Why a $20 Billion Escrow Fund for the Gulf Oil Spill Benefits BP

BP has just had a huge burden removed from its figurative shoulders, the administration of a fund to compensate businesses and people along the Gulf coast for damages and losses due to the Deepwater Horizon oil spill.

The process begins with claims. That's all they are, claims. The businesses and people making those claims are asked to provide proof, usually documentation, that they have suffered a monetary loss. Anyone who has ever made an insurance claim knows that process all too well. The distance between a claim and compensation is a winding path that can involve any number of issues which are subject to negotiation between the parties and very possibly some litigation.

The Unified Command reports in their June 15 2010 report that BP has opened 54,400 claims. $70.3 million has been disbursed. No claims have been denied.

The process is taking time and the media reports that many on the Gulf Coast are complaining that they have heard nothing about their claim. The creation of an escrow fund, to hold $20 billion for these and future claims suggest that action will be taken faster and more responsively. That is probably not going to be the case.

Much of the holdup revolves around proof of loss. Many claimants seem to expect that they will be compensated for what they hoped to make, not what they historically made. Others seem to be under the impression that compensation will be for gross income, not net income after expenses. Still other claimants are discovering that working off the books or failing to keep records may mean their claim will be delayed.

None of that will change with this new escrow account. In fact, Kenneth Feinberg, who will administer this fund, has a reputation for strictness when it comes to proving a loss. He earned that reputation administering the Federal Government's 9/11 fund.

Investigating these claims and determining a fair and just compensation is no longer the exclusive burden of BP. The Federal Government, through this escrow account, has assumed many of those responsibilities. The creation of the escrow account affects all of the legal issues surrounding the loss of the Deepwater Horizon, the spill and all of the other lawsuits in progress or waiting to be filed.

In effect, BP has shifted the legal and administrative burden for its responsibility to the Federal Government. The legal wrangling that will sort out the various dollars and cents, and who owes what to whom will take much longer that if the account had never been created. This is one of the best outcomes BP could have had in regards to its financial and legal obligations over the oil spill. BP will advance $20 billion to the fund and not pay another penny until the fund is exhausted, or additional financial responsibilities have been adjudicated.