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Tuesday, October 31, 2006

Risk-Benefit Decisions and Financial Provisions

I've no idea if BP acted properly or not in the case referred to here at Tort Deform, relating to the massive March 2005 explosion that killed 15 employees in the company's Texas City plant.  The Tort Deform post doesn't currently link to the article it quotes, but here's a Washington Post story that certainly suggests that BP's conduct was at least negligent and possibly reprehensible.  Indeed, BP has conceded responsibility for the accident in question and has settled many of the claims brought.  So we can start off with the sound assumption that the company acted negligently.  Good so far.

But the Tort Deform posts suggests that BP "put aside money to pay the foreseeable legal claims from the accident it knew would only happen in a matter of time."  Wrong.  BP has set aside $1.6 billion to pay claims, but that's obviously a provision for financial reporting purposes for existing liabilities, not something that was done in advance, as the Tort Deform post suggests. 

Put another way, BP did not, back in the '90s, say, "Gosh, we could fix this or we could set aside $1.6 billion to pay for the lawsuits to come."  Rather, in 2006, BP told investors, "We think $1.6 billion will resolve all of these issues." It's different, and in an important way.

As with my prior reference to Tort Deform (with the incorrect representation of the Ford Pinto memo), I agree with what I take to be the post's main point: Corporate defendants sometimes act badly (as do individual defendants, and plaintiffs, for that matter) and many liability modifications proposed have the potential to reduce deterrence.   It's worth noting, though, that the post does not identify which modifications would let BP go "unpunished" (by which I assume the poster means "would make it so the victims would go uncompensated").  I expect it's a reference to caps on noneconomic damages and on punitive damages.

But to imply that BP set aside billions of dollars instead of engaging in proper safety is both incorrect and exceedingly unlikely -- I don't know much about what it would have taken to make the tragedy not occur, but I'll bet it was a lot less than $1.6 billion. 

It's really a similar error to that made in the prior post, too, contending that a company made a decision in advance to pay tort liabilities rather than make a facility or product safer.  No doubt that happens (and rationally must happen), but that's not what this story is about.  And, again as with the Pinto post, it detracts from the value of the point.

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Comments

Isn't DMI just a little bit embarrassed at putting out such shlock? Or do they believe their own propaganda that thinktanks are nothing but noise machines?

Posted by: Ted | Oct 31, 2006 12:20:36 PM

"But to imply that BP set aside billions of dollars instead of engaging in proper safety is both incorrect and exceedingly unlikely -- I don't know much about what it would have taken to make the tragedy not occur, but I'll bet it was a lot less than $1.6 billion."

The following sentence from the article is ambiguous: "It will spend more than $1 billion to refurbish the Texas City refinery over the next five years."

Does "refurbish" mean repair the damages, and fix the original problems that led to the explosion? Or does it just refer to fixing the original problems? If the latter, perhaps BP set aside hundreds of millions of dollars to "buy the tort" instead of fixing the refinery.

Posted by: Justinian Lane | Oct 31, 2006 1:22:23 PM

(a) The excerpt from the article on your website doesn't include that sentence. If the post was relying on it, one would think it would include it, since it included a full paragraph from the article. It's also entirely clear that the post is referring only to the $1.6 billion figure, not the not-quoted $1 billion figure. The post still doesn't link to the article it purports to rely on; you're quoting from the Post article I linked to. Seems unlikely to be the source of the post on your website, which is identified as a CNN story.

(b) There is nothing ambiguous about the $1.6 billion set aside for claims. The article makes it completely clear that there's $1.6 billion to deal with the litigation and litigation alone; that was set aside this year, not before the explosion, as the post on your site suggests. The $1 billion may be to fix the pre-explosion problems or to repair what the explosion cost; either way, it's still a lot less than $1.6 billion, and it's still not what the post on your site was referencing.

Posted by: Bill Childs | Oct 31, 2006 2:32:47 PM

I understand the $1 billion figure comes from the article you linked to. I'm not here to argue for or against Cyrus' post - we write our own posts and fight our own battles at TortDeform. I'm merely raising the possibility that BP estimated it would cost $1 billion to fix the problems in the refinery, and that it would cost several hundred million to deal with the fallout from lawsuits and as such, they decided to take the risk. Perhaps the company didn't estimate such a catastrophic failure would happen. Perhaps it did but didn't care. I'm sure it will all come out in trial(s).

Posted by: Justinian Lane | Oct 31, 2006 5:59:45 PM

That's certainly all possible. And of course, some calculation along those lines is what the tort system is set up to encourage. If that's all the post had said, then there'd be no post here, and I'm pleased that you're not trying to defend the post as it stands.

Posted by: Bill Childs | Oct 31, 2006 6:10:04 PM

Hi there,

The article stating the 1.6 billion number did not specifically state the moment of the decision of the decision to put this set aside. As a result I said "may" have.

To name "may" have as speculation is completely accurate. I said "may" instead of did, because I couldn't say either way without spending a lot of time I didn't have to find out either way.

What I said is that, like to Ford Pinto case, they "may "have made this calculation, not that they "did."

To see my post any other way is to ignore the use of the word "may."

The text of the CNN article


"Chemical Safety Board. BP (Charts) has accepted full responsibility for the disaster at its plant and has settled more than 1,000 lawsuits related to claims made by those injured on site, by family members of those who died, and by people who suffered shock. More than $1.6 billion

"was set aside by BP to resolve those claims"

, a BP spokesman told CNN.

From this article I stated that the "was set aside" MAY" have have been calculated before the accident

given that the company KNEW of the danger and the risk of injury.

People can feel free to discuss whether or not BP definitely put specific money aside to deal with this before the accident or after, and if as argued above, somebody can say they definitely did not... that's fine with me.

The point is that they knowingly decided to put people's lives at risk because of financial concerns.

If somebody can defend the conduct of the company as correct I'd love to here that defense.

Posted by: Cyrus Dugger | Oct 31, 2006 11:17:58 PM

"But to imply that BP set aside billions of dollars instead of engaging in proper safety is both incorrect and exceedingly unlikely"

Can somebody explain why the company didn't then take the proper precautions or make the necessary repeairs when they themselves admit they knew of their own serious safety problems?

Posted by: Cyrus Dugger | Oct 31, 2006 11:21:01 PM

Why didn't they take the proper precautions? They acted negligently, or so it seems. As I noted in the original post, the story certainly suggests at least negligence. But negligence includes a tremendous amount of conduct far short of the cynical buy-the-tort approach you attribute to them, and it's no answer to making an inaccurate statement to say "But they're bad guys anyway."

It would have taken you perhaps two minutes to find a different story that would resolve your "may" statement and make it a "did not" statement. (With Google News, it took me about thirty seconds to find the Post story.) If you're going to make that blunt of an accusation (whether couched with a "may" or not), it seems like it would be worth it to spend that two minutes, especially since it is extremely common for companies to set aside money for legal claims after an event. Why not say to yourself, "You know, I bet BP is doing this for financial reporting purposes and didn't really set aside $1.6 BILLION dollars back in the '90s rather than spending far less on repairs, because that would be silly. Maybe I should actually check to see if I can find a source other than CNN?"

But that would have undercut the argument you'd chosen to make, which was changing the conduct from negligent to very nearly intentional conduct.

Posted by: Bill Childs | Nov 1, 2006 3:19:22 AM

Hi Bill,

Whether or not you wish that I had done what you wished and come to a definitive stance on this particular issue, the point is that I made a conditional non-definitive statement.

You can't make a "may" into an "is," however much you wish to.

Switching gears a little bit the conduct of BP is pretty extreme.

Whether it is negligent, reckless, or knowing is a question that is up for debate.

From the NY Times

"WASHINGTON, Oct. 30 — The oil company BP had “significant knowledge” years ago of the problems that caused the explosion at its Texas City, Tex., refinery in March 2005, that killed 15 workers and injured 180, a federal safety panel said Monday.

In fact, the equipment that let out the flammable hydrocarbons that caused the explosion had discharged such hydrocarbons eight other times, causing fires in two cases, according to the panel, the Chemical Safety and Hazard Investigation Board."

"According to the safety board, the company decided after a 1994 incident to analyze the adequacy of the equipment. But the analysis was never finished “and management officials did not follow up to assure completion,” the board said."

"The chemical safety board’s account on Monday painted a picture of a company driven by a desire to cut costs. “BP implemented a 25 percent cut on fixed costs from 1998 to 2000 that adversely impacted maintenance expenditures and infrastructure at the refinery,” Carolyn W. Merritt, the chairwoman of the board, said in a statement.

Her board found a BP business plan, presented internally on March 15, 2005, eight days before the explosion, that cited the risk that the refinery “kills someone in the next 12-18 months.”

The board said that the refinery’s central training staff was reduced to eight in 2004, from 30 in 1997, and that some of those eight spent little time on training.

Posted by: Cyr | Nov 1, 2006 7:25:41 AM

I'll let your post's language stand on its own.

My belief is that any rational reader would come to precisely the same conclusion I did, which is that you were suggesting and implying (both words I used, never anything stronger) that BP made a choice prior to the accident to set aside $1.6 billion when even trivial research would have shown you clearly that it did not. You've now realized that there is zero basis for that claim and are trying to retroactively change the meaning of the post.

As I noted before, I generally agree with many of the conclusions of DMI and it certainly appears that BP acted foolishly. Saying that more loudly doesn't change the inaccurate impression you sought to make.

Posted by: Bill Childs | Nov 1, 2006 9:03:02 AM

Hi Bill,

If my statement came off as standing for anything more than what I actually stated and now clarify above, I wish that it hand't.

Posted by: Cyrus Dugger | Nov 1, 2006 10:03:10 AM

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