GM won't use insurance proceeds to pay ignition-switch claims

By Rodd Zolkos and Judy Greenwald, Crain News Service

DETROIT (July 9, 2014) — General Motors Co. will not be looking for liability insurance funds to help pay for claims stemming from its ignition-switch safety crisis.

“It will be done through cash on hand, no insurance,” David Roman, GM's director of financial communications, told Crain's Business Insurance magazine, a sister publication of Tire Business.

GM's open-ended compensation fund, unveiled June 30 by attorney Kenneth Feinberg, 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 auto maker's reputation.

While some estimates say the fund could cost the company billions of dollars, Mr. 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.

Reputation repair

“For General Motors, their reputation at this point is at risk,” said Nir Kossovsky, CEO 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.

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, Va.-based consultant Hawthorn Group LC.

“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.”

More litigation

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 Michaels, a partner at Newport Beach, Calif.-based MLG Automotive Law APLC, 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, Ala., 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 added: “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.”

This report appeared in Chicago-based Business Insurance magazine.