February 27th, 2023

Warren Buffett’s Myth of “Free Money” (And how to stop it)

In his annual letter to shareholders this past weekend, Warren Buffett referred to a portion of Berkshire Hathway’s money as “cost free.” He previously has referred to some of Berkshire’s cash as “free money” so this is nothing new.

That “free money” — which I will explain in a moment is not really free, hence the title of this post — is from the insurance businesses that Berkshire owns.

As a brief ‘splainer if you don’t want to Google “Warren Buffett Free Money Insurance:” The insurance biz makes money two ways. The first is by taking your premiums and then years later paying out claims. If the underwriters are doing their jobs well, an insurance business will take in for example, $100 in premiums and pay out $90 in claims and operating costs.

This is a great business, because unlike making widgets where you have to first spend for the raw materials before making and selling the widget, with insurance premiums you actually get the revenue up front and pay later.

Which brings us to the second part of the insurance business, which Buffett calls the “free” part. What happens to those premiums in the interim? Known as the float, that money gets invested. And if you are a conglomerate like Berkshire, you have plenty of businesses to invest in.

So even if an insurer’s underwriters fail at their jobs, and they pay out $105 in costs and claims for each $100 in premiums, they still may have profited with an additional $30 or more in “free” money that was invested in the intervening years.

As Buffett explained in 2019:

If our premiums exceed the total of our expenses and eventual losses, our insurance operation registers an underwriting profit that adds to the investment income the float produces. When such a profit is earned, we enjoy the use of free money – and, better yet, get paid for holding it.

How much they actually make all depends on how long they can invest that float. Delay, delay, delay is, therefore, sometimes in the best interests of the insurance company.

But as I said, the money isn’t free. It has a cost. And that cost is borne by the people that lost their homes to a fire, flood or hurricane (BH owns property insurers), or were injured in car collisions (BH owns Geico), or injured due to medical malpractice (BH owns MLMIC) .

If a claim is delayed because of bad faith on the part of the insurer, the claimant effectively becomes the banker for Berkshire Hathaway. Buffett gets to keep using money to which the claimants are entitled. For free.

A brief example from one of my own cases so you can see it in practice, but any personal injury attorney can relate similar ones:

Simple car collision. Easy liability. Significant injuries. The injured can’t work. The insurance coverage is only $100K. Geico offers $4K eight months after the collision. Hey, maybe the injured is desperate and Geico won’t need to even pay the claim? Five months later they are big sports and increase the offer to $5K. Eighteen months after initial offer they are $12.5K.

Without dragging the whole story out, it takes Geico almost 3 ½ years from its first offer to tender its $100K policy (and over four years from date of collision). Free money? For Berkshire, yes. They were able to invest the money the whole time. But that is money that should have been in the hands of the injured claimant.

Given that Berkshire as a whole has had average annual returns of 20% since 1965, it’s easy to see how the use of that money can pile up — for Berkshire. But not for the injured person that has to lean on friends and relatives to get by.

The problem, here in New York, is that we don’t have a statute that explicitly deals with bad faith insurance tactics. Other states do. Just not New York.

To pursue a bad faith claim in an auto case for example, one must first take a verdict in excess of the insurance policy (years after the injury has taken place) and then the insured person against whom that excess verdict was taken (previously known as the defendant) can sue their own insurance carrier.

But the people who were actually injured can’t do it. They have to hope that the insured will get on board with this. And if the insured is judgment-proof, they may just walk away and say tough noogies.

New York, it should be clear, needs bad faith legislation to prevent this abuse — which will stop insurance companies from using bad faith tactics to stall the payment of claims.

The pandemic has made things worse, with extensive backlogs in the courthouse. As I noted in 2021, a year into the pandemic, if we had a decent bad faith statute many of these delays would vanish.

Even Alabama handles bath faith claims better than us.

Warren Buffett’s Geico, you will not be surprised to learn, wants immunity from bad faith claims. They want the “free money” to continue.

February 16th, 2021

A Year of COVID – And 3 Litigation Changes

It’s been a year since I last set foot in a real courthouse. I appeared for jury selection in a Bronx nursing malpractice case in mid-February. Some money was on the table, but I was pushing for better.

But the news. In the news was the virus. It wasn’t here yet. As far as we knew. But it was coming. And when it came it would come hard, and the world was going to be shut down.

It could be days wasted up in the Bronx waiting for a jury room. More days wasted waiting for a judge assignment after that. If I picked that jury, my gut told me I would never make it to verdict. And then what? How long would it be before my client had another chance?

The client approved of settlement, and I beat a hasty retreat from the courthouse.

It was an unseasonably warm day for February in New York, but I put on my regular winter gloves anyway as I rode the subway out of the Yankee Stadium station near the courthouse. No one, after all, was sure exactly how the virus was transmitted. I touched nothing. The virus was novel.

And a few weeks later news helicopters spun over head as my home was in the bulls eye of the first East Coast Containment Zone. The virus, of course, was not contained. (See: Greetings from the Containment Zone)

What did we learn over the past year? A lot. But I’ll only cover changes to the litigation system. ‘Cause that’s what you came for.

Here we go with three critical changes; the first two have already been implemented (will they continue when it’s over?), and the third will relieve the mammoth courthouse backlog caused by the virus. Given that they collectively change the way litigation has been done for the last 200 years, I would call it significant:

Many Courthouse Conferences Waste Time: Anyone that’s been to the high volume parts of New York City’s courts knows this problem. Hundreds of cases may be on a calendar call. Oft times, if you part of this cattle call, you are just given a new date a few months away. Lawyers gotta schlep to the courthouse for this?

If the case is still in discovery, most issues are resolved by counsel in the hallways. If you have a real issue, you wait (and wait, and wait) for a conferences that takes 5 minutes when you get your turn at the bench. But those five minutes might consume an entire morning of travel, waiting, more waiting, discussion and then travel again. It’s been this way since forever. (See: How One Brooklyn Courtroom Wastes $10M per Year)

On March 13th of last year, at the directive of New York’s Chief Administrative Judge, Lawrence K. Marks, virtual conferences were put in motion in order to reduce foot traffic in the courthouse. (See, Will Coronavirus Push New York’s Courts Out of the Colonial Era?)

Lawyers will now often “meet and confer” to iron out discovery issues without conferences. Sadly, it was not habit before because one side of the equation gets paid by the hour. But now only real problems are likely to see a judge or law secretary (virtually).

For routine conferences this has worked very well, and I hope our judiciary continues this pattern after the pandemic is over. (And it will be over one day. I think it will, I think it will, I think it will.)

Put on a suit, spend 10 minutes in front of the computer, and done. No need to blow half a day for minor discovery issues.

Virtual Depositions Work: While some defense lawyers tried to use the pandemic as an excuse to delay (“We need to see the witnesses face to face!”) that door was firmly slammed shut by the courts. Depositions proceeded virtually. (See: New York Judges Order Virtual Depositions Due to COVID-19)

And you know what? They have worked just fine. I’ve heard few complaints from attorneys on either side. And if you want to be in the room with your own client, have at it. But there’s no need for others to be there if they don’t want to for health reasons, or for mere convenience. There’s no reason I shouldn’t be able to take the deposition of someone in Albany or Buffalo while sitting in my office if I so choose. Pandemic or not.

And if anyone thinks they need to see the reactions of the of the witnesses better, they can always record them. This, of course, is not new. We have had this option for many, many years, but it is very much the exception when done, not the rule.

A bad faith law is needed to move cases: Cases won’t settle without a jury. We knew this before, of course, but it really comes home now. Without the threat of a jury in the box the incentive to settle evaporated for liability insurers, even on clear-cut matters. Worse yet, can now offer even fewer pennies on the dollar if the injured plaintiff was in additional financial distress (and potentially leaning on tax-funded safety net programs to get by).

Insurers have no down side in delay, delay, delay. They just keep the premiums (nicely invested thank you very much) while postponing the benefits. The pandemic is a sweet deal for them, while the victims (and tax-payers) suffer the costs.

And now with the resulting mammoth backlog in the courts due to unresolved cases, and then topped off with cutbacks in the courts due to statewide financial shortfalls (older judges no longer getting certified), there are years of waiting ahead.

But with a good bad faith law, this problem vanishes. Hang the Sword of Damocles over the heads of the insurers and watch their profitable recalcitrance vanish. (See, Why Can’t New York be Like Alabama)

There’s no excuse for New York not having a bad faith law with real teeth, as it has real benefits: Victims get justice, the overwhelmed court budgets get relief, there is less need for tax-payers to fund the costs of the injuries, and the insurance companies merely must do what they were always required to do (but never forced to do).

So there you have it, two very significant changes in the way law has been practiced the last couple hundred years, that we should keep on doing. And one legislative proposal to make the wheels of justice roll efficiently.

The pandemic has caused extraordinary heartbreak in a wide array of areas. We have adapted somewhat to it — and along with you I can’t wait to burn those masks. But some adaptions are worth keeping, and one legislative change is long overdue.

June 3rd, 2020

Why Can’t New York Be Like Alabama?

If only New York was like Alabama. I can almost see your jaw drop and eyes pop.

But New York has a problem and Alabama has a solution. And we should be all over it.

The problem is bad faith by insurance companies, refusing to settle matters because no one holds their feet to the fire to act in good faith. And that causes a backlog in the courthouse. Under normal circumstances.

Those normal circumstances mean, for example, that if a driver has a $100K policy, and there are $400K in damages, the insurance carrier may simply string the case along.

Why not? What’s their downside? The plaintiff, after all, may be desperate and the longer the desperation goes on the better for the insurance company.

And second, if the carriers figure it will cost the plaintiff $20K to try the case, they see little reason to pony up a $100K policy. If a plaintiff fails to take $80K, for example, and spends $20K trying the case, they could “win” with a jury verdict but be worse off than the lower settlement. So they demand a gift.

And if you take a verdict in excess of the policy limit, you’re generally stuck with the policy plus a judgment to collect the rest. But that judgement is against someone that likely can’t pay (which is why they had a small policy to start with).

Last year I laid out the cockamamie way that New York handles bad faith. Briefly, you have to first spend all the money, then take an excess verdict and then get that person you just sued — who owes your client the balance of the funds — to hire you to sue his own carrier for bad faith. Maybe they will, maybe they won’t, maybe they vanish. And the second lawsuit will tack on a few more years.

Now add in the COVID-19 pandemic. Trials have stopped for months on end (and maybe longer). And a trial is the only way to pressure an insurance company. There is now a shit ton of financially strapped, unemployed people, and no pressure at all on the insurance companies to dispose of cases since no juries are being selected any time soon. The problem of an already-overloaded judicial system is now exacerbated.

Just the other day I wrote how a judge had to order virtual depositions go forward due to intransigence by the defense. The defendants tried to use the pandemic as a tactic to stall, stall, stall the case until a vaccine is available or the pandemic has otherwise abated. Delaying justice and thereby denying it.

Now we turn to Alabama. Like many states, Alabama has an actual bad faith statute. And judges are not amused when carriers play games. Because judges don’t want to see their dockets clogged with cases that can be resolved.

Enter, stage deep south, Circuit Judge Karen Hall of Madison County. I know nothing at all about Judge Hall or her politics, age, race, religion, favorite ball team or anything else. What I do know is that she was not amused at Allstate for playing games in her courtroom. And I know this because she gave an award of bad faith damages well in excess of what the plaintiff actually asked for. (Thank you Kevin Grennan for forwarding me this decision.)

Allstate, you may not be surprised to learn given its presence here in this post, did what The Good Hands People apparently likes to do — stall and make the plaintiff spend money because how dare they bring a lawsuit against it.

There was just a $75K underinsured policy in Harbin v. Stewart, so the plaintiff was proceeding against his own insurer for that underinsured coverage that he paid for. Judge Hall ordered them to mediation with all sides to have someone present with full authority to settle. This was, as Judge Hall noted, a “significant damages case” with over $234K in medical bills alone.

The plaintiff traveled to the mediation along with his wife and lawyer ready to talk. The Allstate adjuster decided to stay home. Worse, while defense counsel arrived, he had no authority to settle. He offered nothing. Nada. Bupkus. The judge was not amused at Allstate’s violation of her order.

So they went to trial. Allstate didn’t even contest liability. In other words, The Good Hands People knew they would have to pay something, there were $234K in medical bills after all, and it still offered zip-a-dee-doo-da.

The jury came back with $690K.

Now this is where New York’s legislature should take note, because some problems in Alabama (and elsewhere) are no different than here. Judge Hall noted that the rules were designed for the just, speedy an inexpensive determination of actions. That same theory, though the actual language may differ among states, permeates every courthouse and judicial system. In essence, don’t waste our time, or that of our citizens who must sit jury duty.

After that $690K verdict, plaintiff’s counsel asked for $5K in costs and $52K in legal fees in addition to the $75K policy.

Nope. Not as per Judge Hall. No way. She would not do that.

Two days ago she walloped them, instead, with a $620K sanction. In doing so she noted that Allstate was a repeat offender. And she needed some way to make its conduct stop.

The requested relief, the court wrote, was “inadequate to accomplish the dual purposes of addressing the burden placed on the Plaintiff and addressing the overarching effects of Allstate’s conduct upon the Courts of Alabama, civil litigants, witnesses, and Alabama citizens who must serve on juries every time Allstate behaves in this fashion.”

You can rest assured that Allstate will not try that trick in her courtroom again.

Now it’s New York’s turn. When will our Legislature give us a bad faith law with actual teeth? We are about to see the Mother of All Backlogs in our court due to the virus. It will be exacerbated by insurance company delays. And if/when we get to trial, injured New Yorkers are left looking at carriers offering 50-70 cents on the dollar in some cases, even when the liability is clear.

How will New York deal with the effects of deliberate insurance company delays upon the courts, civil litigants, witnesses, and New York citizens who must serve on juries every time an insurer behaves in this fashion?

Adding insult to injury, New York is likely to see a massive financial strain due to the virus. Albany may well be increasing taxes and decreasing services to balance the budget. There’s little question the justice system will take a further beating on top of what is going on now.

So dear Legislators, please finally pass a bad faith law. With real teeth. Let the judges start enforcing it.

You have the power to make the backlog disappear, stop bad faith and bring long-awaited justice to those that seek it. And help save the State some money in the process.

The case is here: Harbin v. Stewart

June 18th, 2019

Geico Asks for Immunity

New York’s annual legislative session ends Wednesday. And that means, predictably, a mad rush to get legislation enacted without having to wait another year. Or, conversely, a mad rush to stop legislation.

And that’s where we are today, with Geico attempting to halt legislation that would hold it (and other insurance companies) accountable for bad faith in settlement negotiations. Yes, out-of-state-readers, it’s true, New York currently has very limited ways to stop insurance companies from trying to screw you over in your time of distress.

This legislation was first proposed in the wind-swept wake of Hurricane Sandy in 2013, when insurance companies thought it would be a really cool idea to deny coverage for damaged homes. If a policy excluded wind damage, the insurers would claim water was to blame. If it excluded water damage, they would claim wind was to blame.

The denials had a common background – they were dealing with people who had their homes destroyed and were, therefore, in great economic distress. Because everyone needs a roof over their heads. So the denials gave the insurance companies some, let’s call it, leverage.

Delay and delay and force the homeowners to hire lawyers to sue. Then, when the pain is deep enough and the homeowners desperate enough, maybe settle for 50 cents on the dollar. Or 70. But even if the insurers had to cough up 100 cents on the dollar on some claims, so what? That was merely what they had to do anyway. Every cent saved was profit.

And that is part of the base model of the insurance company: Take in as much as you can in premiums and pay out as little as possible and invest the money in the interim.

The legislation that is proposed, that Geico is afraid of, would put a stop to that as well as bad faith tactics in auto policies and elsewhere.

Right now, in an auto case, if an insurance policy is only the bare minimum $25,000 or maybe $100,000, and the damages are $500,000, the insurance company has a vested interest in offering only a portion of the policy. Sure, it’s possible that someone will spend $20,000 and try the case to verdict. But that often makes little economic sense, and all the lawyers know it. You can win but still lose. So why offer the whole policy even if you would, in good faith, owe it?

The only avenue for relief currently is to take an excess verdict against the insured when the insurance company has elected to put its own interests ahead of those customers, because you can’t sue the insurance company directly.

And then, and only then, if the insured is smacked for a big, fat verdict in excess of the insurance policy, there might be some relief. But that relief only comes if the defendants — who you just sued and perhaps, inflicted a bit of anxiety on — then assign their own rights to sue the insurance company for bad faith back to the people that had sued them. And if those people are gone? Or say “screw you, we don’t feel like helping you as we got nothing to take anyway so it doesn’t matter to us?” Well, sorry Charlie.

The bad faith legislation that is now pending would fix this problem, a problem created by the fact they are currently required to act in good faith but there is only one very poor method of enforcement.

Enter, stage right, Geico to oppose this common-sense legislation. In a mass email yesterday from Rick Hoagland, a Geico senior vice president, to its policy holders, it urges people to call their legislators to stop the legislation and protect the insurance company profits.

OK, maybe Hoagland didn’t word it quite that way. He claimed, instead, that legislation protecting both policy holders and the people they may injure would somehow be bad for them. George Orwell would have been proud.

He writes, instead that:

I am the senior vice president of GEICO, your insurance company in New York, and I am writing to ask for your help. The New York State Senate and Assembly are considering multiple pieces of legislation in the next few days that, should they pass, will likely increase insurance premiums for YOU and all New Yorkers, even if you’ve never had an accident.

He doesn’t say it would increase premiums but rather, he speculates. He provides no empirical data. More importantly, he doesn’t tell his insured that the legislation protects them from the bad faith practices of Geico, the company that they paid money to in order to protect them in the event something goes awry. And it is those bad faith practices that could put their own homes at risk in the event of a verdict in excess of their insurance policies.

And, of course he doesn’t tell his readers that the bills are designed to protect them. No, he claims that they “make it easier for trial lawyers to sue insurance companies.”

Here’s an idea, why not just put us personal injury lawyers out of business by dealing in good faith to begin with? Look, Geico I solved your problem! (You’re welcome. No charge.)

Here’s the Geico pitch, compete with links to the bills, which I urge people to read so the they know they are consumer protection bills. The reason he provided links is because he knew, no doubt, that few people would actually click them or get an explanation as to their true purpose:

Assembly Bill 5629-B and its companion bill, Senate Bill 3634-B, along with Assembly Bill 5623 and its companion bill, Senate Bill 6216 , are going to make it easier for trial lawyers to sue insurance companies and will have negative, long-lasting impacts on New York policyholders and taxpayers. (Simply click on the appropriate bill number to link to the text of the legislation.)

The legislation would allow a direct case against the insurance company for bad faith, so that the victims don’t have to rely upon the people they just sued to tender their rights against the insurers.

Geico, of course, would like to make enforcement of good faith laws difficult, thereby giving it a certain level of immunity. Why not offer 20K on a 25K policy when you know it will cost the injured plaintiff that much just to try the case? There’s almost no downside for them for acting in bad faith.

It’s time New York finally put a stop, once and for all, to the bad faith of insurance companies. The law requires good faith dealing and the Legislature should give consumes the tools to enforce it.

The email is here:

February 11th, 2015

Allstate Adjuster Likely Wants Her Snark Back

Don’t those nice Allstate hands look so friendly?

A snarky email from an Allstate adjuster may cost the company $900,000. Here’s the story.

By most anyone’s definition, 66-year-old Carol Haberman’s experience while walking her dog can be a horrible, life-altering one. Newspaper deliveryman James Burke backed out of a driveway at night while making a 3-point turn and ran her over. Realizing something happened, he pulled forward, likely running her over again.

The result? A complex left hip fracture requiring a total hip replacement, a lumbar compression fracture and compartment syndrome requiring a fasciotomy of the left leg.

What happened in litigation, however, was astounding. You may hear me rant about insurance companies and adjusters sometimes, and now you’ll see another reason why. The difference here is that the adjuster actually put her Kool-Aid inspired thoughts into writing.

There were two fundamental issues to deal with: How to apportion fault as between a driver and pedestrian. And how severe the injuries were. This would include, of course, the extent to which she had prior injuries that may have been affected.

But any way you sliced it, this was a significant matter to be deftly handled. Practically speaking, both plaintiff and defendant would want to limit their exposure with a jury. This is the type of common sense risk management of which settlements are made.

This is also one of the primary reasons that picking stupid personal fights with the other side is detrimental to a client. Because one day you might need to talk turkey over coffee with that other side about how to best serve your client with a negotiated deal.

And so it came to pass that, with a $1.25M insurance policy on the line, the parties in Haberman v. Burke thought that they had reached a settlement of sorts. This would have been what we call a high-low agreement that limits the financial exposure of both sides, with the high being $1.1M and the low being $100K.

The problem? Plaintiff’s counsel, Paul Edelstein, believed that this established the high and low of damages, and that only the issue of liability would be tried. Given the costs of hauling experts into court, this is an arrangement that can make sense for both sides.

But no. Allstate insurance adjuster Andrea Sewsankar thought that both liability and damages would still be tried. And she wanted that despite the fact that her “expert” was the discredited orthopedist Robert Israel.

OK. An understandable miscommunication occurred. But one would logically then assume that an effort would be made to hash out a solution, especially since the defendant had a problem with its expert. Whether agreement would have been ultimately reached, who knows, but certainly the efforts would be continued. Right?

Dear Reader, would I be writing this if that effort were made?

No. Instead, Allstate’s Ms. Sewsankar shot off a deliciously snarky email after Edelstein said that the two of them were not on the same page as to the details of the high-low. This was the set-up to the nastiness, via emails that I have obtained that were being used to confirm the deal:

Sewsankar: As we discussed, win or lose, your client is guaranteed a payout of $100,000 in exchange for a cap at 1.1 million. No appeal & your client will be responsible for all liens including and not limited to Medicare.

Edelstein: Correct. But also no damages trial. We will do hold harmless and deal with any medicare lien

Sewsanker: Oh no, damages trial also.

Edelstein: Oh man. Sorry. We weren’t on the same page. I cant do that. Only high low if we do away with damages trial

So far, not a problem, right? Just two sides trying to confirm in writing the nature of a deal, and then realizing that they had an unresolved issue.

And then, Boom! The testy little missive that will likely cost Allstate a bucket full of money before it’s all over, and which cracks open the Kool-Aid drinking mindset of some insurance adjusters, and which will be extremely important after this week’s verdict:

Sewsankar: No problem, I thought you had recognized the awesome skills of my defense counsel & wanted to garner a six figure payout for your client, so I took the opportunity to solidly protect my insured with this cap. Luckily, no payout will be warranted when Ed scores a defendant verdict on liability.

Thanks a million.

Don’t you love the hubris? I’m not sure which part of the email is the best: Is it boasting of the “awesome skills” of her counsel? The “no payout will be warranted?”

I’m betting it’s the “thanks a million” part that really must be hurting Allstate now. Because the liability verdict found 65% in favor of the plaintiff, meaning that Allstate would have been on the hook for only 65% of $1.1M high-low, or $715K.

But instead the case then proceeded to a damages trial with this result this week in very conservative Suffolk County:

past pain/suffering: $500K

future pain/suffering: $750K

future medical expenses: $400K

future home health aid/ assisted living facility costs: $800K

Add that up, and it comes to $2.45M, and 65% of that is $1.6M. And the insurance policy was only $1.25M.

So, when Ms. Sewsankar wrote “thanks a million” she was off by a bit. (I emailed her for comment yesterday morning but she has not responded.)

Her hubristic and intemperate email will, no doubt, be part of plaintiff’s efforts to collect the excess against Allstate in an action for bad faith. Her snark may cost Allstate about $900K. Either that, or it may bankrupt its insured.

You can almost feel the love from Allstate’s “good hands” logo. Almost.