Small Firms, Big Challenges: Managing Litigation Risk in Small Actuarial Firms
The Independent Consultant
Small Firms, Big Challenges: Managing Litigation Risk in Small Actuarial Firms
by Lauren M. Bloom
Practicing actuaries face a number of risks, including the risk that their work will be challenged in court. When working in-house as employees of insurance companies, pension plans or government agencies, actuaries normally run little risk that they will be individually sued. Consulting actuaries are more likely to be the target of litigation, however, perhaps because clients are less reluctant to sue consultants with whom they have an arm's-length business relationship than employers are to sue their employees
For actuaries working in small firms, the risks of litigation can be particularly severe. Large actuarial firms typically devote substantial resources to litigation risk management, using standardized client contracts and disclaimer language, adopting policies to supplement the profession's standards, appointing compliance officers and peer reviewers and engaging outside attorneys to help design and implement their litigation risk management programs. Actuaries working in smaller firms usually cannot devote the same resources to litigation risk management that large firms do. However, the professional services that actuaries provide to their clients involve such large sums of money that a single successful lawsuit can put a small firm out of business.
Fortunately, smaller firms can reduce their litigation risk without unreasonable difficulty or expense. This article, and one to come in the next issue, will offer ideas on how actuaries in small firms can address their litigation risk in rational, cost-effective ways.
Client Selection, Education and Management
The first step in reducing litigation risk is to think twice about taking on the "high risk" client. Unsophisticated clients who do not understand exactly what the actuary can and cannot do are likely to resort to the courts if they rely too broadly on the actuary's work. Clients who want work done at the eleventh hour, without opportunity for peer review or based on critically flawed data, may be withholding essential information. Clients who will not commit to providing the actuary with necessary information and support may be looking for a scapegoat, not a business advisor. Clients with a history of suing previous consultants may be especially prone to resort to litigation over future disagreements.
Even high-risk clients can be effectively served if the actuary actively manages the client relationship. It is usually wise to educate clients about the scope and nature of actuarial work and relevant facts and circumstances not only at the beginning, but throughout the relationship. Litigious, uncooperative or uncommunicative clients may require the actuary to go to greater lengths to document the scope of the assignment and exactly "who said what to whom and how" as a project goes forward. Thoughtful communication can reduce the risk of misunderstanding or client dissatisfaction, in turn reducing the risk that the client will bring suit against the actuary. Contracts, engagement letters, correspondence and even e-mail can be used by the small plan actuary to educate the client, clarify the scope of the assignment and document the course of communications.
Scope of Assignment
Another effective means to mitigate litigation risk can be carefully delineating the scope of the assignment. Assignments for which the profession has developed accepted practices are likely to be less risky than those in emerging areas where fewer outside resources are available to help the actuary do a professional job. A small firm actuary may find it helpful to use techniques, processes and tools like computer software that have been thoroughly tested and are widely used. Some assignments (for example, mergers and acquisitions or negotiations between an employer and a union) are inherently more risky than others, and may be more than some small firm practitioners can comfortably take on. Another way to mitigate litigation risk can be for the small firm actuary to develop a "niche" specialty in which he or she excels, reducing litigation risk accordingly.
Compliance with Professional Standards
Lawsuits against consulting actuaries usually allege malpractice, i.e., failure of the actuary to engage in "generally accepted" practice. The standards set by the U.S. actuarial profession in its Code of Professional Conduct, Actuarial Standards of Practice (ASOPs) and Qualification Standards are compelling evidence of "generally accepted" practice, a fact that the Actuarial Standards Board has explicitly recognized in the Introduction to the ASOPs. Consequently, the small firm actuary is wise to review the standards that apply to each assignment, comply with them, and then document compliance.
Precept 2 of the Code of Professional Conduct requires the actuary, before taking on each assignment, to determine that he or she is qualified by virtue of basic and continuing education and experience to do the work. (The actuary should also be mindful of the Qualification Standards, which establish basic and continuing education and experience requirements for certain actuarial assignments.) This can be a challenge for small firm actuaries, particularly if they are being asked to work in a new area. Teaming up with another actuary who has complementary qualifications can help the small firm actuary meet this requirement, as can obtaining peer review from a qualified colleague. Limiting the scope of the assignment to the actuary's area of expertise can also be effective. The small firm actuary may find continuing education to be particularly valuable as a way to obtain the skills needed to move into new fields.
Large actuarial firms often have "standards compliance officers" who are responsible for ensuring that actuaries in the firm are aware of and in compliance with new ASOPs; small firms rarely have that luxury. Small firm actuaries are still required to satisfy applicable ASOPs, however, so it becomes incumbent upon them to find ways to keep current as the ASOPs evolve. The Actuarial Standards Board's Web site provides the most current version of each ASOP and information about when the ASOPs are being added to or revised. If the actuary is unsure which ASOPs apply in a particular setting, the American Academy of Actuaries' Web site features the "Applicability Guidelines for Actuarial Standards of Practice," a list of commonly-performed actuarial tasks, organized by practice area, and the ASOPs that usually apply. Regular use of the Applicability Guidelines can help the small firm actuary satisfy applicable ASOPs when performing particular tasks.
Two ASOPs almost always apply to actuarial assignments. ASOP No. 23, Data Quality, addresses actuaries' use of data and how to deal with common data problems. ASOP No. 41, Actuarial Communications, addresses actuaries' communications with their principals. Both ASOPs provide invaluable guidance to the actuary on areas that are particularly likely to become an issue in litigation. An actuary's failure to appropriately address flaws in data, or to communicate clearly and effectively with a client, is something a plaintiff's attorney can readily explain to a court. Compliance with ASOP Nos. 23 and 41 can help the small firm actuary avoid those litigation pitfalls.
Large actuarial firms usually have an internal peer review process; again, small firms are less likely to have a formal program. However, peer review can significantly reduce the actuary's litigation risk. Peer review often brings to the surface problems or questions concerning the work product that may not have been apparent to the actuary, offering an invaluable opportunity to correct errors and clarify uncertainties before the client relies on the work. The small firm actuary can point to his or her having obtained peer review as evidence of due diligence in performing the assignment. Obtaining peer review can also increase the small firm actuary's confidence that the work satisfies applicable professional standards.
Some small firm actuaries contract with colleagues to "swap" peer review services, while others engage peer reviewers only for larger or more complicated projects. Less formal review of the small firm actuary's work can also be helpful. Simple proofreading can catch mathematical and other errors. Especially when dealing with unsophisticated clients, the actuary may find it beneficial to have a non-actuary examine a work product for completeness and general comprehensibility. When engaging any reviewer, however, the actuary should bear in mind the confidentiality requirements of the Code of Professional Conduct.
The American Academy of Actuaries' Council on Professionalism has published a paper on peer review, a terrific resource for the small firm actuary who is interested in creating a peer review program. The Conference of Consulting Actuaries has also published guidelines for peer review; more information is available online at their Web site.
Document, Document, Document
It can be tempting for any professional to think the job is finished when the work goes out the door. To reduce litigation risk, however, the small firm is wise to consider what documents to keep and what to discard. Large firms usually have carefully considered document-retention policies. Small firm actuaries often operate more informally, and may neglect to consider this important issue.
Document retention could be the subject of another whole article, but following a few simple "rules of thumb" can improve small firm actuaries' documentation without significantly increasing their effort or expense. The profession requires actuaries to maintain sufficiently detailed work papers such that another qualified actuary could evaluate the reasonableness of the actuary's work. In most instances, the work papers would include documentation of processes used as well as assumptions and conclusions; documenting processes can help the small firm actuary demonstrate adherence to generally accepted practice. The ASOPs contain specific documentation requirements that should be satisfied. Copies of all documents that the actuary sends to the client should usually be retained, even if the version that went to the client was marked "draft." Rough drafts, preliminary calculations and other "raw" materials should be incorporated into the actuary's work papers as appropriate, and then discarded. E-mail can be particularly tricky; although it seems informal, e-mail is as permanent a form of communication as a letter or memorandum, and should be handled with comparable care. Its apparent informality has one important advantage, however; when carefully used, e-mail can be especially useful to prove that a client was given information or asked an important question at a particular point in time.
When it comes to document retention, consistency is key. A qualified attorney can help a small firm actuary develop a document retention policy that is suitable to the actuary's practice. Once the policy is in place, consistent compliance can reduce the risk that the actuary will be embarrassed (or worse) in litigation by having to produce damaging documentation.
Managing litigation risk is an important element of a successful professional practice. By thinking carefully about litigation risk and putting preventive practices in place, small firm actuaries can enjoy their work without excessive concern about the litigation risks associated with it.
Lauren M. Bloom is the general counsel of the Navy Mutual Aid Association; she is also a speaker, writer and consultant on professional ethics and governance.