“Private” Claims Resolution Programs – Some Keys to Success

Fredric M. Brooks and Deborah Greenspan

Brooks, Fredric M.Greenspan, DeborahIn recent years, we have seen an increasing use of a claims resolution (non-litigation) program offered as an efficient way to resolve large numbers of claims by companies faced with potentially vast and costly lawsuits. Examples include the voluntary program set up by General Motors to resolve injury and death claims related to alleged ignition switch defects in over two million cars; the $4.85 billion program set up to resolve certain Vioxx claims against Merck & Co. in the federal multidistrict litigation (“MDL”); the multi-billion dollar fund set up by BP to address claims arising from the 2010 Gulf oil spill; and the current proposal by Volkswagen to set up a claims program to resolve claims arising out of misleading emissions measures in half a million cars sold in the United States.

What Do We Mean by “Claims Resolution Programs”?

Claims resolution programs come in a variety of forms, but in general are administrative programs established to provide monetary or other forms of compensation on a mass scale outside of individualized litigation. There is no specific formula; rather, they can be tailored to the specific situation and claimant population by offering a variety of resolution options through different mechanisms. Claims resolution programs vary in the scope of funding available (capped or open-ended), the nature of relief provided (scope of release, whether there is variation in awards), and the process that is provided (purely administrative to procedures that mimic tort system recoveries and/or may provide claimants with an opportunity to be heard at a hearing).

Why are Companies Turning to these Types of Resolution Programs?

Reasons may vary, but these resolution programs can provide all interested parties with substantial benefits when properly implemented. In part, it reflects a shifting view of the necessity of achieving complete “closure” through a single mechanism. Often companies would seek resolution through a class settlement or bankruptcy—in part because those vehicles have the potential to provide absolute closure and relief from future claims. Those options, however, can involve years of expensive litigation, and the need to provide a remedy for “all” claims can be expensive. By turning to a “self- help” type of claim resolution program, companies can achieve a significant measure of peace relatively quickly. Even if the program resolves only a portion of the potential litigation, the company can succeed in substantially reducing the scope and number of participants in litigation.

The prompt implementation of a fair and transparent claims process can also improve public relations for companies taking steps to provide just and speedy compensation to those alleging injuring or harm. Companies can demonstrate that they are addressing the problem and are being responsive to consumers (and regulators). Claimants can receive prompt and equitable recoveries without the delay and risk of protracted litigation.

Of course, it is crucial to establish effective procedures and terms. The claims resolution process has to be attractive enough to provide claimants an incentive to participate. And it has to recognize the issues that will drive the claimants to reject such an option.

So what are the attributes of successful claims resolution processes?

One instructive example is the 9/11 victims compensation fund. Although that fund was created by statute and not as a private company resolution, it provides many important lessons. The fund provided a no fault administrative alternative to litigation and those who participated waived their litigation rights (including rights against the airlines and their insurers.)  The original fund—which targeted the families of the individuals who were killed or physically injured in the immediate aftermath of the 9/11 attacks—ultimately resolved 97 percent of the claims in a 33-month period. [1]  Such an outcome would have been impossible in the tort system. The fund evaluated the economic and non-economic loss of each claimant individually and provided opportunities for hearings and face to face meetings, thereby allowing the claimants their ‘day in court’. The 9/11 fund was reauthorized in 2011 to provide compensation for those who have been diagnosed with certain latent diseases, including respiratory conditions and certain cancers. This reauthorized fund is intended primarily to benefit the responders, recovery and clean-up workers, as well as residents and other workers who spent significant time in the area of the attacks. To date, that reauthorized fund has received over 20,000 claims and has issued award determinations for over 9,000 claimants totaling over $1.8 billion.[2]

Following negotiations with BP and the U.S. Government, the BP Gulf Coast Claims Fund (“GCCF”) was created a few months after the Deepwater Horizon explosion and resulting oil spill. (Again, there were certain statutory and regulatory requirements and BP had established an initial claims processing procedure, but there was some pressure to establish a more public and ‘neutral’ operation.)  Within a few months, the GCCF had paid claimants over $840 million in emergency advance payments. In total the GCCF paid a total of more than $6.2 billion to over 220,000 individual and business claimants in less than two years of operations.[3]

General Motors opted to establish a similar program to address claims related to allegedly faulty ignition switches in certain cars. That program resolved several hundred claims through the administrative process and paid out $594 million over a short time frame.[4]  Notably, the first trial regarding the ignition switches occurred after all these claims had been resolved administratively.

Of course, there are critics. Some argue that this type of claims resolution undermines the benefits of the legal system: these claims operations—at least in some cases—operate without the oversight of a court. (A class action settlement or bankruptcy resolution is subject to judicial review and approval and requires certain protective findings and procedures.)  Critics also argue that the administrative process reduces the opportunity for fact finding and for development of legal theories.

Keys to Success

While a claims resolution program can provide a fair and efficient vehicle to resolving litigation and litigation risk, its ultimate success in any particular case depends on appropriate consideration and implementation of a variety of factors.[5]  The following sets forth some of the issues to consider:

  • A wide range of interested parties must be considered. Not just the defendants and plaintiffs (who themselves can present varied interests), but also insurers, related businesses, federal, state, and local governments, as well as interests of foreign governments and entities when liabilities outside the U.S. may be implicated.
  • Does or how does insurance factor into such a process? Are there defenses to coverage that arise simply because claims are resolved through an administrative process without the type of fact finding and legal determinations that pertain in the litigation system? A company that does not have sufficient assets on hand to establish such a process might not be able to draw on insurance assets quickly or easily. Note, for example, that GM reported that it would not use insurance proceeds to pay ignition-switch claims, but only cash on hand.[6]
  • Methodology for determining claim value. The process and structure should be designed to best meet the circumstances of the case to help ensure success (e.g., should a fund provide fixed benefit amounts, or should claimants be entitled to receive different awards based on different circumstances based on tiers, grids, or individualized review?).
  • Definition of the scope, speed, and duration of the program. The goal of the company would be to resolve claims promptly, which is also part of the incentive for claimants to participate.
  • Scope of release provided. A program that does not require a full release might attract more claimants, but, of course, leaves the company with future risk.
  • What type of proof is necessary to authorize a payment? The GCCF faced significant issues of proof but at the same time was under considerable pressure to pay claims immediately. How do you reconcile the concerns about fraud or misrepresentation or even mistake against the desire to move quickly ?
  • Is there a need to allow for some type of hearing in order to secure participation in the program?
  • Fairness and transparency. A program that is perceived as ‘unfair’ is not likely to be successful. And a program that does not provide full disclosure to claimants is likely to be perceived as unfair or biased.

It is clear that this type of administrative claims resolution process has achieved success (measured by participation rate and time frame for issuing compensation), but it is important to take care to establish an appropriate program. Any program that is perceived as unfair, inequitable, or slow is unlikely to achieve the results that both claimants and defendants seek.

 

[1] See Final Report of the Special Master of the September 11th Victim Compensation Fund of 2001, at 1.

[2] The VCF was reactivated when President Obama signed into law the James Zadroga 9/11 Health and Compensation Act of 2010. See P.L. 111-347.

[3] See Independent Evaluation of the Gulf Coast Claims Facility (BDO 2012).

[4]  David Shepardson, GM Fund Approves $594.5 Million in Ignition Claims, Reuters (Dec. 10, 2015).

[5] See Deborah E. Greenspan & Matthew A. Neuberger, Settle or Sue? The Use and Structure of Alternative Compensation Programs in the Mass Claims Context, 17 ROGER WILLIAMS U. L. REV. 97, 110–15 (2012); CPR Inst. Comm’n on Facilities for the Resolution of Mass Claims, Mass Claims Resolution Facilities (CPR Master Guides on Conflict Prevention and Resolution 2011).

[6] See Rodd Zolkos & Judt Greenwald, GM’s Compensation Fund is First Step in Repairing Damaged Reputation, Business Insurance (July 26, 2014); http://www.businessinsurance.com/article/20140706/NEWS06/140709916/gm-s-compensation-fund-is-first-step-in-repairing-damaged-reputation

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