General Re Under Scrutiny for Reinsurance Dealings with Failed Virginia Liability Reciprocal

General Reinsurance, a subsidiary of Berkshire Hathaway Inc., has been subpoenaed in an investigation of Reciprocal of America, a former Virginia-based professional liability insurer whose collapse is considered one of the largest insurance fraud cases in that state’s history.

The General Re subpoena, issued in October 2003 by the U.S. Attorney for the Eastern District of Virginia, Richmond Division, was noted in a March 2 filing by Berkshire Hathaway with the Securities and Exchange Commission.

Berkshire also reported that in December 2004 and on several occasions since then, the same U.S. Attorney and the U.S. Justice Department requested additional information about ROA and its offshore reinsurer, First Virginia Reinsurance, Ltd., and information related to transactions between General Re or its subsidiaries and other insurers.

General Re provided various reinsurance coverages to ROA from the late 1970s through 2002.

Four employees of General Re, including a former president, were cited in the subpoenas, Berkshire said.

ROA, which insured doctors, hospitals and lawyers, failed in 2003 after rolling up unpaid liabilities of $450 million. Just last month, two former employees of the company pleaded guilty to using accounting tricks to hide the firm’s financial problems from state regulators.

The SEC and state regulators, including New York Attorney General Eliot Spitzer, have been looking into certain reinsurance products that some critics charge are more like loans to hide losses than insurance. In December, Spitzer’s office and the SEC subpoenaed General Re seeking documents relating to its non-traditional products.

Berkshire said it and General Re were cooperating with all requests.

Meanwhile, the two former top officers of collapsed Reciprocal of America are scheduled for sentencing in June for their roles in what U.S. Attorney Paul J. McNulty has called one of Virginia’s biggest insurance fraud cases.

Kenneth R. Patterson was the president and chief executive officer and Carolyn B. Hudgins was executive vice president of the company when it was placed in receivership in January 2003. They both entered guilty pleas in U.S. District Court to conspiracy to commit insurance fraud and other charges. The two admitted that trying to save ROA, they misrepresented the company’s financial condition using fraudulent accounting techniques and in reports to the Virginia insurance commissioner.

ROA was formed in 1976 when Virginia hospitals and physicians were having trouble getting medical malpractice coverage. ROA created two companies, Doctors Insurance Reciprocal and American National Lawyers Insurance Reciprocal.