The Gulf Oil Disaster: Who's Liable, and for How Much?

Who gets the bill for America's worst ever oil spill? No one yet knows. But Jody Freeman, founding Director of the Harvard Law School Environmental Law and Policy Program, is in a good position to frame — and explain — the liability issues surrounding the spill. Having just served for over a year in the White House as Counselor for Energy and Climate Change, Freeman has returned to Harvard Law School, where she teaches environmental and natural resource law. She spoke with TIME about the legal dimensions of this enormous and costly environmental disaster.

Where does this stand in terms of oil disasters?
This could become the worst oil spill in American history. You can compare it to the 1989 Exxon Valdez oil spill, which is something of a benchmark for U.S. oil spills [the Valdez spilled 250,000 barrels of oil into Alaska's price William Sound and the cleanup at the time cost $3.5 billion] though it makes the Exxon Valdez look like a rather simple case. This is very likely to be bigger — and for more expensive — to clean up, and the lawsuits and damages will probably dwarf the Exxon Valdez.

First, with this you have a much more economically developed coastline than you had in the Exxon Valdez spill so the economic impacts could be greater. Also, you've got a much deeper leak and bigger challenges with containing the damage. The Exxon Valdez was a discrete event with a finite source, a ship. The volume in this case is still unknown, as is the reach of the spill. Is it going to go up the east coast? We just don't know.

Since this accident happened at sea, how does liability differ from environmental disasters on land?
Actually, the liability scheme for spills under the 1990 Oil Pollution Act is quite similar to how we deal with hazardous waste on land, where the Superfund law deals with cleanups and assigns legal liability to responsible parties.

The 1990 act authorized use of a trust fund — the Oil Spill Liability Trust Fund — that the government can use on an emergency basis to respond to the disaster and help clean it up, and then the parties responsible for the spill must repay the cost. Individuals who have suffered economic loss — the fishing industry, the tourism industry and state or federal trustees acting on behalf of fish and wildlife — can also claim compensation from this fund, but only after seeking compensation from the responsible parties. In this case responsible parties would be companies that owned or operated the rig, had an interest in the well, or supplied components in the drilling process, including BP, Transocean, Cameron International and Halliburton. In addition to making claims under the Oil Pollution Act, parties can file separate lawsuits under state law for damages they suffered from the spill. That is why we have already seen over a hundred suits filed and are likely to see many more.

Is there a liability cap?
The other thing about the oil pollution law is that it creates a cap of $75 million per party for damages beyond the cleanup. So the responsible parties must pay the full price of the cleanup [estimates for BP's clean up costs run as high as $10 billion] but beyond that their exposure is limited to $75 million each. Of course, under the law, there is no cap if what has happened is the result of gross negligence or willful misconduct, or a violation of federal operating, construction or safety regulations — so, it remains to be seen whether the $75 million cap even applies in this case. [Bloomberg reported on Friday that BP had pledged to waived its $75 million liability limit.]

Won't insurance companies step in and pay most of this?
Not every company has outside insurance. BP, for one, self-insures. But even where there is outside insurance it will depend on how extensive it is, and what the coverage limits are. It would be very surprising if these companies are fully insured for the cost of a disaster like this.

Transocean filed to limit its liability. Can they really do that?
Transocean filed under the Limitation of Ship Owners' Liability Act of 1851, which purports to limit the ship owner's liability to the post-accident value of the wreck. Here, the wreckage of the rig that Transocean owns is estimated to be worth about $26 million, and they would be seeking to limit their liability to that under this 160-year-old maritime law. I would add, however, they are unlikely to succeed. First of all, claims under this law very rarely limit the liability because the limit does not apply where there's negligence, or where there was a condition of unseaworthiness about which the company should have known. More importantly, the Oil Pollution Act of 1990 preempts the 1851 law with respect to oil spills.

I think what Transocean may be trying to do under the Liability Act is get the hundred-plus cases against it consolidated into a single case, and have it tried in a single venue, which would be a big advantage for Transocean. Filing under the Liability Law allows a judge to stay all the pending cases against Transocean, which then have to be refiled in federal court. This allows the defendant to get control of the litigation and slow things down. Defendants typically seek to consolidate cases because it's much harder to defend against hundreds and hundreds of lawsuits.

If the costs beyond the cleanup greatly exceed the $75 million limit, might the feds pay the rest?
It's hard to say what happens in a typical case, as an oil spill of this magnitude isn't very common. The U.S. Government here is willing to provide emergency support to help fix the leak and contain the damage, but the Obama Administration has consistently said that the liability for cleanup and economic damages rests with BP and the other responsible parties. So far, BP has said it will pay all "legitimate" claims, and the Administration has said it will hold them to it. The government is clearly being active — the Department of Interior is reviewing all deepwater operations in the Gulf to ensure they are safe, and has proposed to restructure the agency that issues drilling permits in order to eliminate conflicts of interest. But it does not look like either the Administration or Congress has any interest in paying all the claims from private parties and local governments — including claims from the tourism and fishing industries, and claims for damages to fish and wildlife, which won't be fully known for years. I think you're much more likely to see Congress try to lift the dollar cap on company liability to a number well north of $75 million, likely into the billions. We're already seeing bills introduced to this effect. I think Congress would rather do that than come up with taxpayer money to pay these claims.

Does Congress have the power to do that, change the law and raise the dollar limit retroactively?
Yes. You'll see a lot of controversy about this, and some will argue that it's unconstitutional, but it's quite clear in the case law that courts are comfortable with retroactive laws like this. Now, we don't know with certainty what this Supreme Court might do, but we have a long trail of precedent that says a retroactive law like this usually survives when it imposes economic responsibility after the fact. What's not okay is ex post facto (i.e., retroactive) changes to criminal law. It's very hard to succeed in constitutional challenge to retroactive economic laws. For example, the Superfund Law, which deals with hazardous waste on land, was a retroactive law. Superfund made the companies that originally produced the waste, and companies that arranged to dump it, responsible for clean-up costs when the waste was discovered years later and posed a danger, even though at the time, what the companies were doing was completely legal. There were constitutional challenges to it, which all failed.

How long before we get our arms around the full cost of this disaster?
The extent of the damage won't be known for many years, and there are many categories of injuries, including natural resource damages that are hard to evaluate. You're going to see an explosion of litigation, and a real conflict over whether the true cause of each and every loss was the oil spill. As a simple example, if a Louisiana business was about to fail before the oil spill, and the oil spill put it over the edge, is that economic loss due to the oil spill? The difficulty of differentiating legitimate claims from illegitimate claims, and figuring out causation and who's responsible ... these are very significant and challenging issues. This is going to be with us for a long time. The Exxon Valdez spill, which was far less complicated, took 20 years to resolve and went all the way to the Supreme Court. This could easily take longer, and it's going to cost a lot of money to resolve unless Congress decides to pass a new law that sets up a specific fund for this and basically sets up a regime to get it resolved more quickly.

Could this be classified at any point as a natural disaster because Mother Earth, not a ship, is spewing out the oil?
I see the appeal of that, but there will be real resistance on the part of both the federal and state governments to considering this an act of God because the original cause was, of course, an incident for which the private companies are responsible. Also the companies involved are large, sophisticated, highly profitable, and can likely afford to pay for the cleanup along with their insurers.