The Most Costly Problem for GM’s Recall: Young Victims – Businessweek

Posted: Monday, October 06, 2014

General Motors (GM) slowly started putting its recall crisis behind it a few days ago, arriving at an undisclosed payout with the families of two victims, Amy Rademaker and Natasha Weigel. The girls were both passengers in a 2005 Chevy Cobalt that abruptly shut off, lost power steering, and failed to deploy airbags when it slammed into a telephone pole. The driver, Megan Ungar-Kerns, survived with severe brain damage.

The accident is a heart-rending paragon of why GM’s recall crisis may cost more than many expect. It’s indisputably tragic, and it presents some very tricky math.

Rademaker was 15; Weigel was 18. Ungar-Kerns, at the time of the crash, was 17. They had almost their entire lives ahead of them: vacations, weddings, reunions, maybe kids, and, of particular if crass importance to GM, lots and lots of potential paychecks.

So-called lifetime earnings lost is a major part of the equation GM is using to determine settlement offers. And there’s a little-discussed demographic wrinkle in the victim pool: Most of the faulty vehicles were starter cars, built for young people drawing steady paychecks. The wave of recalls includes some Buicks and even Cadillacs, but the vast majority of the crummy parts were in Chevrolets, Saturns, and Pontiacs. Among the cars the company had recalled as of June, at least 60 percent cost less than $25,000 new; some, such as the Saturn Ion and the Chevy Cobalt, could be had for less than $15,000.

Data from June 2014Data from June 2014

Texas law firm Hilliard Muñoz Gonzales is representing almost 1,400 people who have filed claims or may in the future, and it acknowledged that the victims skew young. “One girl was about to graduate from law school; another wanted to be a principal,” says Lauren Gomez, an HMG paralegal working on the case. “For some of the younger kids, we just know what their aspirations were.”

The younger the victim, the greater the damage award. Kenneth Feinberg, the third-party settlement specialist hired by GM to handle the victims’ offers, is using the following formula for fatality payouts: $1 million plus lifetime earnings lost plus $300,000 for each spouse and dependent.

Here’s a quick, back-of-the-envelope look at how quickly the costs can accelerate. Consider a 30-year-old father of two who died in a faulty Chevy in 2012 while earning the average U.S. annual wage of $44,322. Assuming a few things (retirement at age 70, annual 3 percent raises, and future earnings discounted by a 2 percent inflation rate), the value of that person’s remaining lifetime income would be $2.16 million. If that same victim were 50, the earnings part of the payout drops by more than half, to $974,066.

Once Feinberg factors in the $1 million flat payment and the $300,000 provision for spouses and dependents, it isn’t hard to imagine many payouts in the $3 million to $4 million range. GM has set aside $400 million, which is beginning to look increasingly paltry.

Meanwhile, the victim pool keeps growing. Feinberg says there have been more filings than the company originally estimated, because his review includes passengers along with drivers. The current tally is 445 claims filed, and GM’s reliability problems continue. On Sept. 11, Chief Executive Officer Mary Barra said the company had “substantially completed” its vehicle recalls. Yet GM recalled another 542,000 vehicles on Friday, including SUVs with potentially loose suspension bolts that have been linked to three accidents. For the year to date, GM has recalled almost 30 million vehicles in North America.


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