2002: What risks and opportunities does asbestos liabilities present to Berkshire's insurance companies?

AUDIENCE MEMBER: Good morning, gentlemen. My name is Hugh Stephenson. I’m a shareholder from Atlanta.

My question is on asbestos liability tort cases. It seems like this is growing to be a bigger and bigger problem, including more and more companies, including a number of companies in the Dow Jones 30 industrials.

What do you see for Berkshire as the risks and opportunities in the operating and insurance businesses?

And, if you two were in charge of writing or structuring a settlement for the whole problem, how would you do it?

WARREN BUFFETT: OK, I’m going to let Charlie tackle most of that, because he’s — we’ve both done a lot of thinking on it. I think Charlie’s thinking is — I know — it’s better, and it may even be more extensive.

Asbestos, as I mentioned in some of these retroactive contracts, is a big part of the liability, but it really doesn’t make any difference, unless — it’s much more dependent on the speed of payments than the amount of payment.

We are capped on all those types of contracts.

So, there’s a figure in the annual report about aggregate asbestos and environmental liability. And that number may look quite big compared to some other insurance companies — but most of that, there’s a limit on.

And, it’s a good thing, because asbestos continues to explode. It’s just — we talked about it last year at this meeting, and I said no matter how bad you thought it was, it was going to be worse. And it has been worse. And it will be worse.

And you make a very good point when you bring up the fact that many companies that are thought to be, or have been thought to have been, insulated from the asbestos litigation have now been dragged in one way or another. And that won’t stop, either.

Ironically, it’s not impossible that that asbestos litigation actually produces some opportunities for Berkshire, in terms of buying companies out of bankruptcy, free of their asbestos liabilities.

We did that — although it occurred much earlier in the — but we bought Johns Manville, which was the, in my memory, was the first major company, really big company, to go into bankruptcy and be forced there by asbestos liability. That happened back in the early ’80s.

And that subsequently, they were cleansed of their liability by, in effect, giving a very high percentage of the company and its debt to the plaintiffs. And their lawyers, I might add.

And when we came along a year ago, I mean, that was all past history. But we probably wouldn’t own the Johns Manville company if it hadn’t been for some asbestos litigation that started 20 years ago or more.

We may see, actually, more companies that end up in Berkshire that have been forced into bankruptcy through asbestos.

But it is a — it’s really a cancer on the American corporate world. And it’s one that growing. And I think I’ll let Charlie talk about it.

CHARLIE MUNGER: Well, the asbestos liability situation in the country is morphed into a very disadvantageous situation where there’s an enormous amount of fraud.

And the wrong people are getting money, and there are vast profits for people who are arranging the fraud. And so it isn’t a good situation.

There’s also real liability to people who have serious injuries, and some of those people are being deprived because the meritless claims are taking so much of the money that there isn’t adequate money for the people who had the worst injuries.

The Supreme Court has practically invited Congress to please step in and create a solution, but, deterred by the plaintiffs contingency fee bar, Congress has refused to do anything.

This is not a good situation, and if you can do anything about it, why, I would encourage you to do so.

WARREN BUFFETT: What do you think it will look like in five years, Charlie?

CHARLIE MUNGER: I would be surprised if there were a constructive solution. I think we’ll have more of the mess we have now.

WARREN BUFFETT: It’s huge, too. I mean, you — there are companies that some of you may own stock in that had huge potential liabilities.

They didn’t think they had those liabilities, even, maybe, a few years ago. But, they’re finding ways to drag in almost anyone.

And, you know, it’s a concern when we buy businesses, because we are a deep pocket. And a tiny — a smaller — company may not have been worth people investing lots of hours on a speculative idea that they could create some kind of a connection with, you know, the ABC Company and hundreds of thousands of people that are claimed to be sick.

But, it gets more interesting if Berkshire — it could get more interesting — if Berkshire’s involved.

So, it’s a real problem for corporate America and they have not been able, in effect, to come up with a solution.

There was a solution, as I remember, and the Supreme Court didn’t allow it. Isn’t that right, Charlie?

CHARLIE MUNGER: That’s right.

WARREN BUFFETT: Yep.

We will be very careful, both in our insurance operations, but just as importantly, in our acquisitions and all of that, in terms of avoiding unnecessary exposure to asbestos liability.

I’m not terrified at all about our insurance operation, in terms of what’s there from the past.

I’m not saying that I know with any precision what the amounts will be, but I — that is not at the top of my list.

But, essentially you will have a plaintiffs bar that, going beyond asbestos, will try to turn any kind of human adversity into a claim against somebody that’s got a lot of money.

And that’s going on with mold. I mean, you may have seen Ed McMahon is suing his insurer for $20 million for the mold in his house. I just wish I could get some of that mold. I mean — (laughs) —

CHARLIE MUNGER: You probably have it.

WARREN BUFFETT: Yeah. (Laughter)

I hope you’re referring to the house. (Laughter)