General Motors says it will settle claims stemming from its defective ignition switch with its own cash, not through liability insurance. Why would an insured company pay millions of dollars — and maybe more — out of pocket?
Well, there are lots of potential reasons.
First, there’s precedent for creating compensation funds with your company’s own money, according to Robert Hartwig, president of the Insurance Information Institute, an industry-funded group.
“BP, in the wake of the Deepwater Horizon disaster, was completely self-insured,” says Hartwig. “Generally speaking, what it paid, and what it continues to pay, is completely out of its own pocket.”
It’s common for companies to self-insure when they get to be the size of GM, according to Peter Viscardi, senior advisor with Hanover Stone Partners LLC, an insurance risk management consulting firm.
“Many of these companies have assets greater than insurance companies. Their balance sheets are strong enough to absorb a certain degree of losses on their own,” Viscardi says.
These big companies, like BP, often set up captives: wholly owned insurance subsidiaries. A trade publication called Business Insider describes GM as largely self-insuring prior to bankruptcy. Big companies can also purchase insurance on top of their in-house resources.
GM won’t disclose the exact terms of its coverage, though a spokesman says it has insurance.
Experts say there are several reasons why GM might not draw on outside insurance to pay for the ignition switch compensation fund.
The claims arose over a long period of time. If GM didn’t inform its insurers about potential liabilities while renewing policies, there could be consequences for the automaker. Also, it’s unclear which liabilities remain post-bankruptcy.
But a lot of it comes down to expedience.
Insurance companies scrutinize claims for extenuating circumstances like, “Was the driver speeding? Was the driver impaired?” Hartwig says.
Kenneth Feinberg, the director of GM’s compensation fund, has explicitly said those factors won’t be considered now.
Not tapping insurance means GM can expedite the compensation process, lessening what analysts see as a bigger risk: further damage to its reputation.
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