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New York City-based Breakaway Courier Corp. has filed a lawsuit against Omaha, Neb.-based Berkshire Hathaway Inc. for an alleged illegal scheme to steal workers’ compensation premiums.
A complaint against Berkshire Hathaway was filed with the state supreme court in Manhattan on behalf of Breakaway by Raymond J. Dowd and Samuel A. Blaustein of New York City based law firm Dunnington Bartholow & Miller.
In the complaint, the scheme is referred to as a “reverse Ponzi scheme” targeting New York consumers. It alleges that Berkshire Hathaway is in violation of multiple sections of New York insurance law by causing an unlicensed foreign insurance company to divert insurance premiums to another entity unlicensed by New York State and siphoning those premiums through under collateralized shell companies.
The scheme differs from a typical Ponzi scheme in which victims are paid with investments by others. Instead, it requires insureds to cover each other’s losses. The complaint states victims of the scheme are led to believe their capital is being paid into protected cells and will eventually be returned to them. Instead, it is siphoned off through an unregistered Hawaiian entity, leaving New York employers and injured workers without the funds required by New York state to cover losses related to worker injuries.
This is because Berkshire Hathaway promises New York insureds discounted workers’ comp insurance, a share in underwriting profits from workers’ comp policies and rewards for low incurred losses, while the companies are actually signing a Reinsurance Participation Agreement (RPA) – a complex derivative instrument that shifts all risk of losses from worker injuries back onto the insureds, according to the complaint.
“As injured New York workers make claims, defendants use the RPA to hit New York insureds with huge, illegal premium bills – the functional equivalent of a margin call,” the complaint says. “Defendants’ scheme relies on withholding information from state regulators. The scheme has indeed put all of New York’s taxpayers at risk.”
Raymond J. Dowd, with the New York law firm of Dunnington Bartholow & Miller LLP, is representing Breakaway in this case.
Dowd said the case is similar to a case in California in which Commissioner Dave Jones has faulted Berkshire’s Applied Underwriters Inc. and California Insurance Co. units over the sale to Shasta Linen Supply Inc. of a nontraditional workers’ comp policy whose terms and rates had not been reviewed by state officials.
“It’s on all fours with that,” Dowd said.
In July Jones’ office issued a cease and desist notice in the Applied case. That matter is still ongoing.
Dowd also explained the parallels in the Breakaway case with a so-called Ponzi scheme.
“Here everybody thinks they have insurance and everybody has to pay their own claims and they’re slowly realizing it that the thing they signed was not insurance,” he said. “There’s no stop-loss.”
He also said it differs in an important way with an insurance pool.
“This is a pool with a drain, and the drain goes right into Berkshire Hathaway,” he said. “Everything is swept out of the pool into a Hawaii captive.”
The case was filed on Friday. He said no court date has been set.
A spokesperson for Berkshire Hathaway did not immediately respond to a request for comment.
Insurance Journal West Editor Don Jergler contributed reporting.