Compensation Fund and Lawsuits in Store for General Motors

General Motors (GM) is facing thousands of personal injury and economic loss claims arising from the American manufacturer’s production of vehicles with faulty ignition switches. The ignition switches on vehicles, such as the Chevrolet Cobalt, Pontiac G5 and Saturn Ion, were prone to turning off power to the engines if the steering column was jostled or the key ring was too heavily weighed down, preventing airbags from deploying in the event of a crash.

At least 13 deaths and 54 accidents have been linked to vehicles with ignition switch malfunctions. Therefore, GM recently has hired mediation specialist, Kenneth R. Feinberg, to set up a compensation fund for personal injury claims filed by or on behalf of crash victims of cars recalled due to the switches from 2003-2011. Mary Barra, GM’s new chief executive, claims that the program will start taking applications on August 1, 2014. To be eligible, the crash must have involved one of the cars involved in the recall, and there must be evidence that the air bags did not deploy. 

Feinberg stated that for those who were killed or suffered catastrophic injuries, the fund will be administered based on their age, earning potential, medical expenses and family obligations. For instance, the fund is offering a 10-year-old paraplegic injured in a crash $7.8 million. For each death, there will be a $1 million starting point and $300,000 for each spouse and dependent of the deceased.

For those with less severe injuries, Feinberg stated that compensation will be based upon the amount of time the victim was hospitalized or had received medical treatment. For example, for victims that were hospitalized the fund is offering: $20,000 to those hospitalized for one night; $70,000 for two to seven nights; $170,000 for eight to 15 nights; and up $500,000 for 32 or more nights.

Victims who accept the proposed settlement of their claims through the compensation fund can expect to receive payment within 90 days. However, if the victims choose to have an economic analysis performed on their individual claims, then they may not receive payment from the fund for up to six months. There is no cap on the amount of money GM will pay to compensate victims.

At least 85 additional cases have been filed against GM that involve economic loss claims only, i.e. claims that a vehicle’s resale value has declined due to the defective ignition switches. These cases have been assigned to U.S. District Judge Jesse Furman for consolidated pre-trial proceedings in the Southern District of New York in In Re General Motors LLC Ignition Switch Litigation, MDL 2543.

This venue was likely chosen for the economic claims because of the necessity for coordination with the court that handled GM’s 2009 Chapter 11 bankruptcy. In the bankruptcy, GM agreed to assume liability for property damage and personal injury arising out of defects from cars made prior to the filing of the bankruptcy, but the company did not assume liability for economic losses. Based on that order, GM has requested that the Bankruptcy Court declare the recall-related litigation pending in the Southern District of New York barred. The Bankruptcy Judge has ordered each side to submit written arguments. A decision is expected by September 2014.

If the economic loss litigation is allowed to proceed, lead counsel for the plaintiffs has opined that the average depreciation claim could total $500 to $1,000 per vehicle.

Despite the automaker’s recall scandal and potential financial exposure from the compensation fund and economic loss litigation, GM’s sales were up 13% in May. According to the Company’s marketing professionals, GM has been able to increase revenues despite being battered by bad news over the ignition-switch flaw, largely because the company no longer manufacturers those vehicles.

Citations: Michael A. Fletcher, GM CEO: 15 fired over ignition-switch recalls; probe shows pattern of failures, no coverup, The Washington Post (June 4, 2014), http://www.washingtonpost.com/business/economy/gm-ceo-15-fired-over-ignition-switch-recalls-probe-shows-pattern-of-failures-no-coverup/2014/06/05/2dc575bc-ecb8-11e3-9f5c-9075d5508f0a_story.html.

Gabe Gutierrez, GM Sacks 15 Workers in Fallout Over Faulty Ignition Switches, NBC News (June 5, 2014), http://www.nbcnews.com/storyline/gm-recall/gm-sacks-15-workers-fallout-over-faulty-ignition-switches-n123331.

Ashby Jones, Plaintiffs' Lawyers Take Aim at GM for Recall, WSJ.com (June 8, 2014), http://online.wsj.com/articles/plaintiffs-lawyers-take-aim-at-gm-for-recall-1402272824?mod=WSJ_hp_RightTopStories.

Ashby Jones, GM to Compensate Crash Victims, But What About Those Who Lost Money?, WSJ.com (June 5, 2014), http://blogs.wsj.com/law/2014/06/05/gm-to-compensate-crash-victims-but-what-about-those-who-lost-money/.

Andrew Harris, GM Economic-Loss Recall Cases Bundled in New York Court, Bloomberg (June 9, 2014), http://www.bloomberg.com/news/2014-06-09/gm-economic-loss-recall-cases-bundled-in-new-york-court.html. 

Michael A. Fletcher, GM Offers Millions to Compensate Some Ignition Switch Victims, Families, The Washington Post (June 30, 2014), http://www.washingtonpost.com/business/economy/gm-offers-millions-to-compensate-some-ignition-switch-victims-families/2014/06/30/032d45c0-ffbc-11e3-8572-4b1b969b6322_story.html

Hilary Stout, GM’s Payout Formula Offers Multimillion Dollar Compensation to Families of Dead, The New York Times (June 30, 2014), http://www.nytimes.com/2014/07/01/business/gms-payout-formula-for-the-dead-1-million-and-up.html?_r=0.

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