If General Motors Co creates a fund to compensate victims of its faulty ignition switches, an option that a top legal adviser suggested it is exploring, the company could give up strong defenses to a wave of lawsuits. But it could stand to gain even more.
By setting up a fund, GM could avert years of civil litigation and limit its financial and reputational harm.
GM has retained Kenneth Feinberg, a Washington lawyer who has overseen compensation funds for victims of high-profile catastrophes like the BP Plc oil spill and the September 11, 2001, attacks.
Feinberg told CNBC on Wednesday that GM is "asking me to help develop some sort of program that might be used to compensate eligible claimants."
Feinberg did not return a request for comment. A spokesman for GM, Jim Cain, said Feinberg is "highly respected for his handling of compensation issues, and we've hired him to explore and evaluate all options." That work is ongoing, and no decisions have been made, Cain said.
GM has been hit with dozens of lawsuits since it began its recall over the ignition switch in February, which has now encompassed 2.6 million vehicles. The cases have been brought on behalf of individuals injured or killed in accidents involving recalled vehicles, as well as by customers who say they suffered economic losses like lower resale value. They claim GM hid knowledge of switch problems for more than a decade.
GM has at least two strong defenses to those suits. One is that so-called New GM, the company that emerged from bankruptcy in 2009, can't be held responsible for the actions of Old GM, which is a separate legal entity. Most of the vehicles with faulty ignition switches were produced before the bankruptcy.
GM made this argument recently in motions filed in federal courts in San Francisco and Corpus Christi, Texas. The company asked to put those cases on hold, saying it intends to ask a bankruptcy court in New York to decide whether such claims are barred against the current company.
Another potentially strong shield for GM, legal experts said, is the statute of limitations, which sets a deadline for filing certain lawsuits. Those limits vary by state, but lawsuits over accidents more than two or three years old may encounter that barrier.
A victims' compensation fund typically requires claimants to waive their right to sue and give up the chance to pursue punitive damages, a type of award not linked to an actual injury but designed to punish companies.
Such waivers would protect the company from having to reveal potentially damaging details about its actions and face juries that could award victims huge sums in punitive damages.
A fund would not, however, shield the company from government probes and potential criminal prosecution. GM is under investigation by federal prosecutors, regulators and Congress. The company is also conducting an internal probe.
But funds are generally voluntary, and claimants can't be forced to sign on, a problem BP confronted. While its fund processed more than 1 million claims and paid out more than $6.2 billion, it was still hit with hundreds of lawsuits from those who were either ineligible or unwilling for the fund.
Compensation programs come in many forms and can be set up in a variety of ways. Congress created the fund for victims of the September 11 attacks, and the White House worked with BP on its compensation system. A company could also act on its own to set up a fund.
There's another option - working with the U.S. Department of Justice.
U.S. Senator Richard Blumenthal, a Connecticut Democrat, suggested that path on Wednesday, saying that GM should agree to make victim restitution a part of any resolution to the ongoing criminal investigation.
That could be GM's best option, as working together with federal prosecutors may help allay criticism that it is acting in its own self-interest, said Adam Zimmerman, a professor at Loyola Law School and tort law expert who worked on the September 11 fund. While fairly unusual, such an agreement would give GM, and victims, "more legal certainty and justice than its own fund."