BP Fights "Fictitious" Compensation Claims

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LONDON -- The Deepwater Horizon disaster, which claimed 11 lives and released almost 5 million barrels of crude oil into the Gulf of Mexico, happened almost three years ago. And yet, as a shareholder of BP , I see the oil supermajor is still paying the price, both literally and figuratively.

You see, the company has already set aside $7.8 billion for compensation, but that sum wasn't capped -- unlike the $4 billion BP agreed to pay to settle criminal charges. Now there are serious concerns that the final figure may be considerably higher because of overgenerous payouts or claims that may even be made up.

"Absurd"
On Friday, the oil company filed an appeal in a New Orleans court against "fictitious" and "absurd" oil spill compensation payouts. Examples cited in BP's filing were a $21 million payment claimed by a rice mill in Louisiana located 40 miles inland that made more sales in the year of the oil spill than it had in the three preceding years, as well as a $9.7 million payment to a construction company that's based almost 200 miles from the Gulf in northern Alabama and does no business in the Gulf region.


The administrator of the compensation payments, Louisiana lawyer Patrick Juneau, argues BP undervalued the settlement and underestimated the number of people and businesses that qualified under the objective formulae in the agreed compensation policy. The policy allows any business in Alabama, Louisiana, Mississippi, and the west coast of Florida to be theoretically eligible for compensation, and companies don't have to prove that the oil spill caused any loss they suffered. Essentially, if a local business made a loss in a given three-month period in 2010, BP is presumed to be responsible.

However, in its appeal filing, BP asserts that some of Juneau's decisions effectively "rewrite the agreement's express terms, and contradict its purpose, plain text, and underlying principles by authorizing compensation awards for claimants seeking to recover for non-existent 'losses.' "

BP has already paid, or committed to pay, some $37 billion in fines, cleanup costs, and compensation, and it could yet face a fine of up to $17.6 billion if it loses the civil lawsuit that it's currently fighting.

"Compensation zone"
If the compensation payments continue to spiral upward, BP's final liability could be considerably higher than anticipated, which could seriously damage the company's future.

Until the company has a clear picture of its total liabilities, there's obviously some uncertainty about its prospects as an investment. And clarity will take some time to come: Businesses in the "compensation zone" have until April 2014 to file a claim, and the damages phase of the current civil lawsuit isn't due to start until sometime in 2014 as well. 

So, for now, I'm happy to keep hold of the BP shares I already own as a calculated "recovery play." Despite the company's ongoing tribulations, the shares are up almost 6% so far this year. However, I probably won't be putting any new money into the company until the financial ramifications of the Deepwater Horizon disaster are fully and finally determined.

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The article BP Fights "Fictitious" Compensation Claims originally appeared on Fool.com.

Jon owns shares in BP. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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