Sept. 10 (Bloomberg) -- Warren Buffett's Berkshire Hathaway Inc. plans to stop insuring lenders through its Kansas Bankers Surety Cos. as U.S. banks fail at the fastest pace in 14 years.

The unit will no longer insure accounts beyond the Federal Deposit Insurance Corp.'s $100,000 limit per depositor and $250,000 limit on some retirement accounts, said Chuck Towle, a senior vice president at Kansas Bankers. The company will exit the business entirely over time, Towle said.

``Eventually, we aren't going to be covering any deposits in banks,'' Towle said in an interview today.

The move reduces Omaha, Nebraska-based Berkshire's risk from bank failures and will affect customers in 38 states. Eleven U.S. lenders have been seized by state and national regulators this year as mortgage markets collapsed. The FDIC counted 117 banks as ``problem'' lenders in the second quarter. The agency typically doesn't say which companies are on its list.

Towle said there was no set period for phasing out the business and wouldn't comment on existing relationships with banks. The Wall Street Journal reported earlier today that the unit was scaling back, saying the order came from Buffett.

Towle declined to comment on Buffett. Jackie Wilson, a spokeswoman for Buffett, declined to comment.

The move may signal that Buffett expects further banking losses after saying in June that he believes the U.S. is experiencing ``stagflation,'' a slowing economy with rising inflation.

`Loss Probabilities'

Buffett, whose Berkshire gets about half its business from insurance operations, said in last year's letter to shareholders that while he is willing to risk a $6 billion payment on a single storm, he won't ``take on even very small exposure at prices that don't reflect our evaluation of loss probabilities.''

Kansas Bankers has 18 employees, making it the second- smallest of Berkshire's operating companies, according to the company's annual report. The business earned $10.9 million last year on policy sales of $19.5 million, according to Oldwick, New Jersey-based ratings firm A.M. Best Co. Berkshire posted net income of $13.2 billion in 2007.

The unit also covers bank executives against lawsuits and protects lenders from losses when customers write bad checks, according to the Web site of the Independent Community Bankers of America. The insurer's biggest markets are Kansas, Missouri, Nebraska and Oklahoma, which account for more than half its business, A.M. Best said.

Berkshire acquired the insurer in 1996 to add coverage of community banks in the Midwest. The deal was valued at about $75 million when it was announced.

Bank Holdings

Banks may use the coverage to assure depositors their money is safe. The insurance isn't required by regulators, said FDIC spokesman David Barr.

``We see this as an opportunity to make sure we're rounding out our customer base,'' said Rod Sargent, chief executive officer of Oklahoma City-based BancInsure Inc., a competitor of Kansas Bankers. The insurer posted full-year 2007 net income of $2.57 million and policy sales of $47.4 million, according to data compiled by A.M. Best.

Sargent said ``almost all banks'' have the coverage and that ``it's essential to banks to have access to some form of excess deposit insurance.''

Berkshire's shares had their worst first half since 1990 and are down 16 percent this year. The company declined $1,000 to $117,000 at 4 p.m. in New York Stock Exchange composite trading. Berkshire has posted three consecutive profit declines on slumping returns from insurance.

IndyMac, Integrity

This year's biggest failure, Pasadena, California-based IndyMac Bancorp Inc., had about $1 billion in ``potentially uninsured'' deposits at the time of its takeover by regulators. The collapse contributed to a 14 percent decline in the U.S. deposit insurance fund that had $45.2 billion at the end of the second quarter.

Deposits over the FDIC limit aren't always a liability. When Integrity Bank in Alpharetta, Georgia, failed, Regions Financial Corp. bought its $974 million in deposits at a price that ``fully covered'' uninsured depositors, the FDIC said.

To contact the reporters on this story: Linda Shen in New York at lshen21@bloomberg.net; Erik Holm in New York at eholm2@bloomberg.net.

Last Updated: September 10, 2008 16:27 EDT