages resulting from Deepwater Horizon are certain to outstrip injury and death claims, and accordingly the utility of the LLA is marginalized in this situation.

The Oil Pollution Act of 1990, 33 U.S.C. 2701 et seq. (the “OPA”), was enacted in the wake of the Exxon Valdez tanker spill. The OPA amended the Clean Water Act, and in pertinent part broadened the scope of damages for natural resource damages, allowing liability up to $75 million for oil spills. In the immediate wake of the Deepwater Horizon disaster, calls arose to increase the liability cap under the OPA; however, there are notable exceptions to the existing cap. Most importantly, the cap does not apply in the event of a spill caused by gross negligence or a violation of federal safety, construction, or operational regulations.

In the wake of any disaster of this magnitude, and particularly in the case of the Deepwater Horizon—where the actions of all parties will be flyspecked, and where the alleged safety shortcuts and other decisions, which have already leaked into the media, at first blush appear apocalyptically poor—potential plaintiffs can bank with near certainty on the violation of any of the myriad of federal regulations to which deepwater drilling is subject. These regulatory violations provide seemingly reliable avenues for bypassing the OPA’s cap. Indeed, civil plaintiffs are likely to benefit from the official findings that will come out of the ongoing, high-profile federal investigations.

Of further assistance to potential plantiffs, the OPA provides for strict liability and channels liability by providing parameters to identify the liable party. In the case of offshore rigs like Deepwater Horizon, the OPA points to the drilling permit holder—BP. Despite a path to pursue BP, of course, potential plaintiffs must remain mindful of the real world import and inherent limitations of pursuing civil litigation. For example, liigation arising out of the Exxon Valdez spill lasted for more than 20 years.

The Gulf Coast Claims Facility

To provide immediate compensatory relief, shortly after the disaster occurred, BP began accepting claims from individuals and businesses for losses incurred in connection with Deepwater Horizon. BP paid its first claim on about May 3, 2010, and handled claims on its own for 16 weeks, paying approximately $396 million on account of 154,000 claims.

As of August 23, 2010, however, through an agreement with the U.S. government, processing of all claims was shifted to the Gulf Coast Claims Facility (the “GCCF”), the newly anointed receptacle for the $20 billion BP Deepwater Horizon Disaster Victim Compensation Fund. Through the GCCF, BP has pledged to provide for the payment of individual and business claims. Kenneth Feinberg, the Special Master for TARP Executive Compensation (otherwise known as the “Pay Czar”) and former Special Master of the U.S. Government’s September 11th Victim Compensation Fund, serves as the government-appointed administrator of the GCCF.

The GCCF is to be funded by BP over a four-year period at a rate of $5 billion per year. Much of the initial funding is coming from the liquidation of non-essential assets and the suspension of shareholder dividends. As of September 5, 2010, the GCCF reports having received 55,364 claims, the overwhelming majority of which are for short-term Emergency Advance Payments (discussed below), and having paid 12,666 of those claims totaling $102,628,903.02. All but ten of those paid claims and less than $100,000 of the payments have been awarded to claimants for lost earnings or profits. Interestingly, a pool of $34,500,000.00 has been earmarked for real estate brokers and agents, with state realtor associations being charged with processing the claims.

Payments are made by the GCCF on account of damages incurred by individuals or businesses arising from (i) removal and clean up costs, (ii) damage to real or personal property, (iii) lost earnings or profits, (iv) loss of subsistence use of natural resources, or (v) physical injury or death, as follows:

Removal and Clean Up Costs.

These claims are limited to expenses to remove, prevent, minimize, or mitigate the effects of the spill where such expenses are reasonable and necessary, the actions were approved by the Federal On-Scene Coordinator, or were otherwise consistent with the National Contingency Plan, and can be supported by contractor invoices, daily logs, disposal manifests, and similar documents.

Damage to Real or Personal Property.

Those who own or lease real or personal property which has been physically damaged or destroyed may submit a claim for that damage or for economic losses resulting from destruction. Payments are based on the cost of repair or replacement, or the loss in value resulting from the damage. Ownership or a leasehold interest must be proven, as well as the causal relation of the damage to the spill, together with evidence reflecting the damage and supporting the claimed costs. Owners and renters of the same impacted property must coordinate amongst themselves to avoid duplicate claims, as the GCCF will not pay the claims of both.

Lost Earnings or Profits.

Payment for lost earnings or profits are available to (a) individuals who have experienced reduced wages or were unable to engage in their usual job, and (b) businesses which have experienced reduced profits as a result of destruction or loss of real or personal property or natural resources as a result of the spill. The claimant must be able to identify the specific property or resource affected (e.g., beaches, fishing stocks), as well as evidence the lost earnings or profits. Other income realized during the period of the loss—for example, from alternative employment—must be reported and will be accounted for when the GCCF calculates the loss.

Loss of Subsistence Use of Natural Resources.

These claims apply to those who used a natural resource for food, shelter, clothing, or other necessities, and have been affected by the destruction of such resource as a result of the spill (e.g., those who fish for their own food). Claimants must identify the affected resource, describe the subsistence use they made of the resource, and the extent to which the resource has been affected (i.e., has access been completely closed or lost, or is it simply limited).

Physical Injury or Death.

Claims may be brought by the injured party or the authorized representative of an injured or deceased party. The claimant must provide applicable medical records reflecting a diagnosis or a death certificate, describe the cause and location of injury, and evidence of, if applicable, disability, uncompensated medical care, and loss of income. Injuries must be proximately caused by the explosion and fire, or the cleanup of the spill. Furthermore, injuries must be physical; emotional injuries are not compensated by the GCCF.

The Claims Process

Claims may be filed in person at regional claims offices, by internet, or by mail, and require use of a standardized twelve-page form. Claimants with pending lawsuits may still file claims with GCCF, and those who previously filed claims directly with BP are required to re-file with the GCCF. All payments from the GCCF are reported to the IRS and, as of this time, the payments from the GCCF are not considered qualified disaster relief payments under IRS regulations and thus may ultimately be includable in the recipients’ taxable income. Payments made to claimants fall under one of two categories: Emergency Advance Payments or Final Payments.

Emergency Advance Payments.

Emergency Advance Payments are deemed interim claims under the OPA, and are available to individuals and businesses experiencing immediate financial hardship. Emergency Advance Payments may be applied for on a monthly basis or, in the event of a claim for lost earnings or profits, loss of subsistence use of natural resources, or loss of income due to injury or death, on the basis of six months of losses, provided that all such claims must be filed by November 23, 2010. Claims are to be evaluated within 24 hours of receipt by the GCCF of complete documentation, or seven days in the event of complex business claims, with payment being made 24 hours after approval. Anecdotal evidence suggests, however, that these stated timeframes do not represent hard deadlines by which the GCCF operates.

Accepting an Emergency Advance Payment does not require the waiver of any right to file suit. However the GCCF takes the position that any payment received on account of an Emergency Advance Payment should be deducted from any payment received in a legal action. Any objections to the amount approved by the GCCF are subject to an appeal process with resolution to be addressed in connection with payment of a Final Payment. Interestingly, there is criticism that certain facets of the GCCF process, including the specified filing deadlines and requirement of a showing of proximate causation, are unsupported by and inconsistent with the interim claims requirements under the OPA.

Final Payments.

Claims for Final Payments may be made through August 23, 2013, and acceptance of a Final Payment requires the execution of a release, the form of which is not yet public. Any amounts paid as Emergency Advance Payments by either BP or the GCCF will be deducted from any Final Payment. Similarly, other payments received in connection with the spill, whether from private insurance or government programs such as the Vessels of Opportunity program, as well as earnings from alternative employment, are also deducted from a Final Payment.

Beyond these points, little guidance has been provided by the GCCF, except that evaluation will be more rigorous than for an Emergency Advance Payment. The suggested documentation required for processing a Final Payment is listed in the exhibits to the GCCF claim form. These exhibits set forth numerous additional types of supporting documents and detailed records, including but far from limited to historical financial records, proof of conducting a job search, and witness statements. The lack of clearly developed procedures leaves some uncertainty for those who may wish to pursue a Final Payment rather than engage in litigation.

Based on current guidance, however, it appears that the option of remedy shopping may still be available, as a party could pursue the claim process for a Final Payment from the GCCF but ultimately have the opportunity to reject such payment and pursue litigation by refusing to sign the required release.

In Summary

For the long term losses incurred by individuals and businesses, neither the Final Payment available from the GCCF nor the pursuit of litigation carry any guarantees or offer clear guidelines to a potential claimant evaluating his or her options. As the GCCF assembles its procedures for Final Payments, and legal claims begin to navigate what promises to be a long and treacherous voyage, parties must accept what solace can be provided by Emergency Advance Payments from the GCCF to aid their immediate losses.

Robert W. ("Bob") Bivins is a founding partner and the managing partner of Bivins & Hemenway, P.A. Bob holds an “AV Preeminent” rating from Martindale Hubbell, has held an "AV" rating for 15 years, and has been listed as a Florida Super Lawyer two consecutive years. Bob's practice focuses on commercial, business law, and real estate transactions.

John M. Hemenway is a founding partner of Bivins & Hemenway, P.A. John's practice focuses on business law, real estate transactions, and estate planning.