The what and why of claims resolution facilities.

AuthorMcGovern, Francis E.
PositionThe Civil Trial: Adaptation and Alternatives

INTRODUCTION I. CLAIMS RESOLUTION FACILITY VARIABLES A. Function B. Metaphor C. Authority and Funding D. Size and Similarity E. Organization F. Eligibility Criteria G. Damage Methodology H. Compensation I. Implementation II. A STRATEGY FOR DESIGNING CLAIMS RESOLUTION FACILITIES III. ASSETS IV. DEFECTS V. THE FUTURE A. Failure Modes B. Standards for Approval C. Process Rules for Creation CONCLUSION INTRODUCTION

"Claims resolution facility" is a generic term used to describe a wide range of entities that process and resolve claims made against a potential funding source. In the context of a natural disaster, for example, there might be facilities to process claims based upon insurance policies, federal or state statutory or administrative rights, international relief efforts, contractual obligations, or any other basis for receiving economic or noneconomic benefits. These facilities are generally characterized by a large number of claims that are in need of rapid and efficient resolution. In certain instances, however, the positive connotations of the term have been expropriated to describe a facility that desires to appear quick and efficient while acting slowly and expensively. In the context of alternatives to the litigation system, claims resolution facilities function to enable the disaggregation of liability from damages in the determination of legal entitlements either individually or collectively, in settlement or as a precursor to litigation. The facilities operate under the assumption that there is at least some liability, and their role is to focus on any residual damage issues not resolved through litigation or settlement.

These facilities vary considerably in form, from "qualified settlement funds" recognized by the federal tax code to ad hoc efforts to resolve disputes prior to any invocation of the legal system. In the context of a man-made disaster, for example, there might be facilities either by defendants or their insurance carriers to settle claims prior to the intervention of attorneys, to evaluate and/or settle claims individually or in groups after the retention of counsel either before or after the initiation of litigation, to determine individual or collective damages, or to allocate damages among claimants.

Part I attempts to identify the critical variables that are integral to the claims resolution facilities that have become alternatives to traditional litigation. These variables include all the essential elements, with particular attention to the criteria and methodology used by claims resolution facilities to evaluate, process, and pay claims. In Part II, there is an analysis of the strategy for designing a claims resolution facility that takes advantage of the multiplicity of options in order to accommodate the particular needs associated with a given claims resolution facility. Parts III and IV consider the assets and defects of claims resolution facilities, including rationales for their recent popularity. Finally, Part V assesses the future by focusing on common failure modes for claims resolution facilities and then proposes possible substantive standards and procedural rules that may increase the legitimacy of claims resolution facilities.

  1. CLAIMS RESOLUTION FACILITY VARIABLES

    The variety of options available for creating a claims resolution facility are daunting. One of the theoretical assets of such a facility is the ability to tailor it to the unique needs of each case. The following discussion attempts to isolate nine different elements found in any claims resolution facility. The next Part attempts to describe how a designer of claims resolution facilities would approach such a polycentric problem to create the most appropriate facility.

    1. Function

      There are generally two potential roles played by claims resolution facilities: (1) determining both the total amount of damages and the allocation to each applicable individual, (1) or (2) performing only the allocation function. (2) The September 11th Victim Compensation Fund illustrates the first variety. (3) It established a process for the payment of claims but did not specify either overall or individual amounts. Total damages were determined from the bottom up by aggregating all the individual damages. Likewise, the MDL-926 silicone gel breast implant settlement (4) and the United Nations Compensation Commission (5) described a process for resolving claims and directed that the total amount of damages would be the sum of the subsequently determined individual amounts.

      The second variety of claims resolution facility has, ab initio, a defined fund and then allocates that fund to individual claimants. The stock analysts' cases, (6) the Alabama DDT litigation, (7) and the A.H. Robins bankruptcy (8) illustrate this variety. Each of these claims resolution facilities had a predetermined amount of money to distribute, and the task was to allocate that money among the various claimants in accordance with the guidelines provided in the settlement that created the facility.

    2. Metaphor

      Because the term "claims resolution facility" contains such a variety of applications, one of the first issues in establishing legitimacy is to determine the metaphor or paradigm that best incorporates the characteristics of the facility. A disaster relief facility has a different narrative from a war reparations or tort facility. (9) The applicable goals, standards, and yardsticks vary depending upon the role the facility plays in the context of the surrounding social and political fabric.

      By definition, the claims resolution facility is an alternative to the standard litigation model. The standard model contemplates a judge or jury determination of liability and damages. The tort paradigm, for example, is of one or more defendants being held liable to an individual for the precise amount of damages they caused in order to create a perfect alignment of both deterrence and compensation policies. (10) In tort cases involving large numbers of plaintiffs, this model is generally a fiction; those cases are typically settled in the form of individual damages, collective damages, or a collective process. (11) The role of damage determination resides either with the negotiators or with a third-party processor, not with a judge or jury. Yet the metaphor remains the same--the party that caused the damage must internalize those costs by compensating the injured party for the precise amount of the damages sustained.

      A contract metaphor is somewhat different. It contemplates that the parties determine and allocate damages in accordance with a predetermined formula that has been accepted by the parties through arms-length negotiation. If the damages are in dispute, a court is available to interpret the contract to decide the nature and amount of damages, if necessary.

      The welfare paradigm is that of a social safety net to insure that no fundamental needs are unmet. (12) There is no implication of wrongdoing or malfeasance. The war reparations metaphor has a host of connotations, including retribution and compensation.

      The concept of a metaphor or paradigm becomes critical for the public perception of the claims resolution facility. The more accountable the party causing the harm, the more likely that the treatment of damages will be viewed as necessarily individual. The more fate is perceived to be the source of the damage, the more acceptable standardized or collective damages become.

    3. Authority and Funding

      Another set of variables incorporated in any claims resolution facility relates to the source of its authority and the source of its funding. Facilities can be the product of a statute, (13) administrative regulation, (14) international mandate, (15) class action, (16) bankruptcy, (17) group settlement, (18) or unilateral offer. (19) Funding can be from a government, multiple defendants, or a single defendant. Both the source of authority and the source of funding will affect the applicable paradigm as well as the choice of organization, methodology, and payment mechanisms.

      Typically, the more governmental the authority, the more legitimate the facility. The more ad hoe the source, the more burden on the facility to legitimate itself by its own design. The more public the source, the greater the acceptance of limited funding. Conversely, the more private the source of funding, the less tolerance for financial shortfalls and the greater demand for "full" compensation. On another axis, the more governmental the decisionmaking process for allocating damages, the greater the acceptability of standardized payments. The more private the decisionmaking process, the more demand for a decentralized payment process.

    4. Size and Similarity

      The size and similarity of claims are critical variables in analyzing any claims resolution facility. The standard model of a one-on-one trial or settlement is the generally accepted mode of dispute resolution. The existence of large numbers of claims affects both the desire for a facility and its precise characteristics. If there are fewer than one hundred claims, the standard model works well. If there are over a thousand plaintiffs, the allure of aggregation and rough justice becomes compelling. (20) This is particularly true when the individual claimants share similar characteristics. Thus, there will be much greater tolerance for fine-tuned inequities in damage determination if there is a corresponding efficiency in claims processing. The law of large numbers becomes particularly compelling.

    5. Organization

      The organization of claims resolution facilities is founded in an inquisitorial model of decisionmaking, not an adversarial one. The emphasis is on truth-seeking and participation rather than political restraint functions. Notice to claimants is typically guaranteed, low access costs are favored, and control of the process by the facility, rather than by counsel, predominates. The organization is more...

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