Risky Business: Q&A

Q: What is asbestos?

A: Asbestos is a mineral fiber that occurs in rock and soil.

Q: How has it been used?

A: Because of its fiber strength and heat resistance, asbestos has been used for insulation and as a fire retardant in thousands of consumer, industrial, maritime, automotive, scientific and building products, including: pipe-covering, insulating cement, insulating block, asbestos cloth, gaskets, packing materials, thermal seals, refractory and boiler-insulation materials, asbestos cement pipe, fireproofing spray, joint compound, vinyl floor tile, ceiling tile, adhesives, coatings, acoustical textures, duct insulation for heating, ventilation and air-conditioning (HVAC) systems, roofing products, insulated electrical wire and panels, and brake and clutch assemblies.

Q: What illnesses are caused by asbestos exposure?

A: Asbestosis (a progressive, long-term, non-cancer lung disease), lung cancer and mesothelioma (a rare form of cancer that is found in the thin lining of the lung, chest, abdomen and heart).

Q: Why aren’t asbestos claims handled by workers' compensation like other workplace injuries?

A: Under workers'-compensation insurance, workers are paid for on-the-job injuries regardless of who is responsible. In return, they give up the right to sue their employer for negligence. In most workplace accidents, the injury is apparent immediately or soon after. But illnesses caused by asbestos exposure may take years or even decades to manifest. So workers who develop illnesses from asbestos exposure have to identify the company that exposed them, then file a claim. Because benefits are computed based on when the incident occurred, workers may face compensation eroded by years of inflation. They often turn to the courts.

Q: Why are insurance companies trying to shed their asbestos and environmental policies?

A: The insurance industry is posting nearly $2 billion in losses each year, according to a 2012 report by A.M. Best Co., because of increased awards to claimants; loosening tort-reform provisions in some states that allow for more lawsuits; and the widespread use of asbestos with its long latency period for related illnesses. Sizable losses are likely to continue for years.

Q: Why is Berkshire Hathaway Inc., through its National Indemnity Co. subsidiary, acquiring asbestos and environmental liability from insurance companies?

A: Because, according to Berkshire Hathaway Chairman/CEO Warren Buffett, the company can potentially profit by investing “float,” the funds set aside to pay future claims.

Q: Float is a normal part of the insurance business model. What’s different about float in asbestos/environment cases?

A: This kind of liability -- often referred to as “long-tail liability” -- takes years, even decades, to come due, because it often takes these hazards that long to sicken workers. This allows for longer-term investment of float and potentially more profits.

Sources: Insurance Information Institute; Environmental Protection Agency; Merriam-Webster Dictionary, A.M. Best Co.

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