Warren Buffett's Berkshire Hathaway faces probe for duping insurance client

Berkshire Hathaway chairman and CEO Warren Buffett.
Berkshire Hathaway chairman and CEO Warren Buffett.PHOTO: REUTERS

CALIFORNIA (Bloomberg) - Mr Warren Buffett's Berkshire Hathaway Inc is being probed by California over workers' compensation policies after the state's insurance regulator ruled that the company duped a small business and circumvented a review of rates.

California Insurance commissioner Dave Jones announced the inquiry  onMonday after ruling in favour of Shasta Linen Supply , a Sacramento-based business that had appealed to his department in 2014 about a policy bought from Berkshire's California Insurance.

Shasta originally purchased a workers' compensation policy from California Insurance with a guaranteed cost, meaning its premiums were based in part on average historical losses, the state's Department of Insurance said in a statement.

The insurer then had one of its affiliates sell the small business a policy that had attractive-looking premiums but a different structure. That coverage - called EquityComp - shifted costs back to Shasta, the regulator found, and imposed rates and terms that the department hadn't approved.

"This is a case of, 'If it sounds too good to be true, it probably is," Mr Jones said in a statement on Monday.

The decision could limit a lucrative business for Berkshire. The regulator found that in the three years before the EquityComp policy was introduced, California Insurance posted US$47 million (S$63.1 million) in profit. In the four years since, that amount soared to US$220 million.

The insurer's losses on workers' compensation policies plunged during the period, relative to the premiums collected.

Mr Jones has ordered his department to determine if there are similar cases, and the review could result in "enforcement actions with potential penalties", according to the statement.

On a conference call discussing the decision, he declined to specify the size of potential fines.

The EquityComp programme falls into a category of coverage that is regularly used and accepted throughout California and the US, said Mr Spencer Kook, an attorney at Hinshaw & Culbertson LLP who's representing the Berkshire insurance units involved.

"The company very much disagrees with the decision and they're going to explore all real avenues to address it," he said in a phone interview.