Life Insurers Getting More Creative

Life Insurance companies are getting more creative in the products they offer. One example is a life insurance product that offers a long term care rider. If you purchase this type of policy and rider, then if you need long term care the death benefit is available during your life to pay for long term care. You are literaly buying one policy that covers two contingencies.

Another new product is a policy that gives you a break in rates even if you are a smoker. But the rate lasts only three years. If you don't cease smoking by the third year, your life insurance premiums jump.

Also, don't forget that the estate tax rates go to zero next year, but jump back to the old rates the following year. It is time to visit your estate planning professional and life insurance agent to start examining your options.

HealthCare -- I

America's healthcare system is neither healthy, caring, nor a system. --Walter Cronkite

It is time to begin the dialogue. The next few weeks we will begin a discussion of what we think Congress will do, what really needs to happen, and how we must demand from the Congressional leadership real reform not "sausage."

Let me hear from you.

Ignoring Risk Management is Risky.

Corporate fraud, data theft, financial reporting risk-and a host of others-can cost organizations dearly, says Ernst & Young in a new survey. That's why it's so important for today's businesses to get their risk management strategies right. Doing so protects organizations' valuable assets, and can also create a competitive advantage.
"This financial crisis has taught us that unidentified risk can lead to catastrophe," says Ernst & Young Partner Tanya Khan. "Clearly, leadership in Canada and around the world must refocus and intensify their efforts to ensure effective risk management is tied directly to business priorities."
In The future of risk: Protecting and enabling performance, Ernst & Young finds 96% of organizations believe they can improve risk management, while nearly half say committing additional resources to risk management could actually drive a competitive edge.
Despite the tangible negative effects of neglecting this area, not everyone plans to spend now. Sixty-one percent say they won't commit more resources to risk management over the next 12 to 24 months. Instead, companies are focused on doing more with the same or less resources and budget.
The survey further finds coverage and focus of multiple risks functions has become increasingly difficult to manage and is compounded by a lack of alignment. Fifty percent of respondents say they have gaps in coverage.
"Departments tend to assess how risk affects them, not the entire organization," Khan explains. "Risk management needs to move out of its silo, and reach across an entire organization if it's going to work well. Companies need to ask: Do our efforts allow us to understand what big-picture risks might emerge 12 months from now?"
Khan adds that there can be an upside to risk. "New opportunities will emerge, even now, and companies must ask themselves how they can seize them. This is the perfect chance to make sure your business has a handle on risk management before something goes wrong."

A few questions to consider for balancing risk, cost and value:
1. Do we understand the risks that our company faces?
2. Do we have a comprehensive risk framework in place?
3. Do we have duplicative or overlapping risk functions?
4. Are the risks we take aligned to our business strategies and
objectives?
5. Are we taking the right risks to achieve competitive advantage?

ERISA Basics

This article begins a series concerning Fiduciary Responsibility under the Employee Retirement Income Security Act (ERISA). Few fiduciaries understand their duties, the liabilities associated with their responsibility, or whether they are even fiduciaries. This first article provides an overview of fiduciary responsibility under ERISA and some basic practices fiduciaries must take to exercise their duties.

Basics of Fiduciary Responsibility under ERISA

The role of a fiduciary is paramount underthe Employee Retirement Security Act.[1] ERISA provides protections for participants and beneficiaries and specifies fiduciary standards of conduct. Yet many who serve as fiduciaries are unaware of their legal obligations. There is also a misunderstanding about the extent of fiduciary responsibility service providers have under ERISA.

The operation of a retirement plan requires many participants. Some are clearly identified as Fiduciaries, others actions make them fiduciaries, while a third group acts under the direction or control of a fiduciary. ERISA defines a fiduciary[2] to the extent an individual
Exercises discretionary authority or control respecting management of a plan or disposition of its assets.
Renders investment advise or has authority or responsibility to do so, or
Has discretionary authority or responsibility in the administration of the plan.

A fiduciary has four primary duties[3] which must be carried out to discharge those duties solely in the interest of the beneficiaries and participants interest.

Duty of exclusive purpose
Duty of prudence
Duty to diversify
Duty to follow plan documents.

Failure to follow these duties may expose a fiduciary to personal liability to restore losses or profits. Willful violation also exposes fiduciaries to criminal penalties.

ERISA specifies five prohibited transactions[4] that a plan may not engage in with a party in interest. They include:

A sale of property between a party in interest and the plan.
Lending money between a party in interest and the plan.
Furnishing goods or services between the plan and a party in interest.
Transfer or use of plan assets by a party of interest.
Acquiring employer securities or real property in violation of ERISA.

A fiduciary may not:

Deal with plan assets in its own account or own interest.
Act in a transaction where the fiduciaries’ interest are adverse to the plan or its beneficiaries.
Individually receive anything of value from someone dealing with the plan.

There are basically two types of fiduciaries. The first is someone named in the plan document who has responsibility for managing the plan’s assets. The other are fiduciaries by reason of his/her actions becomes a fiduciary . Named fiduciaries include:

Plan administrator
Plan Trustee

If the plan so provides any person may serve as both Plan administrator and Plan trustee.

Plan documents usually control a Plan’s administrator in this regard. However, delegating responsibility is considered a fiduciary action. The appointing fiduciary has the obligation to prudently select and monitor the performance of its appointees. Thus when a plan manager appoints an investment manager the other fiduciaries are relieved of this responsibility and, as long as the appointing fiduciary is prudently selected and monitored there is a real transfer of risk of the investment decision responsibility.

An individual or entity can also become a fiduciary by filling a void. For example, a plan sponsor’s chief financial officer may begin to make investment decisions for the ERISA plan for lack of action by the Plan administrator or expedience. By so doing the CFO becomes a fiduciary without realizing the consequences. Such a sequence of events can lead to further exposure if the CFO discovers an act of self dealing between the employer and the plan. The CFO must remember that his/her duties to the plan are paramount.

ERISA specifies three circumstances[5] that give rise to liability for a fiduciary.

A fiduciary knowingly undertakes to conceal, an act or omission of another fiduciary, knowing that such act is a breach
A fiduciary in performing its responsibilities has enabled another fiduciary to commit a breach
The fiduciary has knowledge of another fiduciaries breach and does not make reasonable efforts to remedy the breach.

A service provider can be considered a fiduciary by virtue of rendering investment advice for a fee. While some acknowledge this responsibility as a co-fiduciary this approach does not transfer liability as previously discussed. The provider may later claim advisory capacity without discretion. Thus the importance of getting a service provider’s duties and responsibilities in writing. An investment consultant must acknowledge fiduciary status so they are bound by the duties of prudence, diversification, and adherence to plan documents.

Documentation is the cornerstone of demonstrating sound fiduciary governance and prudent decision making. The first step is to formally identify all plan fiduciaries and each fiduciary’s responsibility to the plan. Second all fiduciaries should meet on a regular basis. Thirdly, no fiduciary should perform multiple functions for a plan; the opportunity for conflict of interest is just too great. Finally, all documents and paperwork that relate to the plan or the decision-making process should be organized and accessible.

Conclusion

Litigation for fiduciary breaches under ERISA is growing exponentially. The burden of proof in such cases lies with the plan fiduciaries. Liability is not necessarily determined by investment performance, but on whether prudent investment practices were followed.

The most effective strategy for achieving the “exclusive purpose” of providing benefits for plan participants is to establish and follow documented procedures that demonstrate a prudent process. Such an approach will provide greater clarity into plan composition and performance, enabling fiduciaries to make better decisions and help their plan participants retire with meaningful benefits.

[1] Brussian v. RJR Nabisco
[2] ERISA Para. 3(21) (A).
[3] ERISA Para. 404(a)(1).
[4] ERISA Para. 406(a)(1).
[5] ERISA Para. 405(a).

Off the Beaten Path

Major League baseball will not let Pete Rose in Cooperstown. We condemn athletes when they bet legally on other sports in Vegas. Professional athletes are encouraged to help in the community. So what do my wonderous eyes see on TV? The Washington Redskins partnering with statewide lotteries to sell lottery tickets with the prizes being Redskins tickets, Super Bowl trips,etc.

That is right the Washington Redskins are endorsing gambling, and taxing the poorest of the poor. They are making money on the very activities that ban ballplayers from career long accolades and cause them to be pariahs in their communities. I do not know if other teams engage in this ultimate of hypocrisy. Let's hope they don't. But when this Nation's Capital sports franchise openly endorses gambling and taxing the poor, it must be condemned and treated as its ballplayers.

We should tell its owner you have lost your tax exemptions, your right to participate in the championship, and you must forfeit your ownership. Perhaps then will the NFL begin to have the social conscience it demands from its players.

Medicare,Medicaid, and SCHIP Extension Act of 2007 (the "Act").

The Act requires Responsible Reporting Entities ("RREs") to report to the Centers for Medicare and Medicaid Services ("CMS") any partial payment, settlement, judgment or award made to a Medicare beneficiary. The Act, which was originally scheduled to go into effect on October 1, 2009, has been delayed by CMS until April 1, 2010.

RREs include liability insurers, no-fault insurers, workers compensation insurers and self-insureds. Hence, insurance companies are responsible for reporting under the Act for many of their insureds. If your customers must register because they fall into one of these two categories, they may designate a reporting agent. If, on the other hand, your customer has a deductible policy or a TPA with which the insurance company has contracted, makes all payments to the claimants on behalf of the customer, then they must register as the RRE and designate the TPA as the reporting agent. Instructions and additional information regarding the Act and registration can be found at http://www.cms.hhs.gov/MandatoryInsRep.

The information provided should not be relied upon on as legal advice or a definitive statement of the law of any jurisdiction. For such advice, the reader should consult with their own legal counsel. No liability is assumed by reason of the information contained herein.

Rolling The Dice in Uncertain Times?

Failing economy, layoffs, high unemployment have become a drumbeat these days. So how do companies react -- cut insurance costs by dropping or lowering limits on employment related paractices insurance? Wrong move.

Employees who are laid off or terminated have one outlet -- they were discriminated. Recent EEOC numbers confirm this trend.

• Discimination claims jumped 13%
• Age discrimination claims jumped 22.3%
• Retaliation claims jumped 18%

The cost:

• The average overall jury award is $252,000.
• The average settlement is $75,000.
• The employers cost of defense averages $120,000 per claim.
• If the employer loses add $200,000 the average cost for the employye's attorney.

So before you think about dropping EPL coverage or reducing your limits, think again.

Just to keep you from ignoring this advise ask your lawyer what Congress recently did regarding ADA and Fair Pay.

Will Wonders Never Cease?

Will Wonders Never Cease?

Pension Trustees are still turning a blind eye to their own personal exposure when they continue to hire consultants to perform other functions such as purchase bonds and fiduciary insurance for the funds and the Trustees. The most glaring conflict is when an actuarial firm charged with determining the financial soundness of the plans turns around and puts on another hat and becomes the agent for the insurance company. That actuary has a fiduciary duty to the plan, but also has a fiduciary duty to the insurance company and is paid by both. No one can serve two masters but many consultants sell their multiple services to a plan offering a shopping cart of services. They ignore the very essence of a fiduciary's duty – to work in the best interest of the plan instead they line their pockets in as many ways as possible.

As a plan trustee don’t fall into this trap. The consultants may be wonderful people, take you out to dinner, or play a great round of golf, but at some point if your plan is in trouble it is your personal assets that are at risk and you do not want an attorney sitting across the table asking you, “Why didn’t you engage a consultant to do so many things, where is the diversification of the services you were provided?” In other words why didn’t you have checks and balances in the advice you were being given.

Also, be leery of actuarial firms who oppose fighting to oppose disclosure of fees regulations. For example, The Segal Company wrote the Department of Labor in 2008 that they reconsider their proposed rules for disclosure; eventhouhg their own letter acknowledged that there may be prohibitions for rebating that restrict their ability to discount insurance commissions, so they do sell insurance, but do not want to disclose what they are paid. So if they say they are not receiving commissions they may be violating the law, yet they don’t want to disclose this to the same people who they owe a fiduciary duty. I don’t want to single out Segal, but actuaries and other consultants have to be sensitive to this issue, not pretend it does not exist.

More importantly, as a plan trustee you have to be careful. Do not let “one stop shopping” entice you into personal bankruptcy, and your plan not providing the benefits it should be providing.

Connecticut AG Criticizes Bailout Money for Credit Rating Firms

Connecticut Attorney General Richard Blumenthal is questioning why up to $400 million in federal bailout money is going to the big three credit rating agencies that he says helped create the economic meltdown.
Blumenthal said Monday that he is investigating why a $1 trillion government bailout program designed to unfreeze the credit markets steers money to Moody's, Fitch and Standard & Poor's and shuts out their six smaller competitors.
He said the companies may have violated antitrust laws, and he alleged they overrated toxic assets before the meltdown.
"The net result here is that up to $400 million in fees will be showered on the same ratings agencies whose mistaken ratings and inflated ratings led to the economic crisis,'' Blumenthal said. "It is another reward for failure.''
Blumenthal said he subpoenaed the companies for documents last week and asked Federal Reserve Chairman Ben Bernanke in a letter sent Monday to revise the bailout program to stop favoring the three rating agencies.
The program, created by the Federal Reserve and the Treasury Department, is called the Term Asset-Backed Securities Loan Facility.
It provides loans to big investors and companies to buy newly issued securities backed by consumer debt, stimulating lending for auto, education, credit card and other loans.
The program starts by providing up to $200 billion in financing to investors, such as hedge funds, private equity funds and mutual funds, to buy up the debt. It has the potential to generate up to $1 trillion in lending.
Blumenthal said the program requires financial institutions to have new securities rated by two or more "major nationally recognized statistical rating agencies.'' He said Moody's, Fitch and Standard & Poor's are the only raters that meet the criteria.
Spokesmen for Fitch and Standard & Poor's said they were reviewing Blumenthal's comments and would provide responses later Monday. A message was left for Moody's.
A message was also left for a Federal Reserve spokesman.
Blumenthal's new actions expand his existing antitrust investigation of the three rating agencies. He sued the firms last July, alleging they gave artificially low credit ratings to cities and towns that ultimately cost taxpayers millions of dollars in unnecessary insurance and higher interest payments.
The three firms have denied those allegations and said the lawsuit is without merit.
Blumenthal said the three agencies have become an "old boys' club'' on Wall Street and their monopoly must be broken up.
"The Fed is strengthening and entrenching the stronghold held by the Big 3,'' he said.
Securities and Exchange Commission Chairman Mary Schapiro said last month that the SEC may need to ask Congress for broader authority to supervise the Wall Street credit-rating agencies. Schapiro has suggested the SEC should explore ways to diminish the market's dependence on ratings by the big agencies. The three firms dominate the $5 billion-a-year industry.
The SEC was given new authority over them in 2006 legislation, but Schapiro has said she isn't sure whether it's enough

Misidentification Creates Problems for Insureds, Agents, Attorneys

By Beth D. BradleyApril 8, 2009
Among the issues that plague coverage lawyers and insurance agents, and especially insureds, is that of a misnamed, unnamed or mischaracterized insured. All too often in insurance policies, corporations are designated as assumed names, partnerships as individuals in corporations, or the names simply do not match the insured.

The problem is compounded when there may be several related entities, all of which are insured or intended to be insured. A related problem exists when the addresses are wrong or the insured's business is not accurately described.

These issues are also problematic for agents. As the intermediary between insurer and insured, fingers may point at the agent from either direction if there is a mistake.

Even when the named insured is correctly named, the type of entity can determine coverage. Managers of a limited liability company are insured, executive officers and directors of the corporation are insured, and spouses of partners in a partnership or joint venture are insured. If an entity is not named, it may have no coverage whatsoever. Misstating the form of an entity, be it corporation, partnership or sole proprietorship, can also lead to disastrous consequences.
For example, the policy itself provides that no coverage is included for a partnership that is not named in the declarations. Accordingly, a partnership that is misnamed as a corporation or sole proprietorship may have no coverage. And, while coverage is afforded for directors or officers of the corporation, in their individual capacity, if the corporate status is not revealed, this same coverage may not exist.

Under the standard ISO general liability form, the policy provides limited coverage for newly acquired or formed organizations, but only for 90 days unless they become named insured. Even this coverage, however, does not extend to unnamed partnerships.

A twist on these issues is created by the complaint allegation rule. If there are entities that might otherwise be entitled to coverage, they may not be if the pleadings do not match the policy names or reveal the corporate relationship.

On a related note, failure to include the proper address or addresses for the insured may also impact coverage, especially where an endorsement limits coverage to designated premises or projects.

Similarly, failure to properly describe the operation may limit coverage, if there is an endorsement for designated operations, or may lead to a claim from the insurer, if an unknown operation, for which no premium was charged, leads to coverage.

Liability policies are not the only ones impacted. Ownership of autos is another area ripe for unintended consequences under commercial auto policies, where coverage may be determined by ownership of the auto. In Houston General Ins. Co. v. Owens, 653 S.W.2d 93 (Tex. App. - Amarillo 1983, writ ref'd, n.r.e.), Ralph Owens formed a trucking company, Ralph Owens Trucking Co. Inc. The corporation engaged in the trucking business, but the trucks were owned individually by Owens. As the individually owned trucks were traded for replacements, the replacements were acquired in the corporation's name.

Although Owens testified he requested that the agent procure coverage in the names of both the corporation and Owens, individually, the primary policy was issued in the names of both entities but the umbrella policy was issued in the name of Ralph Owens only. The insured prevailed at trial, proving he had requested the coverage and establishing that the agent was acting on behalf of the insurer, but the case then proceeded to appeal.

On appeal, the court reversed, finding that while coverage existed under the umbrella based on a provision stating that any insured in the underlying was also an insured, the insured had failed to prove that the settlement was actually an amount it became legally obligated to pay because of an accident.

The entire mess likely would have been avoided had the insured been properly named in the policy.

Bradley is a partner in the Dallas law firm of Tollefson Bradley Ball & Mitchel LLP.
Editor's Note: The above is edited from an article, "What's In a Name? Or: A Rose by Any Other Name Is Not an Insured," that appeared in the March 23, 2009, edition of Insurance Journal South Central.

Job Bias Charges Hit All Time High

The U.S. Equal Employment Opportunity Commission (EEOC) announced that workplace discrimination charge filings with the federal agency nationwide soared to an unprecedented level of 95,402 during Fiscal Year (FY) 2008, which ended Sept. 30. This level is a 15 percent increase from the previous fiscal year. The FY 2008 enforcement and litigation statistics, which include trend data, are available online at http://www.eeoc.gov/stats/enforcement.html.

“The EEOC has not seen an increase of this magnitude in charges filed for many years. While we do not know if it signifies a trend, it is clear that employment discrimination remains a persistent problem,” said the Commission’s Acting Chairman, Stuart J. Ishimaru. “The EEOC is committed to vigorously enforcing federal laws prohibiting employment discrimination and will continue to invest in programs such as its systemic litigation program to maximize its effectiveness.”

According to the FY 2008 data, all major categories of charge filings in the private sector (which includes charges filed against state and local governments) increased. Charges based on age and retaliation saw the largest annual increases, while allegations based on race, sex and retaliation continued as the most frequently filed charges. The surge in charge filings may be due to multiple factors, including economic conditions, increased diversity and demographic shifts in the labor force, employees’ greater awareness of the law, EEOC’s focus on systemic litigation, and changes to EEOC’s intake practices.

The FY 2008 data also show that the EEOC filed 290 lawsuits, resolved 339 lawsuits, and resolved 81,081 private sector charges. Through its combined enforcement, mediation and litigation programs, the EEOC recovered approximately $376 million in monetary relief for thousands of discrimination victims and obtained significant remedial relief from employers to promote inclusive and discrimination-free workplaces.

D&O Costs for Financials Skyrocket

CHICAGO, March 2 /PRNewswire-FirstCall/ -- Directors' and officers' liability insurance costs for the S&P Financials Sector increased 50 percent in the fourth quarter of 2008 compared to that of 2007 according to the Quarterly D&O Pricing Index released today by Aon Corporation's (NYSE: AOC) Financial Services Group.

Time to Call a Certified Risk Manager?

Today's degenerating business circumstances have forced companies to examine their risk management programs to identify the significant risks that were minimized or overlooked. The financial free fall brought attention to six primary risks: short-term investments, financial firms, business associates, insurance providers, emerging risks, and costs. Short-term investments were revealed to carry high liquidity risks. Financial institutions neglected to limit their exposures only to their capital, entered into agreements that placed credit lines in peril, and enacted policies that placed a concentrated portion of financial risk onto individual institutions. The collapse of Bear Stearns demonstrated why businesses must pay more attention to their business-partner-related exposures and monitor the financial health of affiliated institutions. The near-collapse of American International Group pushed companies to consider alternative means of limiting exposures, such as self-insurance and captives. Sixteen months ago, businesses paid less attention to emerging risks related to changing business conditions, overall economic conditions, and governmental policies. Finally, businesses failed to garner a return-on-investment in risk management spending by drafting policies that were reactive instead of proactive in nature.

Where Were All The Investment Evaluators and Actuaries?

At the height of the Watergate scandal, Judge Scirica was reported asking, "Where were all the lawyers?" Now as we are embroiled in a financial breakdown especially of the America's pension and retirement assets, someone should start asking, "where were those experts who evaluated pension funds about their investments and the actuaries? Bernie Madoff has become a household name, investment advisors are closing shop, and pension trustees are calling lawyers and notifying their fiduciary carriers. Yet the same old crowd is out there advising pension and health and welfare funds offering "one store shopping." "Buy fiduciary insurance from us when we wear one hat, let us evaluate your investment portfolio wearing another hat, and we will also be your actuary and give you assurances of your plan's stability with your insurance carrier and to your members with another hat," they advertise. They even tell the fiduciaries they can "save them a little money if we do it all." Try telling your spouse you have to move out of your home because you saved a few bucks for the Pension Fund you used to sit on their Board.

Reports of over $1 Million dollar losses involving Bernie Madoff are common place these days. Individuals, charities, and pension funds were enticed by someone selling them something that seemed to be "to good to be true." Plan fiduciaries should be looking at those multiple hat firms with the same skepticism as if Bernie Madoff came in their office today offering them a guaranteed return on their investment. We have written for years advising to be careful of "Cowboys wearing multiple hats" regardless of where they are headquartered. As a fiduciary whose personal assets are at risk, we recommend in this time of uncertainty employ a certified risk management expert to do an evaluation of your plan from top to bottom. Listen to them and heed their advise. You will sleep better and so will your plan participants.

Footnote: The author of this is employed by Creative Risk Management and The McLaughlin Company who are both proud to say we did not have one client invest with Madoff. This footnote is more disclosure and transparency then you will ever have received from "the cowboys above described."

Bad Timing?

401(k) plan sponsors, unable to persuade employees to enter into plans in the 1980s and 1990s, were finally seeing broad participation in 2008, just before the financial markets all but collapsed. Now, employers are in the unenviable position of defending workers' investment in high-return, risky assets. According to Greenwich Associates' new U.S. Defined Contribution (DC) Pension Plan Research Study, enrollment of eligible employees into corporate 401(k) plans was 79 percent in 2008, up several percentage points from 2006. More than four out of 10 large DC programs and almost 50 percent of smaller programs automatically enroll workers into corporate 401(k) plan unless they opt out. As businesses have begun adopting automatic enrollment, they have also been changing default investment options from conservative funds to target retirement date funds that frequently expose the funds' equity to more risk. Participants in these plans are hit particularly hard by recent economic failures, as many employees have a large chunk of their personal equity--and in some cases, their total retirement savings--bound up in a DC plan.

Investment Performance Leads to Claims

When investments don't perform well, clients get upset. Here are the professional liability insurance claim ramifications and how to guard against claims.

"The potential for investment-related claims in the current, de-leveraging economy will probably be highest for investments that have significant exposures to leveraged transactions such as real estate deals, hedge fund programs, and collateralized transactions," says Ric Rosario, CEO of CAMICO Mutual Insurance Co. (camico.com). "The more traditional direct exposures would include raw land developments, residential and commercial projects underway, which are always a little risky in the first place. Also, any activity or entity that pools invested funds in an unregulated environment is very problematic."

The current economy spurs some investors to blame the financial planner or investment advisor for having recommended an investment that ended up being disappointing, he adds. "It may be that the general partner or president of an investment entity was reassuring investors through newsletters that the investment was still performing when the investment was actually going south. The client may see the planner or advisor as the trusted professional who was responsible for exercising due diligence over the client's entire financial picture."

Tough Economy's Effects

"In the current economy, it will be very difficult for clients to make successful claims alleging that their investment advisor guided them into bad investments, as opposed to other, safer choices that might have been selected by a more prudent professional," says Michelle Duffett, executive VP for Insight Insurance Services (insightinsurance.com). "Virtually all investments have declined in value and all investment advisors are in the same situation to varying degrees. That said, we expect that claims will increase. Clients are more likely to sue in tough economic times," she adds.

Gary Sutherland, CEO of insurer NAPLIA (naplia.com), likewise believes that the current downturn won't produce "a significant amount" of additional claims against CPA investment professionals. "This obviously assumes that these advisors have advocated a conservative portfolio management strategy and have kept their clients fully informed of market developments," he adds. "There is the possibility of claims arising from the use of non-standard or alternative investments, because of the potential for consumers to allege that they were mislead or poorly informed about the risks involved in such investment vehicles. Additionally, we've encountered situations where claims have arisen because the advisor didn't update the original risk assessment worksheet and failed to reflect appropriate investment strategies or risk tolerance for current market conditions."

Investment fraud is always a problem that can cause claims, says Rosario, and it can encompass: 1) financial statement fraud; 2) fraud perpetrated though other forms of false information (e.g., e-mail, newsletters); and 3) Ponzi, pyramid, and other schemes like the recent headline scandals involving financier Bernard Madoff.

"It can strike in large dollar amounts and affect a variety of engagements such as reviews, audits, tax advice, and investment advice," Rosario adds. "The more time that a CPA has been associated with fraudulent activity before it is uncovered, the more likely the CPA will be perceived by juries to have 'validated' the fraud, unwittingly or not." Jury research, he adds, also shows that the public, including clients, perceive that the CPA's fundamental job is to advise clients of opportunities and warn them about risks.

"Also, looking at a situation in hindsight means that the history of it can be rewritten in a manner that benefits the client and portrays the CPA as having failed to warn the client," Rosario says, adding this can also happen in any financial statement services or even non-attest or consulting engagements.

Bill Thompson, president of CPA Mutual (cpamutual.com), says that so far investment performance-related claims are "no worse than other accountants' claims. Most of our members are sophisticated enough to obtain client agreements with their investment clients, in which the client assumes some responsibility for their investment selections," he says. "Most of their clients also realize that the CPA can't guarantee investment performance and that markets are cyclical. Our folks do a pretty good job educating their clients, and, for the most part, have investment-savvy clientele. A lot of our insureds are fee-for-service, too, so this helps mitigate losses as opposed to commissioned-based investment advisors."

Speaking for CNA (cna.com), assistant VPs Joseph Wolfe (risk control), Jeffrey Day (underwriting), and Melissa Thomas (claims) point out that most accountants don't have investment advisory practices. "Investment advisors will experience some claims to the extent they recommended investment in derivative securities or auction rate securities "which lost substantial value or could not be readily sold in the marketplace." The general dip in the markets, however, "is less likely to result in increased claims activity unless investment advisory clients are retired or close to retirement, and their portfolios incurred significant losses. Risks are elevated for trustees and accountants providing family office services based upon the fiduciary duties assumed in these roles," they say.

Duffett says she anticipates that claims will also arise against the CPA firms involved in the headline Madoff fraud. "Although this situation is extreme in the dollar amounts involved, this type of fraud isn't new," she points out. "When government regulations fail to keep investments safe from criminals, it's typical for investors to sue the directors, officers, lawyers, and accountants who reviewed the company's activities. Already investment advisors who didn't promote the Madoff funds are claiming to have been skeptical of the prospectus. Other experts are stating that the fraud should have been apparent, as the investor statements reflect option transactions beyond the total market activity for the day. With hindsight, clients will find a myriad of small cracks and hints to find fault with the accounting professionals that reviewed the criminal's work."

Typical Claims

Many of these claims allege that the accountant was negligent in referring the client to a specific investment advisor, and in many cases allege that while the accountant wasn't the primary investment advisor, they should have recognized that a particular investment wasn't suitable for that client and advised the client of that. Additionally, when an accountant mentions a particular investment opportunity to a client, the client generally will assume that this is equivalent to a recommendation.

One typical claims scenario, Rosario says, involves an older client who has a lot of funds to invest but does not want to be bothered with details. The client is successful in his or her own profession, is demanding, but has little patience for, or understanding of, financial concepts, rather just wanting the financial planner to handle all of the decisions. "The planner recommends a significant portfolio shift from fixed income to equity at a time when equity investments are doing well. The planner also recommends an investment advisor," Rosario says. "The client is so pleased with the returns first produced by the equity investments that they invests even more of the fixed income funds into equity. When the next economic downturn comes along, the client's portfolio loses over one-third of its value, and the client is extremely disappointed. The planner's engagement letter mentions investment risks, but it was never signed or acknowledged by the client, whose files only include the planner's recommendation to invest more aggressively. The client sues the planner, alleging that the planner had a total responsibility for his overall financial well-being and should have warned him of all the risks he had taken. A good risk management technique is to refer the client to more than one investment advisor, thus avoiding the appearance that the planner made the decision for the client."
Thompson likewise says he's seen several types of investment-related claims based on:

1. Allegations of "churning," or recommending allegedly inappropriate investments which generate commission income;
2. Allegations of lack of appropriate investment diversification;
3. Alleged failure to identify or follow (often perhaps more a failure to properly document than follow) a client's risk tolerance; and
4. Alleged confusion regarding how independent entities are affiliated and the services the client thinks they are providing.

A common cause of financial planning and investment management claims is the allegation of a conflict of interest, Duffett says, which "will arise from the referral fee or commission collected by the CPA firm for sending a client to a particular investment advisor. We've found these types of conflicts to be nearly impossible to defend. Once a CPA is paid in any form by an investment firm, 'independence' is a myth. A conflict of interest may also arise from directing the client into a private investment managed by another client, or in which the CPA has invested personally. Even with disclosures, clients and third parties have a tendency to disown knowledge of the conflict, deny their understanding of the conflict, or claim they were unduly persuaded by their professional accountant's involvement.

"It's difficult to be a competent CPA and an accomplished securities broker," Duffett adds. "The body of knowledge is simply too great. Many CPA firms have hired investment professionals to help bridge the knowledge gap. But compared to standard investment advisors, CPAs have more professional liability risk. It's common for professional liability claims against CPAs to include an allegation that the accountant's personal knowledge of the client's finances should have required the CPA to take additional precautions to protect the client's assets. A full-time securities broker on staff or in a wholly-owned subsidiary doesn't protect the CPA firm from claims that there was a need for the firm to analyze the client's ability to absorb risk and guide their investments."
Impact on Premiums?

While voicing no current plans to raise premiums, insurers hold out the right to bump up rates if claims from the down economy escalate. "A key factor is that the largest 'cost of goods' for an insurance company is claims and the related defense costs, which will usually be 70 to 80 cents on the premium dollar collected," Rosario points out. "If claims tick up significantly further than we have currently planned for, it's inevitable that carriers will have to raise rates. The wild card is the loss prevention activity that CPA firms have taken in advance of the recession. A CPA firm may not be able to stop clients from filing lawsuits to cover their own losses, but if the firms have taken the right actions, the overall severity (cost of claims) could be significantly reduced, taking some pressure off rates."

Adds Sutherland, "There's a move by the more forward-thinking firms to purchase separate coverage for financial planning to isolate the potential of claims from this area of activity from eroding coverage for the traditional practice areas. The trigger seems to be about 15 percent of revenue from PFP. The advantage over adding coverage by endorsement to an accountants' professional liability policy is the separate limit of coverage, and any claims won't adversely impact the core practice."

Encouraging Feedback During a Downturn

Advisors often let fear rather than client feedback take hold during uncertain markets, says Julie Littlechild, president of Advisor Impact, a New York-based consultancy to financial advisors and accountants. "Market downturns," she says, "are when advisors need to step up and identify opportunities that result from gathering feedback from clients. The recent downturn has created an environment in which many investors need and want more frequent and reassuring contact with their advisors." Pinpointing what is most important personally to clients often occurs only when times are tough, she claims, and "client feedback" means more than asking clients to rate satisfaction. It's also a chance to understand what's most important to them and the additional services they need.

Best Practice Tips

Insurers offer these tips in a troubled investment landscape:
* Monitor clients and make sure investment allocations are as agreed in the client file (Bill Thompson, CPA Mutual).
* Don't make unusual offers or "sell away" from your broker/dealer's standard menu of investments. No private offerings or derivatives, for instance (Thompson).
* Obtain signed engagement letters yearly for all financial planning and investment advisory engagements. These letters should clearly define the timing and scope of services and client responsibilities, and include loss-limitation and alternative-dispute resolution clauses and disclaimers regarding investment performance and the volatility of market conditions (Joseph Wolfe, Jeffrey Day, and Melissa Thomas, CNA).
* Document all client conversations, even "casual" inquiries that may come up in social contact with clients. Respond to ad hoc requests for financial planning or investment advice by recommending that the client or prospect contact your office to set up an in-office consultation (Wolfe, Day, Thomas).
* Document who's authorized to provide instruction to you on behalf of the client. If you don't have discretionary authority over the investment of client funds but transmit instructions to others on the client's behalf concerning investments, create a form the client is required to complete and convey to you containing their instructions and approval to request the completion of the transaction. Conveying investment instructions to others on behalf of clients creates a fiduciary duty to the client (Wolfe, Day, Thomas).
* Accountants who perform administrative services for employer-sponsored benefit plans should avoid providing investment advice to plan participants (Wolfe, Day, Thomas).
* Regarding state and federal licensing rules applicable to investment advisory services, consider situations wherein services may be rendered in jurisdictions other than where your firm is domiciled, and research applicable state securities laws (Wolfe, Day, Thomas).
* Background, credit, and reference checks should be obtained before accepting any significant engagements. Risk factors can be determined in interviews or by checking with the client's prior accountant. If the CPA doesn't perform due diligence work regarding the investments, he or she should determine who's taking responsibility for performing the work (Ric Rosario, CAMICO).
* Meet with clients quarterly to make sure they understand new developments impacting their financial and investment plans. Periodic re-balancing of asset allocation also can be conducted. Update the documents to reflect changes and obtain client signatures (Rosario).
* Insist that any professionals involved in related financial planning functions have errors and omissions insurance to help insure the client against losses and help protect you from claims directly related to their work. Some accountants' professional liability policies don't provide coverage if a commission is involved, so additional coverage may be needed. When dealing with a high-value trust, consider higher limits. In any event, ask for coverage clarification in writing from your carrier to avoid misunderstandings (Rosario).
* Don't provide referrals to relatives, to financial advisors with whom you have personal investments, or from one client to another. Refer at least three fully independent options to your client and document that you aren't recommending any one of them specifically. Never accept any type of remuneration from any investment firm (Michelle Duffett, Insight).
* Utilize a strongly worded contract that specifically identifies out the services, costs and administrative items, and utilize a risk-tolerance worksheet and update it annually or when a customer's personal circumstances change (Gary Sutherland, NAPLIA).

Washington DC Water and Sewer Back up Claims

Washington DC's water and sewer utility has put out the following notice:

We're reviewing our claims program as it relates to water main breaks and sewer back ups. Our current policy is we generally do not pay for cleanup costs or damages that result from sewer backups or main breaks. We seek to determine the cause of the backup, if we had prior notice of a problem and whether we failed to timely fix the problem before WASA can consider payment of any claims. The property owner is also required to maintain and remove any clog in the sewer service line that extends from the building to the main sewer line.

Stringfellow Decision

On January 5, 2009, the California Court of Appeal issued its long-awaited decision in the Stringfellow insurance coverage case. The court held that a policyholder facing long-term property damage or personal injury claims may be entitled to indemnity under all years of insurance policies that were in effect while the damage took place. State of California v. Continental Ins. Co., 09 Cal. Daily Op. Serv. 161. The court also disapproved precedents in California and elsewhere that have limited policyholders to collecting only one year's policy limits for continuing injury claims.
This landmark decision, which is likely to influence courts around the country, potentially multiplies the amount of insurance that policyholders can use to pay for claims under standard general liability policies. It is especially significant for policyholders (such as manufacturing, chemical, pharmaceutical, construction, and waste disposal companies) that routinely face claims for progressive property damage or personal injuries that might have started years ago.
The case started in 1993, when the State of California sought indemnity from its insurers for its estimated $700 million cost to clean up industrial waste near the Stringfellow acid pits in Riverside County, California. The State demanded coverage up to the combined limits of all its liability policies that were in effect during all the years when the contamination took place and continued to migrate offsite. Following an earlier Court of Appeal decision in FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998), the trial court finally ruled in 2004 that the State could not "stack" or combine its successive years of policy limits as it sought to do, but instead had to pick one year's policies and demand payment under them. This ruling meant that the State could not collect more than the maximum ($48 million) in insurance limits it had purchased in any one policy year.
The Court of Appeal reversed the trial court's ruling on the "stacking" issue, and held that the State could collect the combined limits of all policies in effect when the contamination occurred and while it continued to migrate offsite. Noting that the standard language in each of the State's liability policies promised to pay "all sums" for any "occurrence" that caused property damage or bodily injury during the policy period, the court held that each policy had an independent contractual liability to pay regardless of whether the State had purchased similar policies in other years that might also be obligated to pay. In so holding, the court disapproved of FMC and other "anti-stacking" cases, in which courts have ignored the literal language of the standard liability policies and tried to impose limits on the number of policies under which an insured can collect.