No on D&O

Giant Berkshire Hathaway, which makes much of its money on insurance and investing insurance premiums, does not provide liability insurance for its own directors.

Warren Buffett, the 80-year-old chairman of Berkshire Hathaway and billionaire investor, issued his annual letter to shareholders late last month. The “Oracle of Omaha” had things to say about opportunity in America, investing, corporate culture and insurance, or the lack of it in the case of the firm’s directors.

Buffett believes that corporate culture matters. At Berkshire Hathaway, directors are expected to act like owners. They are not treated like rock stars. They do not get fancy Wall Street-like perks. And if they screw up, they must bear the consequences without insurance protection. Buffett explains:

“They receive token compensation: no options, no restricted stock and, for that matter, virtually no cash. We do not provide them directors and officers liability insurance, a given at almost every other large public company. If they mess up with your money, they will lose their money as well. Leaving my holdings aside, directors and their families own Berkshire shares worth more than $3 billion. Our directors, therefore, monitor Berkshire’s actions and results with keen interest and an owner’s eye.”

Berkshire Hathaway is parent to GEICO, General Reinsurance and other insurance firms. The otherwise modest Buffett does not skimp in his praise of Berkshire’s insurance operations. “Among large insurance operations, Berkshire’s impresses me as the best in the world,” he wrote. Indeed, Berkshire has turned an underwriting profit for eight consecutive years.

Why would the “best in the world,” a very profitable firm, skimp on D&O?

Buffett says that two of the disciplines required of a sound insurance operation are “an understanding of all exposures that might cause a policy to incur losses” and “a conservative evaluation of the likelihood of any exposure actually causing a loss and the probable cost if it does.”

But his aversion to buying D&O might be found in one other of his of points of wisdom:

“‘The other guy is doing it so we must as well’ spells trouble in any business, but none more so than insurance.”

Someone must have told Buffett that other insurers the size of Berkshire Hathaway are buying D&O and that turned him against it.