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GM's compensation fund is first step in repairing damaged reputation

Litigation persists over defective ignition switches

GM's compensation fund is first step in repairing damaged reputation

The open-ended compensation fund General Motors Co. has established will provide a claims-paying vehicle for individuals killed or injured in accidents caused by defective ignition switches and is a big step toward curbing damage to the automaker’s reputation.

GM will not look to its insurance to help pay claims from the fund it formed on June 30.

“It will be done through cash on hand, no insurance,” said David Roman, director of financial communications for Detroit-based GM.

While some estimates say the fund could cost the company billions of dollars, fund designer and administrator Kenneth R. Feinberg is solely responsible for setting the amount of compensation it pays.

“There’s no cap on it,” Mr. Roman said. “Mr. Feinberg will have the final determination on numbers.”

Under the compensation fund, family members of those killed as a result of defective switches are eligible for at least $1 million; other factors may increase the compensation. Those injured in accidents caused by the defective switches also are eligible for compensation. At least 13 deaths have been tied to accidents resulting from the defective switch, and GM has recalled 2.6 million older-model cars to fix the problem.

“For General Motors, their reputation at this point is at risk,” said Nir Kossovsky, CEO and director of Steel City Re, a Pittsburgh-based broker and adviser specializing in corporate reputation management and risk transfer.

“They’ve arguably made one of the best strategic moves for reputation restoration. It will be expensive, but it beats the alternative,” he said.

Mr. Feinberg is no stranger to such compensation funds, having led the September 11 Victim Compensation Fund, the BP Deepwater Horizon Disaster Victim Compensation Fund as well as the fund established for victims of the 2013 Boston Marathon bombings.

Despite the potential cost of the GM Ignition Compensation Claims Resolution Facility, it’s the right direction for the company to address the crisis, other crisis management experts agree.

“A company almost has no choice but to go this route. I think it’s the right thing to do even from a cost/benefit standpoint,” said Larry Walsh, vice chairman of Alexandria, Virginia-based consultant Hawthorn Group L.C.

“Years of litigation could be more harmful to the company and even more expensive,” Mr. Walsh said. “It seems to me a smart way to go. It is trying to reach out to people directly, deal with them honestly.”

General Motors “is doing the smart thing, the right thing, throwing in a bunch of billions” and addressing the black eye to its reputation it has received, said Anthony Sabino, founder of law firm Sabino & Sabino P.C. in Mineola, New York.

“It certainly is a tremendous idea from a public relations standpoint for General Motors to go beyond what a lot of people would see as the minimum steps necessary to make things right,” said Royal F. Oakes, a partner at Barger & Wolen L.L.P. in Los Angeles.

There is danger for GM, though, in considering claims already settled prior to GM’s 2009 bankruptcy reorganization. “That step could undermine the ability of General Motors down the line to try to enforce the finality of the (bankruptcy) agreements,” Mr. Oakes said.

Mr. Kossovsky thinks GM’s selection of Mr. Feinberg is solid.

“Ken does a great job of speaking to the ethics point, but to the financially oriented investors, Ken also has a reputation for helping companies control what might be uncontrolled compensation,” Mr. Kossovsky said.

Despite the compensation fund, GM still faces numerous suits that have been filed in connection with the switch defect. The defect, which goes back more than a decade, can result in “inadvertent key rotation,” allowing the switch to move out of the “run” position, turn off the engine and deactivate the power steering, power brakes and air bags.

Plaintiff attorney Jonathan A. Michaels, a partner at Newport Beach, California-based MLG Automotive Law A.P.L.C., has filed litigation on the issue. “We continue to strongly believe in our case, which subjects GM to punitive damages,” he said of one wrongful death suit he has filed against GM and two putative class actions seeking economic damages.

“Victims have the burden of proof to establish the ignition switch was the proximate cause of the accident” to receive compensation from the fund, Mr. Michaels said. With many accidents occurring up to 10 years ago, “I just don’t know how lay people” will be able to provide that proof, he said.

Jere L. Beasley, founding shareholder of plaintiff law firm Beasley, Allen, Crow, Methvin, Portis & Miles P.C. in Montgomery, Alabama, said his objections to the fund include that Mr. Feinberg has the sole ability and authority to establish eligibility, the burden of proof and the amount of compensation to be awarded.

He said, however, “There’s some good features of the plan, obviously, and I think with some modification and some improvement, a plan could be workable.”

Mr. Beasley said he already has filed four suits in the case, and as of late June, had been contacted by some 300 people about pursuing litigation.

“We anticipate filing a tremendous amount of lawsuits,” he said.

Joanne Doroshov, executive director of the Center for Justice & Democracy at New York Law School in New York, likes the structure for allowing compensation for crashes that occurred before 2009, but agreed that the required documentation is “so extraordinarily burdensome that it’s going to be unlikely that any deserving victims are going to get anything.”