2020: How will the pandemic affect Berkshire's insurance businesses?

Becky Quick: This next question comes from Steven Staller. He’s a shareholder in Atlanta, Georgia and he says, “Would you please help us understand the effects of COVID-19 are on our insurance businesses? Other insurance companies have reported losses from boosting reserves for future insurance claims that they expect to be paying as a result of Coronavirus. Yet in Berkshire’s 10Q released this morning, we do not appear to have reported much of these future expected losses. Can you tell us why this is the case? What kind of risks Berkshire is underwriting that allows us not to be affected by the pandemic or conversely, what we are writing that might be?”

Warren Buffett: Well, the amount of litigation that is going to be generated out of what’s already happened, let alone what may happen, is going to be huge. Now, just the cost of defending litigation is huge, enormous expense, depending on how much there is.

Now, in the auto insurance field, which is our number one field in terms of premium volume by some margin, that’s more definable, but who knows what comes out of it in terms of litigation. But in what they call commercial multiple peril, which involves property losses and where some people elect to buy business interruption experience coverage, many policies quite clearly in the contract language would not have a claim for business interruption under a commercial multiple peril policy where you’ve elected that. But other policies do I know of, I think I know of one company. I don’t know the details, that’s written a fair amount where they cover or they certainly there’s a good argument perhaps that they cover business interruption that might arise from a pandemic.

Well, they’re in a very different position than the standard language which says that you recover for business interruption only if involves physical damage to the property. And you can buy all kinds of different policies. We are not big in the commercial, multiple peril business.

So I mean, this is not like our auto business or anything of that sort, but we will have claims. We’ll have litigation costs, but proportionally it’s not the same with us as with some other companies, which have been much more…

…those with some other companies which have been much heavier in writing business interruption as part of a commercial, multiple peril. But you don’t automatically get coverage if you have business interruption. I mean for example, I think it would be unusual if say General Motors had a strike, which they did, and that they have business interruption that covers a strike. We actually wrote about, probably the only annual report in the United States, we wrote about business interruption insurance because we had it over in France, when one of our properties was adjacent to a much smaller property that had a fire and then it spread to our plant and it caused a lot of physical damage and we have business interruption that ties in with that. But if we had some company we were selling auto parts to and they had a strike, our business would be interrupted, but that is not part of the coverage, unless you specifically really buy it. So, there’s some claims that are going to be very valid and related to the present situation. There’ll be an awful lot that there’ll be litigation on that won’t be valid.

And, there’s no question that some insurance companies, I know one particular, that will pay a lot of money relative to their size, in terms of policies that they’ve written. And I think we have reserved, and our history shows we generally have reserved on the conservative side, adequately at least. And that’s certainly our intent. And we tell no managers of any of our insurance operations, what numbers we expect from them or do any of that. They evaluate their losses and they build in something for social inflation. They build in things for all kinds of things. And generally speaking, Berkshire has been pretty accurate in its reserving. And, I have no reason to think that we’re otherwise than that, currently.