Why Cap Damages?

Can anyone think of legitimate reasons to cap damages for the oil spill still ongoing after 36 days in the Gulf of Mexico?

Sen. Robert Menendez (D-N.J.) is set to introduce on Tuesday afternoon a bill that would fully eliminate any cap on the amount of economic damages that oil companies would have to pay for spills they’ve caused.

The New Jersey Democrat is revising an earlier version of legislation he introduced which would have raised the cap from $75 million dollars in liability to $10 billion. Now, the cap will be effectively unlimited, an aide said.

The revised legislation, which ups the ante a bit in the oil-spill debate, will get its first floor hearing on Tuesday afternoon as Senate Democratic leadership is expected to call for unanimous consent. In all likelihood, a Republican senator will object (they have objected twice already to Menendez’s $10 billion cap) forcing Democrats into another course of action. It should be noted, as well, that the Obama White House has refused so far to endorse an actual dollar figure for where they’d like a liability cap to be, though they have expressed support for raising it.

The $75 million dollar cap was apparently enacted 20 years ago in the wake of the Exxon Valdez disaster in the Oil Pollution Act. I honestly don’t see a good reason. Is it consistent with some sort of international accord?

Talk about moral hazard. $75 million is a pittance. I can see why BP self-insures for this kind of event. It’s a fly speck on their balance sheet.

Note that this is corporate welfare. In the absence of the law there would be no limitation on liability.


Well, here’s a reason. BP may be subject to a $60 billion dollar fine above and beyond any civil damages:

NEW YORK, May 25 (Reuters) – Just how many barrels of oil are gushing into the Gulf of Mexico from the Deepwater Horizon spill is a billion dollar question with implications that go beyond the environment. It could also help determine how much BP (BP.L) and others end up paying for the disaster.

A clause buried deep in the U.S. Clean Water Act may expose BP and others to civil fines that aren’t limited to any finite cap — unlike a $75 million limit on compensation for economic damages. The Act allows the government to seek civil penalties in court for every drop of oil that spills into U.S. navigable waters, including the area of BP’s leaking well.

As a result, the U.S. government could seek to fine BP or others up to $4,300 for every barrel leaked into the U.S. Gulf, according to legal experts and official documents.

Capping civil damages while exacting substantial fines amounts to a $60 billion transfer from the private sector to the public sector. I guess that’s one way to tax oil without enacting an explicit tax at the pump.

11 comments… add one
  • steve Link

    “As a result, the U.S. government could seek to fine BP or others up to $4,300 for every barrel leaked into the U.S. Gulf, according to legal experts and official documents.”

    First, I had thought the $75 million was for punitive damages above payments for damages litigated in court?

    Tyler Cowen had a nice piece on torts vs regulation. One of the commenters, a lawyer I believe, pointed out that courts are not especially good at sorting out these kinds of claims. The claims will be diffuse, many people will be affected and the time factor of delayed damage makes it difficult to resolve. How long will the oyster beds not yield? How long will the shrimp be affected? Class actions are hard to organize and distribute money.

    A fine makes sense in that it may be the best way to approximate the true costs of the real damages caused. It more closely aligns risks and benefits for the oil companies. Is it the best way to get money to those who have been harmed? Maybe not, but there is no good answer there IMHO. OTOH, the $50,000 a year fisherman litigating against BP is up against bad odds also. (I assume you have had experience with litigation. I find it interesting that one of the first things lawyers assess is the level of assets of the opposition and their ability to carry on prolonged litigation.)

    So, no, there should be no limits on litigation and the amounts recovered.


  • I assume you have had experience with litigation.

    Plenty. On both sides. That’s why my immediate reaction on hearing of the problems with the well was that what was most needed was a streamlined administrative approach for resolving claims outside the conventional court setting.

    My second reaction was that we needed better strategies for dealing with such accidents, a view that I feel that subsequent events have fully supported.

  • PD Shaw Link

    Damages are traditionally intended to compensate for injury to a person or loss of property. When you have an oil spill, usually neither happens. The things that get hurt are natural resources like fish which are nobody’s property. Tourism can be hurt, but tourist companies don’t own the beaches or the sunsets.

    At the time of the Exxon Valdez, federal environmental law required the responsible parties for the cost to clean-up any spills.

    So when Exxon Valdez hit, you had a program which dealt with two things (1) damage to self and property and (2) clean-up, but didn’t address the economic losses in the fishing and tourism industry. The Oil Pollution Act of 1990 added natural resources damages, but capped them, and added a Response Trust Fund to provide additional funds to compensate injuries and resources for government response. It was a compromise intended to expand liability without bankrupting a company.

    I do not believe these caps, however, are effective if federal regulations have been violated. I assume they have not been violated unless I read evidence otherwise.

  • PD Shaw Link

    A few thoughts on the penalties.

    They are for negligence. From what I’ve been able to determine, the oil platforms are permitted under the Clean Water Act under a single permit for all oil drilling operations in the region. (All platforms are considered to have the same environmental risks) It’s issued by the USEPA region. This is the permit where I would expect fo find the requirements for drilling oil using the available technology and practices to reduce the risk of spills. If they complied with the permit, which I suspect is more likely true than not, I’m not sure how anybody could have been negligent.

    Who was negligent? The article seems to brush over the strong possibility that BP did not do anything wrong. When I lived in Louisiana I knew a number of oil rig workers and none of them worked for a company I’d ever heard of before like Amoco or Exxon. BP didn’t operate the platform and probably didn’t even have legal permission to do so under the permit.

    The USEPA has a penalty matrix that they use to determine the amount of the penalty they seek. It’s focused more on the business advantages a company might have received by not complying with the Clean Water Act. Egregious behavior gets a higher penalty, but it’s not really tied to the actual injury. For example, if the company violates the laws while operating next to a school yard, the penalty would be stiffer regardless of whether any school children were injured. The matrix considers past violation history and diligent efforts at clean-up. The highest CWA penalty I’ve found a judge issue was for $12 million.

  • PD Shaw Link

    BTW/ The truly weird damage caps are under maritime law. The families suing Deepwater Horizon are all having their lawsuits joined in federal court where the TOTAL PAYOUT by D.H. will be capped at approximately $27 million, which is the current estimated value of the oil platform. I don’t know if there are exceptions to the cap or what the justification is. I guess U.S. law gets strange at the borders, perhaps due to international accords?

  • steve Link

    “Who was negligent? The article seems to brush over the strong possibility that BP did not do anything wrong.”

    Would not res ipse loquitur apply?

    … it ordinarily would not occur without someone’s negligence;
    … it in this instance probably did not occur without someone’s negligence;
    … it was caused by an instrumentality that was under the exclusive control of the defendant; and
    … it was not caused in any way by the plaintiff

    Given that hundreds/thousands of wells have been drilled w/o incident, and the accounts I have read indicate that there were ignored problems with the drilling, this may apply. I also think that they may be vulnerable by having, as I understand it, placed all their backup into the BOP. Nothing is truly foolproof or accident free. They could have/should have had pre-built containment domes. Even if they did not work, there would at least be evidence that they had planned for a failure.

    “It was a compromise intended to expand liability without bankrupting a company”

    Why would we protect a company from bankruptcy if they caused enough damage to merit it?


  • Piggybacking on PD Shaw’s point about negligence, it may well be that the damage cap is a recognition that “stuff happens” when doing something inherently damaged and that said stuff, while unfortunate, isn’t anyone’s fault, really.

    So, say the government decides promoting oil exploration offshore is to the public’s benefit. It stands to reason, then, that having companies who do so go bankrupt when “stuff happens” is to the public’s detriment.

    If the above is all true, it’s not unreasonable for society to decide that it will self-insure against unlikely catastrophes, with industry paying a token amount so they have some skin in the game — and because they benefit most directly from this indirect subsidy.

  • inherently damaged = inherently dangerous.

  • PD Shaw Link

    steve, r.i.l. exists because tort law is concerned with compensating injured parties. Civil penalties are imposed to discourage violations of regulations, regardless of injury. To apply r.i.l. would be pretty close to ticketing five cars for speeding when your radar detected somebody was speeding and shifting burden on each car to prove that it was complying with the posted speed limit.

    Also, regulatory programs largely exist to require best available use of technology before operations begin. Whatever the permits and regulations required is probably the standard of care owed. The regulations may need to be strengthened, but the USEPA cannot increase technological requirements without evidentiary basis, including a cost-benefit analysis.

  • PD Shaw Link

    “Why would we protect a company from bankruptcy if they caused enough damage to merit it?”

    Why would Louisiana pass caps on oil spill liability under state law? The communities most likely to be harmed by oil spills are the most dependent on oil industry jobs and tax support.

  • steve Link

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