2011   Financial Report of the United States Government

Notes to the Financial Statements

Note 22. Contingencies

Financial Treatment of Loss Contingencies

Loss contingencies that are assessed to be at least reasonably possible are disclosed in this note. Loss contingencies involve situations where there is an uncertainty of a possible loss. The reporting of loss contingencies depends on the likelihood that a future event or events will confirm the loss or impairment of an asset or the incurrence of a liability. Terms used to assess the range for the likelihood of loss are probable, reasonably possible, and remote. Loss contingencies that are assessed as probable and measurable are accrued in the financial statements. Loss contingencies that are assessed as remote are not reported in the financial statements, nor disclosed in the notes. All other material loss contingencies are disclosed in this note. The following table provides criteria for how Federal agencies are to account for loss contingencies, based on the likelihood of the loss and measurability. 1

Likelihood of future outflow or other sacrifice of resources. Loss amount can be reasonably measured. Loss range can be reasonably measured. Loss amount or range cannot be reasonably measured.
Probable
Future confirming event(s) are more likely to occur than not. 2
Accrue the liability. Report on Balance Sheet and Statement of Net Cost. Accrue liability of the best estimate or minimum amount in loss range if there is no best estimate, and disclose nature of contingency and range of estimated liability. Disclose nature of contingency and include a statement that an estimate cannot be made.
Reasonably possible
Possibility of future confirming event(s) occurring is more than remote and less than likely.
Disclose nature of contingency and estimated loss amount. Disclose nature of contingency and estimated loss range. Disclose nature of contingency and include a statement that an estimate cannot be made.
Remote
Possibility of future event(s) occurring is slight
No disclosure No disclosure No disclosure

The Government is subject to loss contingencies that include insurance and litigation cases. These loss contingencies arise in the normal course of operations and their ultimate disposition is unknown. Based on information currently available, however, it is management’s opinion that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the financial statements, except for the insurance and litigation described in the following sections:

Insurance Contingencies

At the time an insurance policy is issued, a contingency arises. The contingency is the risk of loss assumed by the insurer, that is, the risk of loss from events that may occur during the term of the policy. The Government has insurance contingencies that are reasonably possible in the amount of $267.0 billion as of September 30, 2011, and $224.2 billion as of September 30, 2010. The major programs are identified below:

Insurance in Force
Insurance in Force is the accumulation of policy limits for all policies issued and outstanding at a point in time. The Government has Insurance in Force in the amount of $1,408.6 billion as of September 30, 2011, and $1,394.8 billion as of September 30, 2010. These amounts represent estimated maximum exposure to insurance claims and guarantee programs. The major programs are identified below:

Deposit Insurance

Deposit insurance covers all types of deposit accounts such as checking, NOW and savings accounts, money market deposit accounts, and certificates of deposit (CDs) received at an insured bank, savings association, or credit union. The insurance covers the balance of each depositor’s account and shares, dollar-for-dollar, up to the insurance limit, including principal and any accrued interest through the date of the insured financial institution’s closing. As a result, the Government has the following exposure from Federally-insured financial institutions:

Legal Contingencies

Legal contingencies as of September 30, 2011, and 2010, are summarized in the table below:

 
2011
2010
 
Estimated Range of Loss
for Certain Cases 2
 
Estimated Range of Loss
for Certain Cases 2
(In billions of dollars) Accrued
Liabilities 1
Lower End Upper End Accrued
Liabilities 1
Lower End Upper End
Legal contingencies
Probable 9.2 9.0 9.7 4.3 4.3 5.2
Reasonably
possible
  12.4 14.6   118.4 122.6
1 Accrued liabilities are recorded and presented in the related line items of the balance sheet.
2 Does not reflect the total range of loss; many cases assessed as reasonably possible of an unfavorable outcome did not include estimated losses that could be determined.

The Government is party to various administrative claims and legal actions brought against it, some of which may ultimately result in settlements or decisions against the Government.

Management and legal counsel have determined that it is “probable” that some of these actions will result in a loss to the Government and the loss amounts are reasonably measurable. The estimated liabilities for these cases are $9.2 billion and $4.3 billion as of September 30, 2011, and 2010, respectively, and are included in “Other Liabilities” on the Balance Sheet. For example, DOI is subject to various claims and contingencies related to lawsuits. For cases in which payment has been deemed probable and for which the amount of potential liability has been estimated, about $4.7 billion and $0.3 billion has been accrued in the financial statements as of September 30, 2011 and 2010, respectively. The Cobell vs. Salazar lawsuit brought against the Interior Department and Treasury Department on behalf of 490,000 individual Indian trust beneficiaries for an historical accounting of their trust accounts and reform of trust management systems. On December 7, 2009, the parties announced that a $3.4 billion settlement had been reached. On December 8, 2010, the President signed into law H.R. 4783, the Claims Resolution Act of 2010, which authorized and funded the settlement. DOI has accrued the $3.4 billion in their financial statements. The settlement agreement provides for the distribution of $1.5 billion directly to individual Indians, the creation of a $1.9 billion fund to purchase highly fractioned interests in trust lands that stymie and slow the Government’s management, and sets aside up to $60 million for educational scholarships for Indian children.

There are also administrative claims and legal actions pending where adverse decisions are considered by management and legal counsel as “reasonably possible” with an estimate of potential loss or a range of potential loss. The estimated potential losses for such claims and actions range from $12.4 billion to $14.6 billion as of September 30, 2011, and from $118.4 billion to $122.6 billion as of September 30, 2010.

Numerous litigation cases are pending where the outcome is uncertain or it is reasonably possible that a loss has been incurred and where estimates cannot be made. There are other litigation cases where the plaintiffs have not made claims for specific dollar amounts, but the claimed amounts may be significant. The ultimate resolution of these legal actions for which the potential loss could not be determined may materially affect the U.S. Government’s financial position or operating results. Examples of specific cases are summarized below:

Environmental and Disposal Contingencies

Environmental and disposal contingencies as of September 30, 2011, and 2010, are summarized in the table below:

   
2011
 
2010
   
Estimated Range of Loss
for Certain Cases 2
 
Estimated Range of Loss
for Certain Cases 2
(In billions of dollars) Accrued
Liabilities 1
Lower End Upper End Accrued
Liabilities 1
Lower End Upper End
Environmental and disposal contingencies
Probable 20.0 20.0 20.2 15.8 15.8 16.0
Reasonably possible   0.2 0.2   0.2 0.3
1 Accrued liabilities are recorded and presented in the related line items of the Balance Sheet.
2 Does not reflect the total range of loss; many cases assessed as reasonably possible of an unfavorable outcome did not include estimated losses that could be determined.

The Government is subject to loss contingencies for a variety of environmental cleanup costs for the storage and disposal of hazardous material and the operations and closures of facilities at which environmental contamination may be present.

Management and legal counsel have determined that it is “probable” that some of these actions will result in a loss to the Government and the loss amounts are reasonably measurable. The estimated liabilities for these cases are $20.0 billion and $15.8 billion as of September 30, 2011, and 2010, respectively, and are included in “Other Liabilities” on the Balance Sheet. DOE is subject to Spent Nuclear Fuel litigation for damages suffered by all utilities as a result of the delay in beginning disposal of spent nuclear fuel and also damages for alleged exposures to radioactive and/or toxic substances. Significant claims for partial breach of contract and a large number of class action and/or multiple plaintiff tort suits have been filed with estimated liability amounts of $19.1 billion and $15.5 billion as of September 30, 2011, and 2010, respectively. However, DOE reported that several developments have made it difficult to predict the amount of the Government’s likely liability, which at this time is undetermined.

Other Contingencies

DOT and HHS reported the following other contingencies:

Treaties

The U.S. Government is a party to major treaties and other international agreements. These treaties and other international agreements address various issues including, but not limited to, trade, commerce, security, and arms that may involve financial obligations or give rise to possible exposure to losses. A comprehensive analysis to determine any such financial obligations or possible exposure to loss and their related effect on the consolidated financial statements of the U.S. Government has not yet been performed.

Footnotes

1 In addition, a third condition must be met to be a loss contingency: a past event or an exchange transaction must occur. (Back to Content)

2 For loss contingencies related to litigation, probable is defined as the future confirming event or events are more likely than not to occur, with the exception of pending or threatened litigation and unasserted claims. For the pending or threatened litigation and unasserted claims, the future confirming event or events are likely to occur. (Back to Content)


Last Updated:  February 16, 2012