Professionalism: A Legal Perspective

Lauren M. BloomGeneral Counsel

American Academy of Actuaries

Litigation against actuaries is increasing for

several reasons: Actuaries are doing more; The weak economy has highlighted

reserve shortfalls; American society is increasingly

litigious; The plaintiffs’ bar has found the

actuarial profession.

Claims against actuaries are usually for malpractice:

Failing to follow generally accepted practice; thereby

Injuring a plaintiff to whom the actuary has a legally-recognized duty;

Causing the injury in fact and law; and Generating compensable damages.

Various defenses are available (e.g., plaintiff’s contributory negligence), but do not eliminate liability if the elements of malpractice are present.

The more professional assignments an actuary undertakes, the greater his or her malpractice risk.

Professional standards (the Code, ASOPs and Qualification Standards) are strong evidence of generally accepted practice.

Failure to comply with the Code, Qualification

Standards and ASOPs may be considered malpractice.

To comply: Identify and read all applicable

professional standards; Conform work to the standards or

deviate and be prepared to explain; and

Document, document, document.

Which standards apply? The Code and Qualification

Standards apply to all professional services rendered in U.S.

The Code can also apply to practice abroad -- see draft white paper on international practice.

Which ASOPs apply? The ASB’s ASOPs apply to U.S.-

based practice. Not all ASOPs apply to each

assignment. Use the Academy’s Applicability

Guidelines as a starting point.

Applicable ASOPs include:

ASOP No. 21 (recently revised) ASOP No. 23 (recently revised) ASOP No. 41 ASOPs relevant to the task at hand

(e.g., ASOP 9, 36)

Communications can be particularly important in mitigating litigation risk – poor communications can

be seriously misconstrued.

Keep the ASOPs close at hand when working, and

follow recommended processes.

If you deviate: Describe the nature, rationale and

effect of the deviation in an appropriate actuarial communication; and

Be prepared to defend it. Deviations can cause special

problems in litigation.

Documentation can be critical to successful malpractice defense.

Documentation should (usually) include:

A description of what was done and why; Sufficiently detailed work papers for

another qualified actuary to review the work for reasonableness;

A record of what the principal was told and when;

Proof that open questions were asked and answered.

Documentation should (usually) not include:

Rough drafts of finished documents; “Back of the envelope” calculations; Evidence that outstanding questions

were never asked or answered.

Documentation: Can be maintained as part of an

ongoing document retention policy - do not destroy evidence!

Will be reviewed with the benefit of hindsight.

Helps you if it shows you complied with applicable law and standards.

In litigation, standards help defendants who complied, but can hurt defendants

who didn’t.

The absence of published standards does not prevent

litigation.

The profession can mitigate its litigation risk through active participation in the standard-setting process.

Actuaries can mitigate their risk of liability through:

E&O Insurance Establishment of appropriate

business relationships Recognition and adjustment for

high-risk assignments Quality assurance

Establishing appropriate business relationships

Use of engagement letters and contracts: Arbitration clauses/waiver of jury trial Third party indemnification Limitation on use/ distribution of work product Limitations on liability Ownership of intellectual capital Billing and payment terms What happens when the relationship ends?

Principal signoff on key assumptions, methods and conclusions

Maintaining records of communications

Recognition and adjustment for high-risk assignments Identify high-risk circumstances Consider how to address:

Additional review Reliance on other professionals Appropriate disclosures in work

product:• Intended audience and use(s)• Limitations on distribution• “Caveat emptor”

Quality Assurance Confirm scope of assignment:

client approval of assumptions; documentation of client instructions and

decisions regarding work. Checking requirements:

work gets checked after it is done. “Peer Review” requirements:

work and/or processes are reviewed by another practitioner with appropriate skill;

Academy white paper on Peer Review.

Government Oversight U.S. government has several

ongoing investigations; U.K. government is separately

investigating the U.K. profession; The international financial

community is watching with particular interest.

Morris Review Began with single company’s failure

to pay as promised on annuities; Expanded to review of entire

profession, in U.K. and worldwide; Has shifted focus to U.K. problems

with retirement savings – not dissimilar to U.S. situation.

The U.K. is likely to see: Increased outside oversight of

profession; New standards prepared with lay

involvement; A lay-lead discipline process. Is this what would serve the U.S.

profession best?

U.S. leadership is considering:

Stricter continuing education requirements

Enhanced independence for ASB and ABCD, with possible lay involvement

Encouraging, or even lobbying for regulatory requirement of, peer review

The profession can help by avoiding the conduct that

set off the Morris Review in the U.K. and the Arthur Anderson inquiry here.

Enron and related cases have triggered:

Adverse media attention for the accounting profession

Shareholder anxiety Immediate and strong Congressional

action Lessened respect for professions

Actuaries can expect: More questions from auditors and

management Ethical requirements in addition to

the Code Additional documentation

requirements (Maybe) more pressure to keep

reserves low

Actuaries will need to: Comply with applicable ASOPs Document work products and retain

the documentation as required by law

Be prepared to respond to questions

Anticipate uncertainty until the new rules are sorted out

Sources of Support Your corporate counsel and standards

compliance officer; ABCD; Academy:

Committee on Qualifications; Practice Notes and Applicability Guidelines; Discussion papers; Legal Department; Seminars.

Questions?