Is Berkshire’s Workers’ Compensation Innovative, Or Too Costly?

Berkshire Hathaway Inc., controlled by the famous tycoon Warren Buffet, has branched out into other ventures such as real estate and insurance. The niche that Berkshire is attempting to fill is a more “customized” approach to home selling and insurance.

Recently, Berkshire Hathaway rolled out a program that would give commercial businesses, a break on their workers’ compensation insurance premiums, if they promised to minimize the risk posed to their customers. Many companies thought it was an excellent way to cut costs and to reduce the risk of being involved in litigation for injuries.

The problem is that what most companies assumed was a deal, has not worked to their advantage in practice. The contracts that many businesses signed have become a burden, both financially and legally, for those who signed them. After paying out far more than they would have with other insurance coverage policies and to construction site accident lawyer firms, many businesses have joined together to sue Berkshire Hathaway for deceptive practices.

Why are they suing?

Businesses that contracted through Applied, the insurance portion of Berkshire Hathaway, insist that they were given insurance options that insurance regulators had not yet approved. This has led to inflated bills, determined according to formulae that are consistently stacked to profit the insurance company.

Applied is not covering specific injuries, and is passing along the costs to those they insure. In fact, so much widespread chaos has ensued that Vermont, California, and Wisconsin have banned some of the plans that are offered by Applied.

The insurer insists that the “innovative product” that they sold was all in writing, and that the companies who signed on were completely aware of the logistics and legalities involved. To date, only 400 of the policies sold have ended in litigation. Because some companies didn’t see the results that they had hoped for, Applied insists, they are using regulatory situations to avoid having to pay their fair share. The fact is that as many as 90% of those carrying the innovative new product have renewed their contract.

Applied, the Berkshire Hathaway insurance subsidiary, has agreed to halt policies in California, Wisconsin, and Vermont. Although they continue to fight against removing their product from California, where they have the largest customer base and where demand is highest, they have put the policies on hold.

Jeffrey Silver, the lawyer for Applied, insists that any time a new product is offered and things don’t go exactly as planned, it takes regulators a while to catch up and sort through the details. In the meantime, the product will remain available in those states that have not identified a problem with it.

Informed by the testimony of both disgruntled businesses and employees of Applied, courts are finding that the new product was nothing short of a gamble. Recent findings have suggested that the reason why some companies aren’t upset is that they won on the deal. Many parties who were questioned have admitted that not all the logistics were explained. When businesses lose, they can lose big, without having any idea how much they could be on the hook for.

Applied is an insurer that grew out of a small startup business in 1994. Small businesses would hire them to arrange workers’ compensation packages and coverage, as well as handling tax reporting and payroll. After exponential growth, Applied eventually acquired a company that would provide workers’ compensation directly. As a one-stop shop, they became more appealing to small companies who wanted to take care of financials and insurance by outsourcing.

Buffet didn’t get involved until 2006. Even at that time, there were questions about the potentially unscrupulous behavior of Applied. In 2004, Applied was being accused of evading state unemployment taxes in the amount of over $27 million. When sued, they lost in court.

Their product is a loss-sensitive insurance policy, whereby companies can save on their workers’ compensation premiums based on actual claims. If they could stay accident-free, their coverage would remain reduced.

A “profit-sharing plan” was then initiated. Employers were required to fund accounts in case major accidents occurred, so that they could cover the cost. If a major accident happened, the premium price could climb to a guaranteed maximum amount.

Insurers have underwriters that work to set a calculated price for risk. Applied worked under the guise that if an employer was able to maintain an accident-free business, they could get a break on their insurance. The problem is in the fine print, and in the fact that businesses can’t control accidents in all cases. In fact, that is why they call them accidents. In an attempt to save money on workers’ compensation through Applied, many businesses have unintentionally made themselves vulnerable to much higher costs. Some big companies have saved pennies to spend dollars.