On July 17, 2014, Liberty Mutual Insurance Company announced that it had entered into a multi-billion-dollar “retroactive reinsurance” arrangement with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway, Inc., with respect to asbestos, environmental, and other “long tail” exposures under all insurance and reinsurance in effect prior to January 1, 2005. Liberty Mutual ceded approximately $3.3 billion of existing liabilities, and NICO will provide approximately $3.2 billion of additional aggregate adverse development cover, for total aggregate coverage of approximately $6.5 billion. Liberty Mutual paid NICO total consideration of approximately $3 billion. NICO will assume responsibility for claims-handling related to Liberty Mutual’s asbestos and environmental claims. According to Liberty Mutual’s press release, Liberty Mutual “believe[s] that this agreement further strengthens our financial position as it eliminates a substantial source of uncertainty in these liabilities and allows us to focus on execution in our core businesses.”
The agreement is the latest in a string of at least 25 similar deals, collectively worth tens of billions of dollars, that NICO has entered into with other insurance carriers, including CNA, AIG, Gerling and Lloyd’s Underwriters/Equitas. These deals are profitable for NICO and Berkshire Hathaway because they can “float” the income from them. Long-tail claims develop over time, thus NICO can invest the proceeds from the sales and the reserves and receive substantial returns on the investments. If timed correctly, these returns more than offset the amounts paid out in claims. The longer it takes to pay claims, the longer the money can be invested and the greater the profit.
As has been widely reported, policyholders that have dealt with NICO on their long-tail claims allege that maximizing the “float” gives NICO an incentive to delay and/or frustrate payment of claims. In numerous lawsuits filed across the country, policyholders allege that NICO and its claims-handling affiliate, Resolute Management, Inc., pursue very aggressive strategies to reduce and slow down improper reimbursements to policyholders, the payment of attorneys’ fees to defense counsel, and the offering and payment of settlement amounts to underlying claimants. The lawsuits accuse NICO and Resolute Management of bad faith and tortious interference with the insurance contracts with the original insurers. In October 2013, Ford Motor Company announced a settlement of its lawsuit in which NICO paid $22 million on unpaid claims of $20 million. See “Ford, Berkshire Hathaway subsidiary settle insurance dispute”.
If NICO and Resolute run true to form, policyholders with long-tail claims under Liberty Mutual policies can expect their claims to be handled now in a manner similar to that alleged in other policyholders’ lawsuits.