Is Obama’s Demand For A BP Fund Just A Way To Limit Liability?

Posted by Jason | Posted in Government, Miscellaneous | Posted on 14-06-2010

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There is no doubt BP has bungled the handling of this oil spill. What is even more bungled is the government’s back and forth trying to act like they are or even can do something about this that will actually help. Most recently, Obama is now calling for a fund to be setup to pay claims.

From the Wall Street Journal:

The Obama administration, facing growing public anger over the Gulf of Mexico oil spill, plans to ask BP PLC to establish an independently administered fund for reimbursing victims—in effect, taking some of the compensation decisions out of the company’s hands.

White House officials on Sunday said they wanted BP to put “substantial” funds into an escrow account to cover claims by Gulf Coast businesses and residents affected by the spill.

President Barack Obama plans to bring up the idea at a White House meeting Wednesday with top BP executives, including Chairman Carl-Henric Svanberg.

The call was echoed by congressional leaders and state officials. In a June 10 letter to BP released on Sunday, Senate Majority Leader Harry Reid (D., Nev.) and other Democrats asked BP to establish a $20 billion account, administered by an independent trustee, that would be used to pay the damages and clean-up costs associated with the spill. Florida Governor Charlie Crist and other officials in the Gulf Coast region joined the chorus.

It remained unclear how any such funds would be supervised, in particular who would oversee the compensation decisions. Administration officials on Sunday didn’t comment on the size of the escrow account they will seek, or on where money might come from. Nor did officials detail the legal status of the proposal.

Such a fund would provide a measure of security, proponents argue, for people concerned BP might file for bankruptcy protection or otherwise stop paying claims at some point in the future. It also has the potential to give the government or its designees control of distributing a significant pool of relief money.

OK, so the fund does not sound like a bad idea other than the “It remained unclear how any such funds would be supervised…”. That sure sounds like a nice slush fund for someone.

While not opposed to the idea of the fund, BP objects to the implication that if it isn’t required to set money aside, it might try to avoid paying it in full, according to a person familiar with the company’s position. BP insists it has the financial muscle to settle the final bill for the clean-up, as well as pay its dividend.

From BP’s side, maybe they do have the means to pay the bill. If there is no fund setup all at once, BP will be able to handle claims as they come, which will help cash flow. If the government tells them to setup a fund, and it’s required to be funded all at once, that could really harm BP’s chances of recovering from this. Cash is king, and if cash flow runs out, BP may be too tarred and feathered to raise capital.

Legal experts struggled to come up with a precedent for such a move. Examples of government-run funds exist, but they differ from the proposal facing BP.

Are we trying to act like our government cares about the law now?

In the early 1980s the government passed Superfund legislation that would create a fund to pay for the cleanup of hazardous-waste dump sites.

Through the law, the Environmental Protection Agency can compel the polluter to clean up the site or pay for it through the Superfund and sue for reimbursement.

Around the same time, the first of about 40 trust funds were set up with court approval by Johns Manville Corp. and later other companies with asbestos liability to alleviate some of the problems of lengthy asbestos-related litigation. But their creation stemmed from bankruptcy proceedings for Johns Manville. The trusts now oversee about $20 billion in assets, a sum that has nearly tripled since 2005, consultants say.

What they don’t say is this huge fund created an industry of lawyers looking to make millions off these claims. Instead of settling suites for those effected by asbestos, it was really a pay off to the trial lawyers.

Typically, corporations fund such victims accounts to settle class action lawsuits, although there have been a few examples of legislatively mandated funds such as the 9/11 victims fund, according to Howard Erichson, a law professor at Fordham University. “If the idea is to get BP to do this voluntarily, the question is what’s in it for them? Is there some liability protection in it for them?” Mr. Erichson said.

See, here’s the pay off to BP. While the government is trying to make it seem like it’s coming down hard, they will really setup an escape route for BP. They will put in liability protection for BP.

What I would like to know is why are we pushing to have a fund setup now? Did we not know there are risks involved in what they were doing, and shouldn’t we have planned accordingly? Of course, they didn’t because instead of focusing on liability they focused on buying off the government regulators. In a free market with private property protection, companies would buy insurance for liability protection. Insurance is the fund that would pay claims. Why is there not drilling rig insurance that pays out when something like this happens? My guess is there is no need for an insurance company to provide insurance like this, because government is used as the insurance.

Let’s just think about how this should work. If I’m BP, and I’m proposing to drill one mile below the ocean. One of the first things I should be thinking about is how will I pay claims if this goes bad? I better get insurance. Then the project should be submitted to an insurance company. The insurance company would have the expertise to evaluate the riskiness of the project. Then based on that, they would say, “BP, we are willing to issue a policy on this project for X number of dollars. Here are the things that we would require to issue this policy. 1.) You must use this latest technology. 2.) You must have this expertise on site at all times. 3.) We will inspect the rig weekly…..”. You get the picture.

Now, the insurance company is basically saying we are taking the risk off BP, and to do this BP will pay them so much money and meet certain criteria. The insurance company now must limit it’s chances of having to pay out claims. That is how they make money, and YES, this is a good thing. Insurance provide a valuable service to society, so quit letting the government smear insurance companies.

Anyway, so the insurance company will take actions to limit their chances of being liable. How will they do that? They will first take actions, such as inspections, to make sure that the rig is up to the highest standards. Also, they will develop clean up plans ahead of time, so they can quickly take action and limit their losses before the problem gets out of control. If they don’t, they run the risk of losing money on this policy.

So as you can see, this is how a true market works, when there is real private property protections in place. Instead, we have a government regulated market, where there were laws on the books capping the oil companies’ liability at $75 million. Why buy insurance or why provide insurance, when the government already said what your cap is? Oh sure, Obama is grandstanding and trying to make it seem like he’s coming down hard on BP. The truth is they will setup a way for BP to limit it’s liability. They will protect big oil. Even if BP doesn’t make it through this, the billionaires at the top have already put into place a way to limit their losses. Entities, government created of course, will be moved around, gobbled up, etc, but make no mistake about it. The government is and will protect their rich masters, instead of doing the one simple thing a just government is supposed to do, protect property rights.

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