American International Group (AIG), the largest insurer in the United States by the measure of market value, will pay Warren Buffett's Berkshire Hathaway approximately $10 billion for backstop protection on a number of insurance policies that its corporate clients have bought, including workers' compensation and similar policies. Warren Buffett, the billionaire investor, may be liable to back up to $20 billion worth of potential insurance payouts, although that figure will depend upon the size of the future claims. Now, lawyers representing various U.S. companies have addressed their growing concerns about whether claims will continue to be met after the deal goes through.

Legitimate Claims in Question

Lawyers arguing on behalf of companies involved in legal disputes regarding policies and coverage have suggested that this deal and others like it will reduce the likelihood that legitimate insurance claims will end up being rejected. According to reporting by the Financial Times, these arrangements are becoming more popular all the time. Robin Cohen, the head of insurance recovery practice for McKool Smith, told Financial Times that "the concern is we're going to have to litigate more and more for claims that are clearly covered." Ann Kramer, a partner at Reed Smith, echoed those fears, indicating that customers of various insurance companies had previously been "burnt so often" by similar arrangements.

AIG Response

For its part, those close to AIG suggest that the agreement will not hinder the insurance company's ability to pay out valid claims. A person familiar with the matter and close with AIG told FT that the arrangement will "not impact AIG's ability to protect the interest of its policyholders."

The terms of the agreement leave AIG with the "sole authority" to process and resolve claims as it sees fit. This may provide a glimmer of hope for pessimists, as a similar deal six years ago between AIG and National Indemnity Company (Nico; a subsidiary of Berkshire Hathaway) placed Nico in charge of handling a number of claims. To further aid in the smoothing out of the process, AIG said that Nico would have "various access, association and consultation" privileges for this new agreement.

Still, lawyers are not convinced, saying that the real-life implications for policyholders are still unclear. One partner at Covington in London was quoted by FT as saying that "this deal would merit close monitoring from policyholders to see how claims are handled under the new deal and ensure that policyholders have options for recourse should claims not be handled properly." If the incentive for minimizing claims cost for Berkshire is too great, the feeling is that customers who hold policies of various types with AIG may be the ones who end up suffering the consequences.