Actuaries Targeted More Frequently In Malpractice Lawsuits

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Actuaries, who for years had a low profile that avoided the kind of malpractice actions routinely bombarding accountants, are now increasingly bigger targets for such lawsuits, according to attorneys and others familiar with the industry.

“They were below the radar screen for years,” says Joseph P. Dailey, a New York-based attorney specializing in actuarial malpractice issues.

Dailey and his partner, Loren F. Selznick, are the authors of “Navigating The Litigation Minefield: A Guide To Actuarial Malpractice Claims.”

By their calculations, as of July, more than 50 suits had been filed against actuaries, with over 70% coming in the past 10 years. This number, Dailey says, reflects only those with recorded decisions, and there are undoubtedly many more that never reach that stage. “Most of them are settled before theres a final resolution,” which makes it difficult to gauge the success rate of such actions, he says.

A quick settlement would probably be the result in cases where actuarial negligence stemmed from an obvious typographical error, Dailey suggests, adding that there were a relatively small number of cases in that category.

Recounting the history behind the increase in lawsuits, Dailey notes that “people had been going after accountants for at least 100 years, but actuaries escaped until the mid-70s–and the ironic part is they popped up because of rules and regulations the professional societies strongly pushed for.”

In his legal study, he says the lawsuits began hitting life and health actuaries in 1975, after the Employee Retirement Income Security Act required their clients to file annual statements of actuarial opinion.

In September, a National Association of Insurance Commissioners task force took up the idea of imposing limits on the indemnification of actuaries against malfeasance, but the issue has been put on the back burner since actuaries strongly objected.

In the 50 actions he examined, according to his and Selznicks breakdown, 34 were filed by actuary clients; 19 of the 34 were brought against pension actuaries by corporate sponsors, pension plans or liquidators.

Five actions were brought against life and health actuaries by client companies and liquidators.

Factors that have resulted in suits, according to his study, are reserve deficiencies, underfunded pension plans, and insurance company insolvencies.

The last cause led to an action that made headlines several weeks ago when the Pennsylvania Insurance Department sued the auditor Deloitte & Touche and its actuary, Jan A. Lommele, for misconduct related to the failure of Reliance Insurance, a Philadelphia-based property-casualty insurer.

Dailey says the vast majority of the cases are against consulting actuaries because “they are similar to large independent accounting firms and they have deep pockets.”

If a company gets into difficulties, he notes, “experience teaches us there are likely to be lawsuits and professionals of any ilk are liable to be brought into the fray.”

With actuaries, Dailey says, the suits will have “nothing whatsoever to do with their conduct.”

Daileys guide cautions actuaries that in their reports they should avoid using words such as “best” or “most reasonable,” unless such descriptions are backed by a statistical analysis.

Looking at the state laws affecting actuaries, Dailey says New York provides them with the greatest protection against liability while Wisconsin, Mississippi and New Jersey are the loosest.

Dailey says actuaries can seek to limit liability by setting contract provisions with clients that limit the amount of recovery that can be sought. “But the problem is, in many instances, the person suing is a third party not bound by contract,” he notes.

However, actuaries can require clients to indemnify them against defending against a third party, he notes.

At Milliman USA in Seattle, Wash., Chief Risk Officer Lynn Peabody said one result of the fallout from “a very litigious society” is that indemnification and hold-harmless agreements are much more prevalent for all kinds of actuarial assignments.

She says at Milliman they have observed more and more lawsuits in recent years, “but weve been luckier than some of our competitors.”

Nevertheless, in order to protect itself, the firm “is enhancing [its] client screening processes andpeer review processes to help manage the risk,” Peabody says.

Additionally, she says, the company is “trying to institute contractual provisions as well, not just to limit liability, but to manage the overall litigation risk.”

Discussing the causes of lawsuits, Peabody noted that, for actuaries, “making projections related to future events and using historical analysis creates situations where five or 10 years down the line theres a good likelihood [that] the assumptions were using are not right.”

Anytime there are unanticipated negative results, “theres a likelihood someone will be upset over that,” she added.

According to David Westberg, a consultant for Towers-Perrin in Toronto, who recently gave a presentation on the actuarial malpractice issue, the result of all the legal action is that actuaries can expect premiums to rise.

He says errors and omissions insurance rates for accountants typically are about 10% of their average revenue, while actuaries have been spending one percent or less.

That figure will change now that some insurers are backing away from providing such coverage, he said, noting that all it takes is “some large claims payouts to make premiums totally inadequate.”

is an associate editor of NUs Property & Casualty/Risk & Benefits Management edition.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 18, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.