Yesterday (once I finally got it posted — sorry), we talked about a rotten life insurance policy that one reader’s parents had been talked into.

Today, let’s look at a different insurance deal, this one from Warren Buffett’s company, Berkshire Hathaway.

The folks at Berkshire Hathaway are smart and honest and they’re not giving anything away.

(BRK is the company that Warren Buffett has built from a threadbare New England clothing manufacturer with a $19 a share book value in 1965 to a global insurance and reinsurance giant, with major stakes in Coca Cola, American Express, Gillette, among others. Current book value: about $38,000 a share.)

Until recently, you could buy auto insurance through GEICO, a Berkshire Hathaway subsidiary, and you could buy butter crunch from its Sees Candy or furniture from its Nebraska Furniture Mart — but you could not deal with BRK directly.

Now, via the Internet, for two insurance products, you can.

One is “excess umbrella liability insurance” — in case the guests who slip on your icy front porch suffer particularly horrendous injuries and meet up with a particularly sympathetic jury — and the other is “annuities.”

You can get an instant quote on either by clicking here.

I am going to leave annuities for another time. Today let me just tell you how simple and smart (at least from Warren’s point of view) the Excess Umbrella product is.

An umbrella policy, as you know from last month, picks up where your underlying policy’s liability coverage leaves off. Ordinarily, you would get an umbrella policy from the same carrier that writes your homeowner’s and/or auto policy. But you can certainly call an independent agent and but coverage from a different carrier — assuming you can find one willing to take your business. Carriers will want to verify, first, that you do have ample “underlying” liability coverage via your primary policies. Typically, you would need to have $1 million in liability coverage on your homeowner’s policy and a $300,000 or $500,000 limit on auto. The umbrella — typically an additional $1 million of coverage — would only kick in once these underlying limits were exhausted.

Umbrella coverage is usually very cheap — as little as $100 a year for $1 million, rarely more than $350 — because few people are sued, and of those, most have no need of coverage beyond their underlying coverage.

Still, you never know, which is why an umbrella helps people with assets to protect sleep better.

Now comes BRK to offer even more peaceful sleep. And to answer frequently asked questions about umbrella policies here.

The deal is very simple. Whatever umbrella coverage you have now — $1 million, say — BRK will match, and for just 90% of the premium you are now paying.

So if today you pay $250 a year for $1 million umbrella, BRK will sell you a second $1 million for $225.

Virtues? Well, it’s easy to understand. That’s a plus. And it seems relatively cheap — 10% off what you’re paying now. And you can apply right on-line. Send in your application, a copy of your umbrella policy, and a check for $225, and the chances are good you’ll be all set and sleeping like a baby.

And I’m not saying you shouldn’t do it! (I would certainly check with my primary umbrella carrier first to see what it would charge to double your limit.)

But look at how smart this is from BRK’s point of view, especially in the Internet age.

BRK presumes that the underlying carrier is not an idiot, and is attempting to profit by writing your policy and tens of thousands like it. In this example, $250 is a premium that the underlying company believes sufficient to generate a profit.

So BRK has let the underlying carrier do all the research on your insurability, pay all the agent commissions . . . BRK just piggybacks on top.

Even if it were taking equal risk for a premium 90% as great as the other carrier’s premium, BRK would probably doing better. It’s getting 90% as much money, but with a much lower cost of acquiring the business.

But BRK is not taking as much risk. The only way BRK could suffer a complete $1 million loss is if both the underlying carriers did, first. The basic auto or homeowner’s policy would pay, and then, if that weren’t sufficient, the $1 million umbrella coverage would pay. Only if that were not sufficient does the BRK coverage kick in . . . and then possibly not even in the full amount.

Granted, if you lose a $15 million lawsuit, all the coverage will be quickly exhausted and BRK will be out its full $1 million right along with everybody else. So I don’t mean to say this extra coverage is worthless — it’s not. Or that BRK bears no risk — it does.

Still, you can see what a smart deal this is for BRK. It’s a simple, no-nonsense, customer-friendly product, very light on overhead and expenses. The underlying carriers are the ones that need the marketing staffs and underwriters to sell the policies and evaluate the risks, and the claims departments to spring into action once there’s a claim.

Berkshire just sits back and makes money.


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