Newsletters › Black Swan Justice
Say you went into business selling gourmet sandwiches—something we at Mandel Bhandari wish someone in our neighborhood would do. You would probably buy yourself property insurance (in case your toaster catches fire), and maybe business interruption insurance (in case the fire takes out your whole kitchen), and certainly general liability insurance (in case a customer slips and falls while fleeing from your inferno). But you probably wouldn’t buy yourself insurance to protect yourself in the event that a plague of weevils devours out the nation’s supply of sandwich bread. It’s just too improbable to consider.
But in this issue of the Mandel Bhandari newsletter, we look at improbable disasters, and how their victims should be compensated.
In his 2007 book The Black Swan, Nassim Taleb argued that much of history is shaped by “Black Swan Events,” which are events that are beyond our expectations until they actually happen, have an extreme impact when they finally do occur, and are subsequently rationalized or explained away, as though we should have seen them coming all along. The list of Black Swans that we have seen in the new century is already long: the September 11th attacks, the destruction of New Orleans after Hurricane Katrina, the financial crisis of 2008, the explosion at the Deepwater Horizons oil drill in 2010, the disaster at the Fukushima Daiichi nuclear plant in 2011.
It isn’t just the direct effects of these Black Swans Events that make them so historically important—it is also the way that they cause us to change our behavior. The September 11th attacks led to a tremendous reorganization of America’s domestic security apparatus; the financial crisis led to the Dodd-Frank Act and the regulation of consumer financial products; the disaster at Fukushima Daiichi may change the fortunes of the global nuclear power industry for decades to come.
For lawyers, Black Swan events have another interesting consequence: for better or worse, society often affords the victims of Black Swan events special treatment. For example, the families of passengers who died when American Airlines flight 77 crashed into the Pentagon on September 11 could seek compensation through the special September 11 Victim Compensation Fund; but the families of passengers who died two months later, when American Airlines flight 587 crashed in Queens, had no choice but court.
Sometimes there are good policy reasons for the distinction. Take the case of the sandwich shop and the weevil plague. You can’t sue a swarm of weevils in federal court the way you can sue American Airlines, and insurance companies cannot always afford to insure against the biggest cataclysms, so maybe there should be special public relief funds for victims of natural catastrophes.
But other times, the policies are murkier. Kenneth Feinberg, who oversaw the September 11 Victim Compensation Fund, is now overseeing a second unusual settlement arrangement: the so-called Gulf Coast Claims Facility, for victims of the BP oil spill. Significantly, settlements paid out under the Gulf Coast Claims Facility will be paid with private money, not public money. But to take advantage of the special, expedited claims process, victims of the BP spill have to waive their right to sue in court. Essentially, BP is trying to limit its liability by actively crafting a low-cost claims resolution process, rather than by passively waiting to be sued.
Claimants to the Gulf fund are given a choice: they can pursue the standard compensation option—in general, twice the losses they suffered in 2010—in which case they will need to prove their economic losses as a result of the BP spill; or they can select a quick-pay option—$5,000 for individuals, $25,000 for businesses—in which case they don’t need to offer any such proof.
But it is open to debate whether the Gulf fund is a good choice for individual victims of the BP spill. Justice delayed is justice denied, and obviously it means a great deal to many families to be able to get five thousand dollars without delay. But is five thousand dollars sufficient to compensate you, if your community and your coastline have been damaged for years and years to come? Is twice the dollar amount of your losses in 2010 complete justice, if you have to prove to Kenneth Feinberg the same damages you would have to prove to a jury—and if that jury, unlike Kenneth Feinberg, might award you punitive damages?
Although addressing a Black Swan Event after it occurs may not be as difficult as trying to prepare for every conceivable Black Swan Event that may occur in the future, it is still far from simple. But one thing we know is that unexpected and improbable disasters will occur. Perhaps it is time for the government to create an institutionalized alternative to litigation, similar to the 9/11 victims fund, that kicks in when a disaster of certain size and scope takes place. But in the meantime people and businesses should weigh their options carefully before deciding to take advantage of ad hoc mechanisms for compensation created in the wake of Black Swan Events.