The Special Master's Report on the September 11th Victims Compensation Fund:
Is He Right That Victims' Families' Awards Should Have Been Equal?

Congress responded to the mass tragedy of the September 11 attacks by passing a law entitled the Airline Transportation Safety and System Stabilization Act.

This law did two things. First, it limited the airlines' liability with regard to harm arising from the attacks, so that they could (it was hoped) stay in business. Second, it created a no-fault government fund--the Victim Compensation Fund - that would provide unprecedented compensation to those killed or injured on the day of the attack. Participation in the Fund meant the claimant waived the right to sue.

Special Master Kenneth Feinberg was appointed to captain the Fund. Now, a little more than three years after the attack, the Fund has finished its business, but terrorism remains a threat. It is therefore fortunate that two remarkable reports that discuss the Fund have been made available to the public.

One report is the "Final Report of the Special Master for the September 11^th Victim Compensation Fund of 2001," authored by Feinberg and his associates. The other report is entitled "Compensation for Losses from 9/11 Attacks," and was issued by the nonpartisan, highly respected Institute of Civil Justice of the RAND Corporation.

In this column, and my next column, I will discuss these reports and reflect on what they have to teach us.

The Special Master's Report: Right To Deem the Fund a Success

The tone of Feinberg's report is modest and neutral, yet there is no mistaking the fact that Feinberg deems the Fund a success. And he is right to do so, for the program achieved its purposes efficiently and completely.

In 33 months, the Fund disbursed $7 billion, based on the claims of 2880 deceased and 2680 injured victims of the attack. By Feinberg's estimate, 97% of the families of deceased victims who might have sued to recover tort damages opted for the Fund instead. It did all this for a total cost of about $86 million.

The general consensus of the families of the victims, and of the media, is that Fund treated applicants respectfully, and Feinberg did the best he could, given the restrictions placed on him by Congress.

These restrictions were a direct consequence Congress's ambivalence when it created the Fund. Congress wasn't convinced that the airlines (and others protected by the bill) had been negligent and therefore partially responsible for the events of 9/11, but it also wasn't convinced they were legally innocent, either. But it was quite certain that it didn't trust the tort system.

So rather than immunizing the airlines (and others) entirely, Congress chose instead to limit their liability, and also to give the victims an incentive to bypass the courts. That incentive was the Fund - which would offer "full compensation" (minus a few things) if the victims and their families gave up the right to sue, as well as some other things they could, in theory, receive in a successful lawsuit.

What exactly did families give up by opting for the Fund? They gave up the right to a jury trial, the right to an appeal, and chance that their own insurance companies' payments might not be deducted from their recovery.

Feinberg's Smart Choices: Give Families Full Information, and Hold Hearings

In return the families were to receive "full compensation." But Congress did not tell Feinberg what "full compensation" meant. It was up to him to decide how he would calculate the awards.

Early on, Feinberg made a decision to make the process an open one - that is, he would give as much information as possible to the pool of potential applicants about how the awards would be calculated. Indeed, he even posted sample awards on the Fund's website.

As Feinberg probably anticipated, a backlash developed -- especially from the families of victims who earned more than $231,000 per year. Some of these families felt the Fund was not really providing "full compensation" given that high earners at the start of their careers, such as young brokers and bankers, had been lost.

Fortunately, Feinberg's willingness to take a risk and post tentative conclusions helped him develop responses to his critics, some of whom were mollified. In addition, Feinberg's office opted to hold hearings on 3629 claims, representing almost 70% of the total number of victims.

These hearings were time-consuming and expensive, but they guaranteed that victims and their families could say anything they wanted to the Special Master and his representatives. In a sense, the hearings gave applicants back something like a "day in court"--which was exactly what Congress had deprived them of when it created the Fund.

Feinberg's Critique: Congress's Restrictions on Compensation Were Mistaken

At the end of his report, Feinberg offers his thoughts about the Fund as public policy. Again, he has opted to be brave and candid.

According to Feinberg, it was a mistake for Congress to have agreed to "full compensation," regardless of how that term was limited or interpreted. He has three reasons for reaching this conclusion.

First, "full compensation" means that the government had to provide individualized determinations -- which, in the end, meant that the Special Master had to be judge and jury in each claimants' case. Feinberg notes that eventually the families and victims came to trust his office, but it seems very likely that that outcome was a result of Feinberg's choices, not Congress's. Had Feinberg not opted for openness and hearings, families might have been very dissatisfied.

Second, Feinberg notes that it was very difficult to perform individualized calculations quickly. Soon after 9/11, many came to view the Fund one of the ways to "heal" the country. Yet a protracted application process--even if non-adversarial - was unlikely to promote healing.

Third, finally, and most fundamentally, Feinberg feels Congress's idea of "full compensation" was unfair. For instance, as noted above, the Act deducted money if families had insured themselves - but that mean that "ant" families who scrimped to buy insurance were penalized in comparison to "grasshopper" families who spent all their disposable income on luxury items.

And the unfairness went deeper: As Congress wrote the law, a banker was "worth" more than a fireman, simply because the largest component of "full compensation" is income projected across the deceased future lifespan. That is how the tort system works, of course--but Congress wanted to use the Fund to escape the tort system.

Feinberg's Solution: A Flat, "One Size Fits All" Compensation Award

Feinberg argues that Congress should have created a flat, "one size fits all" award - one that does not distinguish between the professional and the laborer, or the young and the old. Indeed, Feinberg would not even have distinguished between the singleton with no children and the paterfamilias with five children. The expense of hearings would have been eliminated.

Feinberg concedes that Congress could not have created a "one size fits all" award high enough to persuade most of the families not to sue. The average award to the families of the deceased was about $2 million, and many of the families of higher-earning victims received up to twice that amount.

Congress would never have authorized a death benefit of $2 million. (Feinberg notes, by comparison, that Congress offers a death benefit of $250,000 to the families of servicemen.) HThus, Feinberg admits, any uniform benefit would necessarily have been a lot less than $2 million, and thus should have left open the victims' option to sue (with the benefit presumably being deducted from their ultimate recovery), and declined to limit defendants' liability in such suits.

There are a number of problems with Feinberg's solution. First, it would have meant that the Fund would never have achieved its original purpose--protecting the airlines. Second, while the costs of hearings would go away, so would their benefits. The hearings had great value in that they gave the families and the victims the sort of human response that people crave after a tragedy. They let them "tell their story" and achieve some catharsis, much as they could at a trial.

These drawbacks, though, are to be weighed against the benefits of switching to Feinberg's approach. On balance, some may feel that Feinberg may be right that, overall, a "one size fits all" plan would still have been preferable.

On the other hand, others may feel that, on balance, something like the Fund is still a good idea in the wake of a terror attack. And the RAND report gives us reason to think so. In my next column, I will look at the RAND study of compensation patterns after 9/11, and apply some of its conclusions to the Special Master's report.