Insurance Actuaries Targeted In Suits

Once flying beneath the radar, actuaries are now in plain view of plaintiffs' attorneys

With the rising tide of litigation in the United States, actuaries are increasingly finding themselves alongside company managers and accountants as defendants in lawsuits.

Although actuaries are finding themselves in courtrooms more often, Lauren Bloom, general counsel for the American Academy of Actuaries, noted that everyone else seems to be as well.

"I think it's fair to point out that litigation is increasing among most professions," she said. "Society has found a way to settle problems in court and so more people are getting sued in general."

Ms. Bloom said the Academy has seen an "uptick in litigation" against actuaries, but the size of the problem can be deceiving given the number actuaries out there, she says. There are roughly 17,000 actuaries in the United States, with a sizeable portion operating either within companies or in academia. So, "while the number of lawsuits is still very small," the increase in cases has been dramatic, she said.

There is no disputing that the number of lawsuits filed against actuaries and actuarial firms has risen in recent years, and there is little dispute as to the cause for that increase. "I think the plaintiffs' bar is more aware of actuaries," Ms. Bloom said.

Frederick W. Kilbourne, a co-founder of the Kilbourne Company in California and the incoming president of the Conference of Consulting Actuaries, noted that actuarial liability "certainly seems to be a growth area for attorneys" as they look for defendants to file suit against. "We've been discovered by the plaintiffs' bar."

Actuaries "were able to fly under the radar screen for many years," according to Joseph Dailey, an attorney at the firm of Dailey and Selznick in New York, with accountants instead being the main target for lawsuits.

Now though, "actuaries have become a target equally with accountants when something goes wrong," said Charles Bryan, a casualty actuary, who is president of C.A.B. Consulting, LLC.

Attorneys are increasingly looking beyond the front lines of a company when filing suit, according to Ms. Bloom, who noted the reason more suits are being filed against actuaries could be that "most of the low-hanging fruit has already been picked."

Typically, lawsuits against actuaries are filed when a company has become insolvent and placed into receivership, or is liquidated outright. In these situations, Ms. Bloom explained, it has become common practice for those in charge of the process to cast a wide net in seeking funds.

"It's become the perception that when a company fails, the receiver's job is to get revenue from any possible source," she said. "They sue every service provider" involved with a company, meaning their accountants and other consultants, a group which typically includes actuaries.

A large number of the suits filed against actuaries have been filed against those acting as pension consultants, she said, adding that consultants, in general, "are more likely to be sued" than other types of actuaries (such as those working at insurance companies or in universities).

Mr. Bryan noted that going after actuaries as part of the liquidation process is a relatively new development, saying that "four or five years ago, liquidators weren't thinking about actuaries."

Part of the reason actuaries have become targets of litigation may be because of regulatory requirements that gave them increased importance to insurance companies, requiring companies to obtain actuarially certified statements.

Mr. Dailey noted that pension actuaries have been facing litigation since the enactment of the Employee Retirement Investment Security Act, and that life- health actuaries have faced these problems since certification requirements were established for those companies during the 1970s. The National Association of Insurance Commissioners established similar certification requirements for property-casualty insurers in 1990.

These actions, Mr. Dailey noted, were supported by the actuarial community, which "thought this was a great idea, because it created a lot of work for their clients."

"The flipside of the coin was greater exposure" to lawsuits, however, he added.

Making the landscape increasingly difficult for actuaries are the stakes involved in their work. "The scope of potential liability is huge," Mr. Dailey noted. "These are large items on a balance sheet" to which actuaries certify.

Also complicating the issue is the difficulty and uncertain nature of actuarial work.

In working on loss reserve estimates, Mr. Dailey noted, actuaries are trying to determine the full costs of an insurance policy, which may not be actually known until decades after it is written. This work is especially difficult for general liability policies, where unknown and unpredictable factors can drastically affect an insurer's exposure.

As an example, Mr. Dailey noted instances in which "very aggressive courts" threw out insurers' exclusions for certain types of damages. "How is an actuary supposed to account for that type of decision?" he asked.

The arcane and complex nature of actuarial work also makes it difficult for actuaries to defend themselves in court.

Mr. Kilbourne noted that the complexities of actuarial work are a "built-in problem" for actuaries in court, making it easier for attorneys to confuse defendants.

Also, the predictive aspect of the work is not often understood by the average person, he said.

"Since we deal with the future, everything is an estimation," he said. "The man in the street tends to overlook that."

As a result, adequate insurance coverage is becoming harder to obtain. Ms. Bloom noted anecdotal evidence that coverage is "more difficult to get than it used to be," and that some insurance companies have stopped writing coverage for actuaries.

Mr. Bryan noted that the larger actuarial firms have taken matters into their own hands and formed a shared risk pool, meaning the brunt of the problem is being borne by actuaries operating in small firms or individually.

"It's almost impossible to get liability insurance for more than $5 million in coverage, which is really not that much" given the sums actuaries work with, Mr. Bryan said. As a result, he explained that most individual or small-firm actuaries have only the $5 million worth of coverage, or operate without coverage when they realize that the $5 million won't provide any significant protection.

Another strategy being employed by individual actuaries, according to Mr. Bryan, is to establish themselves as a limited liability corporation, and thus provide some insulation between their liabilities and their personal assets. So far, however, he noted that it hasn't been determined that this concept will actually succeed.

Overall, efforts to help actuaries reduce exposure to liability lawsuits are taking place on two main fronts. On the legislative side, Mr. Bryan said efforts are underway to obtain for actuaries the same type of safe harbor provisions enjoyed by accountants under the Private Securities Litigation Reform Act of 1995, which state clearly the uncertain nature of future statements.

Actuaries "don't have that kind of protection today," he said, but will be making "significant efforts" over the next few years to obtain them.

Elsewhere, actuarial trade associations are making efforts to ensure that members understand their liabilities and know the practices that will help them avoid those risks. These practices may not necessarily help actuaries avoid facing litigation, Mr. Dailey noted. But they could help provide a strong defense against allegations of negligence or misconduct.

"There's little you can do to avoid a lawsuit, he said. "But there's a lot you can do to affect the outcome of a lawsuit."

In the long run, however, Ms. Bloom said that actuaries will have to learn to accept the increased likelihood of litigation. Even with litigation risks "not even approaching the level of malpractice risk of other professionals," she said, lawsuits have just become too ingrained as a part of the business world.

"It's just part of practicing as a professional in the United States," she said.

Art caption Someone with calculator and/or pocket protector and/or spreadsheets on witness stand--someone at a desk pouring over numbers:

Actuaries are now being dragged into court alongside accountants and company managers, where they face the difficult challenges of explaining complex work and uncertain predictions.

Pullquote no photo:

"The scope of potential liability is huge" for actuaries, according to legal expert Joseph Dailey, who explained that actuaries became targets when regulatory requirements authorized them to certify to the reasonableness of large and uncertain balance sheet items.

"It's almost impossible to get liability insurance for more than $5 million in coverage, which is really not that much" given the sums actuaries work with.

Charles Bryan, President, C.A.B. Consulting, LLC.