Warren Buffet is waging a big bet on asbestos — and those who have loved ones suffering from asbestos-related diseases should hope that the legendary money-maker gets his bet wrong.
Buffet’s company, Berkshire Hathaway, has subsidiaries in many different industries, but one of its largest profit centers is insurance. And for serval years, Berkshire has been quietly attempting to corner the market in an obscure form of insurance related to asbestos.
A System Created To Help Those Hurt by Asbestos
For decades, companies that manufactured asbestos-containing products ignored – and sometimes even hid – evidence that their products were dangerous, harming both their employees and the workers and citizens who used their products. Although court-ordered asbestos trusts have been set aside for victims with asbestos-related diseases, much of today’s compensation – more than half – comes from viable defendants, or companies still in business, such as Ford, General Electric, and General Motors – and these defendants have insurance.
Billions have been paid out by such offenders, but often 20-50 years pass between a person’s exposure to asbestos and the first symptoms of disease. This means it’s unclear just how many former workers and their loved ones may eventually come forward, and how much money these companies really need to be set aside for future victims. Because of this unsureness, companies take out insurance policies. And to provide some backup if the offenders run short of insurance money, many large corporations have taken out so-called “reinsurance” policies — that is, more plainly, insurance on an insurance policy. It’s these asbestos reinsurance policies in which Warren Buffet’s Berkshire Hathaway has taken an interest.
A High Stakes Bet against Victims and Their Attorneys
In recent years, attorneys for victims have been more successful at proving their clients’ claims and winning a decent share of compensation. That’s made issuing asbestos reinsurance a less-attractive proposition for many big insurers, and many of these insurers want out of the market.
Not so with Berkshire. Over the past 5 years, Berkshire Hathaway has been slowly buying up asbestos reinsurance policies, snapping up business from Liberty Mutual, AIG, CNA, and Lloyd’s of London.
What’s in it for Berkshire? Well, in part Buffet hopes to make money by investing the reinsurance premiums into other businesses. Even when the policies kick in down-the-line, any profit he makes in the meantime he can keep. (In investing circles, such a tactic is known as “float”.)
But is that incentive really enough to explain why Berkshire has invested so much in this obscure form of insurance? Many observers think the answer is “no” — they think Buffet has a much bigger opportunity in his sights. Why?
Well, if the trust funds end up paying out less money than expected, the reinsurance policies will never kick in, and the big premiums the companies have paid will be pure profit. In effect, Buffett and Berkshire are making a bet — a bet against asbestos victims and their attorneys. If they fail to get the expected level of compensation for asbestos victims, Buffet stands to win more money for his ever-growing empire.
In Berkshire Can We Trust?
By now, Berkshire’s various subsidiaries control practically all of the asbestos reinsurance market. In December, another reinsurer, Alleghany Corporation, forked over $400 Million to Berkshire and AIG in order to close out its own asbestos-reinsurance claims and get out of the market. In short, “I don’t think there is another American insurance company with more asbestos exposure [reinsurance] than Berkshire,” investment expert David Merkel wrote in a blog post.
That’s an awful lot of power over asbestos victims’ lives in 1 company’s hands. And they may not be using it wisely. A 2013 investigation by Scripps-Howard reporters found that
“Berkshire-owned companies that handle its asbestos and pollution policies – National Indemnity Co. and Resolute Management Inc. – wrongfully delay or deny compensation to cancer victims and others to boost Berkshire’s profits. In multiple cases, courts and arbitrators have ruled that the Berkshire subsidiaries’ tactics have been in ‘bad faith’ or intentional”
The damning report uncovers several instances of Berkshire-owned companies working hard to prevent asbestos victims from receiving their rightful due.
Berkshire’s delaying tactics may be designed to push back settlements in these cases until insurers can hope for a more favorable outcome. Indeed, a 2014 bankruptcy court decision in favor of a manufacturer of asbestos-containing products has given corporations new hope that they may be able to escape paying for the harm their product have caused. That would certainly benefit Berkshire’s bottom line.