American International Group, Inc. ("AIG") recently announced that it entered into a significant reinsurance agreement with a subsidiary of Berkshire Hathaway Inc. ("Berkshire"). Reportedly, that agreement "covers 80% of substantially all of AIG's U.S. Commercial long-tail exposures for accident years 2015 and prior." While AIG states that it "will retain sole authority to handle and resolve claims," the details of the arrangement, by which the Berkshire subsidiary "has various access, association and consultation rights," remain far from clear. The involvement of the Berkshire subsidiary and any other related Berkshire entities, which have routinely put their economic interests ahead of their insureds', should give policyholders pause. Policyholders should remain vigilant and cautious.
American International Group, Inc. ("AIG") recently announced that it entered into a significant reinsurance agreement with National Indemnity Company ("NICO"), a subsidiary of Berkshire Hathaway Inc. ("Berkshire"). According to an AIG press release, "The agreement covers 80% of substantially all of AIG's U.S. Commercial long-tail exposures for accident years 2015 and prior, which includes the largest part of AIG's U.S. casualty exposures during that period." The most significant group of claims likely to be covered by this agreement are environmental claims -- since AIG already ceded its asbestos liabilities to NICO in 2011 via a separate agreement.
According to AIG, it "will retain sole authority to handle and resolve claims." However, the press release includes an important caveat: "NICO has various access, association and consultation rights." While the details of those rights and NICO's involvement in claims-handling are far from clear, NICO's involvement in claims-handling at any level should raise red flags for policyholders.
On paper, the AIG-NICO arrangement appears to differ from the traditional Berkshire model in that NICO does not assume claim control; nevertheless, policyholders must proceed with caution. Previously, many insurers have entered into reinsurance agreements with NICO under which the insurer appoints NICO to perform administrative services connected with the reinsured policies, including handling the settlement and payment of claims under those policies. Pursuant to those arrangements, NICO typically then appoints Resolute Management, Inc. ("Resolute"), a Berkshire-affiliated claims adjuster, to act as NICO's agent to handle claims. Resolute, in turn, takes an aggressive approach to claims-handling, designed to minimize and/or delay payments under the reinsured policies and thereby maximize Berkshire's profits. As Berkshire has publicly pronounced, it makes its money "off of the float": The longer it can delay paying claims, the longer it can hold onto and invest the reinsurance premium, and the more money it can make.
Although it does not appear that Resolute will be directly handling claims under this new agreement with AIG, it does appear that NICO will still have some rights related to the handling and resolution of those claims. Reed Smith will continue to monitor how this arrangement actually works, and any related developments. At this time, though, given (i) NICO's "various access, association and consultation rights," (ii) its economic interest as the reinsurer, (iii) Berkshire's stated business model, and (iv) past conduct by Berkshire, NICO, and Resolute, policyholders have reason to be wary. Accordingly, policyholders must remain vigilant with how claims under these reinsured AIG policies are handled.
If and when any issues arise, policyholders should consult coverage counsel promptly. Attorneys in Reed Smith's Insurance Recovery Group have extensive, first-hand experience dealing with NICO - and Resolute - in connection with long-tail claims, and can assist policyholders in pursuing claims against those or other parties as necessary.
Client Alert 2017-032