Make Them Pay

"I’m worried to hell and back, so is everybody else," says Roland "Mac" McRae, 74, owner of the Cedar Point Fishing Pier on Alabama’s Gulf Coast. We spoke by phone on May 29. His business leases time on a fishing pier located just a few hundred miles from the Deepwater Horizon offshore oil rig, which on April 22 caught fire and sank, unleashing what is now the largest and most destructive oil spill in U.S. history.

As local fishermen stay home and business plummets, McCrae tries not to think too far ahead. "I don’t even go there. All my life, I’ve had a little jingle in my pocket," he says. "To me, life’s not worth living if you don’t have a little jingle in your pocket." McRae is one of an estimated 14 million people living along the Gulf of Mexico, millions of whom are likely to be affected one way or another the oil spill. "When they finally close that well, if they can," he reflects, "the entire ecology of the Bay and the Gulf of Mexico will never be the same."

Ecology isn’t the only unknown. More than 20 years after the Exxon Valdez dumped 11 million gallons of crude into Alaska’s Prince William Sound and caused billions in damages, the United States is again facing a massive oil spill and a vast undetermined price tag. But this time, the rules are different. The legal system, also entering uncharted waters, must now grapple with two difficult questions in fielding the concerns of people like McRae. The first, of course, is: Who’s to blame? The second is: Who will pay?

The first answer is easy; the second, not so much.

BP, of course, is taking the blame. The company was leasing the rig from Transocean, the world’s largest offshore drilling company, and managed operations with subcontractors such as Halliburton, when the disaster occurred. The explosion and sinking of the rig has thus far released between 18.6 million gallons and 29.5 million gallons of oil into the blue waters of the Gulf, according to the latest government estimates. On its website, BP says it "takes full responsibility for responding to the Deepwater Horizon incident"; however, the company has already attempted to share the blame with its contractors during intense questioning at a congressional hearing.

Since the Exxon Valdez disaster, a new suite of rules and regulations has supposedly made it easier for victims of oil spills to claim damages, but the new system also limits the punitive damages and payouts communities can expect. "Before, if the oil doesn’t touch you, then it didn’t matter how much economic losses you suffered," says David Oesting, a lead attorney on the Exxon Valdez case with the law firm Davis Wright Tremaine. "That’s all different now."

In 1990, Congress passed the Oil Pollution Act, adopting some recommendations of the Alaska Oil Spill Commission that made companies liable for economic harms from a spill without a court decision. To avoid the chaos that followed the Exxon Valdez spill, when 30,000 fought for compensation in hundreds of lawsuits, the new law streamlined the process. Now, BP (along with any other parties deemed "responsible") is automatically liable and must pay for all cleanup costs and damages to natural resources, property, and revenue caused by an oil spill.

Yet the Oil Pollution Act also caps damages to $75 million for spills from vessels, or $350 million from offshore facilities (it is not clear yet which limit applies to the mobile Deepwater Horizon rig). Once this amount is exhausted, claimants may receive payments up to $1 billion per incident (spill) from something called the Oil Spill Liability Trust Fund, which is financed through a tax on petroleum imported or produced in the United States.

In order to even be eligible for such payments, claimants must keep a tidy tally of both damages incurred and lost revenue sources. A hotel without customers, national wildlife refuges without animals and patrons, and states with massive, oil-related clean-up costs — all must place a dollar value on their harms and petition for compensation. A subpoena may be of less value than a calculator, says Oesting who is already involved in the BP case. "If I was [a claimant], I wouldn’t hire a lawyer, I’d hire a very good forensic economist to set your losses and present your claims to BP," he says. "If they don’t pay it, then go to the [Oil Spill Liability Trust] Fund. The government can duke it out with BP."

Yet limits on liability do not apply if the responsible parties committed gross negligence, wilful misconduct, or violations of government regulations. This seemed like a foregone conclusion by many in Congress even before Attorney General Eric Holder announced on Tuesday the criminal and civil investigations of BP and others for violations of the Clean Water Act, the Endangered Species Act, and the Migratory Bird Treaty Act and the Oil Pollution Act of 1990 — something the government is almost certain to find.

Even with criminal charges, however, Congress can intervene by removing the $75 million cap. And it remains to be seen whether the death of 11 workers on the Deepwater Horizon could lead to charges of manslaughter, or worse, against BP. It turns out that even the current law — which has never been tested in a disaster of this magnitude — is not such a helpful guide to predicting what will happen next.

Perhaps the biggest wild card is the possibility of lawsuits outside the purview of the Oil Pollution Act. Anyone can sue and claim damages in the courts, invoking laws that cover such incidents; most suits against Exxon were by communities and businesses. Such claims would be subject to no mandatory caps — allowing juries to potentially exact a steep toll on BP in court.

For its part, BP has stated in news reports and congressional testimony that it expects to exceed the $75 million cap  without seeking reimbursement from the Oil Spill Liability Trust Fund. In other words, either out of a sense of responsibility or a last-ditch effort at damage control, the oil giant has  committed to paying damage claims without considering the cap (if not necessarily the true cost of damages). This does not seem to have mollified Congress, which is already debating raising liability to $10 billion. Elected officials, meanwhile, are vowing financial retribution: Louisiana Sen. Mary Landrieu pledged last week that BP will repay "every penny of loss to affected individuals, businesses and communities, as well as the American taxpayer."

To date, although BP says it is paying off all "legitimate" claims, only $37 million had been distributed to claimants, primarily for those in immediate dire straits. "The primary focus is on direct impacts and people’s ability to earn income," says David Nicholas, a BP spokesman in Houston. "We’re pushing them through as quick as possible." Of the 26,000 or so claims submitted as of May 30, the firm has paid out about 12,000, typically to shrimpers, boat captains, and others affected by government restrictions on fishing grounds.

Those paid for lost income this month are eligible next month, and much larger payments are still due for businesses and natural resources ruined by the spill. Nicholas says the total cost of the operation for the first month of the spill is at least $930 million. Yet the level of compensation so far, most observers think, is extraordinarily low, given the size of the region’s population and the value of its fisheries.

BP’s legal strategy has yet to emerge. For now, it has set up a website to pay out immediate claims. One prediction is that BP will settle many of the outstanding costs as soon as possible, and allow bad press to recede for as long as 2 to 3 years, before attempting to fight any cases and paying out claims of pending lawsuits.  

For McRae, at the Cedar Point Fishing Pier in Coden, Alabama, his business may not survive to see the fight. Business is down 50 percent compared to last May. He’s already submitted claims to BP for the loss in customers, but says he hasn’t heard back and is not optimistic after attending a meeting with company officials in the neighboring town of Gulf Shores. An accountant at the meeting representing a local condominium development raised his hand to say that he submitted 1,700 pages documenting his losses, and BP replied requesting more information. "Does that tell you they are going to do the right thing?" asks McCrae. "They are not going to do the right thing."