Prof. Noah Hall teaches environmental and water-rights law at Wayne State University Law School. He and I recently talked about BP
Mac Greer: What's the biggest misconception about BP's liability?
Noah Hall: That's a great question. On the one hand, I think some folks are completely overestimating BP's liability and expecting them to go bankrupt any day now. But while $40 billion or $50 billion would be an unprecedented amount of liability for an environmental disaster, BP has unprecedented wealth, revenue, and cash reserves. And that $40 or $50 billion that I would call "back of the napkin" estimates is going to be paid out over five to 10 years. So you're really only talking maybe $5 billion or $10 billion per year in liability, which a company the size of BP actually can absorb and pay out and probably remain solvent and profitable.
On the other hand, there seems to be a misconception, especially among some of the more anti-corporate circles, that BP is going to get out of this scot-free, without having to pay a dime or maybe just $75 million or something. And that's total nonsense as well. BP is going to pay a massive bill for this. I guess the truth is really just somewhere in between. I don't think that this disaster on its own would bankrupt BP. And I don't think BP is going to get out of paying for all the damage they have caused.
I think actually, legally, this case is going to be fairly straightforward in that BP is going to be liable for the damage. They are going to be writing checks for the damage. There will be litigation over the extent of the economic losses and the damages by the businesses and the property owners and the local governments in the Gulf area. But really I think BP is going to be responsible, they're going to pay it out, and they'll have enough money to pay it out.
Greer: And Noah, when you're talking about this with your law students, what are the big questions to ask as we try to get a sense of how this is going in terms of BP's liability?
Hall: Sure. A couple of things. One, is BP going to be able to bring in other responsible parties to share the liability burden? Transocean
The second issue will be whether BP is grossly negligent or did anything that would warrant punitive damages. We know that BP is responsible, and with most of the laws that claims will be brought under, it doesn't even really matter if they did anything wrong. It doesn't matter if they did everything by the book or took the best precautions available, they're strictly liable. Basically, the oil is in the water. BP is responsible. They have to pay out the claim. But you are going to see claims for things like punitive damages, and that's when we're really going to find out how egregious BP's conduct was and if they really did anything wrong or whether they were just responsible the party when this disaster happened.
The third thing I would be watching for is the extent of the economic-loss claims, because those are the ones that can really spiral out of control. Right now, most of the economic-loss claims that are being filed are pretty straightforward. There are things like Gulf fisherman whose boats are grounded during the oil spill and can't go out and make a living --- so you pay them $5,000 a month or $10,000 a month, very straightforward. But what's going to happen five years from now, when the tourism industry in Florida is still down 20% or 30% and they're going to claim that's the result of the BP oil spill? BP is of course going to say no, it's the result of a recession, bad marketing, consumer preference, or all of the other factors that go into whether or not an industry is doing well or an economy is doing well.
And that's going to be a big question -- how much of the economic impact in the Gulf region is going to be pinned on BP? And will BP be legally responsible for it? And that's really just going to come down to a battle of economic experts.
More from The Motley Fool
Better Buy: ConocoPhillips vs. BP
These oil industry titans have a lot in common. Which is most likely to outperform?
Why These 2 Big Oil Stocks Jumped in October
They surprised some investors by leaving their U.S.-based peers in the dust.
BP Just Beat the Rest of Big Oil to a Big Milestone
With the announcement that it will start to buy back shares again, BP wants to show that it's in the best shape among integrated oil and gas companies.