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Milwaukee Product Liability Attorneys

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					Actuaries Are From Mars;
   Judges and Juries
    Are From Jupiter
                   By
       R. Timothy Muth
     Sandra Zunker Brown
     Reinhart Boerner Van Deuren s.c.
         1000 North Water Street
          Milwaukee, WI 53202
               414-298-1000
          www.reinhartlaw.com
               Overview
• Why You Should Care About How Judges
  and Juries Think
• What We Know About Juror Perceptions of
  Actuarial Work
• How This Impacts The Way Actuaries Testify
  In Court
• How This Information Impacts The Way
  Actuarial Work Product Is Communicated
Why You Should Care

 Increasing claims against
         actuaries
At least 50 lawsuits have been
     filed against actuaries

• 70% filed in the last ten years.
• Casualty actuaries are the target in
  50% of all suits filed against actuaries in
  the last six years.
            Areas of Claims

•   Reserve Estimates
•   Mergers & Acquisitions
•   Defined benefit plan valuations
•   Withdrawal liability
•   Insolvencies
•   Conflict of interest
Some Claims Against U.S. Actuaries
Verdicts                    Amount   Outcome
Alabama Life/Health
   Insurer                  $80M     Verdict

Missouri Casualty Insurer   $18M     Verdict

Taft Hartley Plan           $39M     Verdict

Arizona Life Insurer        $17.5M   Verdict

Open or settled
Calif. Workers Comp
  Insurer                   $650M    Settled

Valuation of Municipal
   pension plan             $2.0B    Open
   Some Claims Against Actuaries
            Worldwide
Claim                   Amount   Disposition
Canadian pension plan   $30M     settled
Dutch Life insurance
   software             $15M     pending
London market
  acquisition           $500M    settled
Ontario legal
  malpractice           $100M    pending
“First, sue all the consultants.”

 Business Week magazine - June, 2000
      Post- Enron Litigation
          Environment
• Weak economy/poor investment returns
• More claims against professionals
• Increasing juror cynicism
• More plaintiffs‟ attorneys who
  understand this area and experts willing
  to testify for them
• A standard of perfection
Company Actuaries Find Themselves
 Before Judges and Juries as Well

• Plaintiffs include liquidators, state
  insurance commissioners, purchasers
  of insurance companies, and
  reinsurers.
• Claims against company actuaries
  almost always assert fraud.
  When actuaries make
mistakes, great amounts of
money are usually at stake
   Juries have not favored the
       actuarial profession

• In 1998, the first jury trial of an actuarial
  malpractice case was conducted.
• The actuarial firm lost.
• Since then, actuaries are 1-4 in jury
  trials of malpractice cases.
    Reasons for Losses
1. Work too complicated to do without
   mistakes/perfectly
    - Actuaries not used to working under microscope
2. Juries/Judges view actuary differently than
   the profession views itself:
    » impartial financial guardian
    » level of accuracy and detail that is rarely
       practiced
Juries and the Actuarial
      Profession
What The Jury Hears First:

  Plaintiff‟s Opening Statement
What We Know About the
 People Who Hear This
               A Jury is:

• “Twelve people who don‟t know
  anything and can‟t read.”
          Mark Twain




• “Twelve people who weren‟t smart
  enough to get out of jury duty.”
          Norm Crosby
In surveys of mock jurors ...
   74% admit that they do not
     know what an actuary is

   Beyond life expectancy
     tables, juror understanding
     of actuaries is almost
     nonexistent
              Most Jurors:

•   Do not understand what you do
•   Have never sat for jury duty before
•   Do not understand insurance or jargon
•   Do not understand statistics
•   Cannot comprehend large numbers
•   Suffer from “math anxiety”
• “Many people have a fear of numbers,
  and their anxiety causes them to view
  those who are comfortable with
  numbers as nerdy or different. „Math
  geeks‟ often are ridiculed and mocked.”

     “Statistical Evidence: How to Help Jurors
      Understand and Use it Properly.” 67 Defense
      Counsel Journal 386.
 Juries have difficulty
understanding actuarial
       concepts
Jurors Assume Actuaries Can
   Get Perfect Information
• “Why would an actuary keep using bad
  data once the actuary knows the data is
  bad?”
• “Why not take aggressive steps to
  ascertain the correct data, whether or
  not it was your responsibility?”
• “Shouldn‟t you have consulted the client
  more about the data?”
Juries believe there is a great deal
of precision in actuarial estimates.
                           Applying a tail
                           factor of .017...
  The Jury Selection Process

• Parties can strike jurors for any reason
• Someone will have an incentive to
  have a jury who does not understand
• Persons who use math or statistics in
  their jobs are likely to be struck
                Judges

• Plaintiffs must waive right to jury trial
• Few judges have heard actuarial
  malpractice cases
• A little knowledge can be dangerous
• Few judges have an insurance industry
  background
• Judges will award big damages
Juries and judges always have
          hindsight.
Testifying to Actuarial Issues
Two Modest Goals for Actuary
       Witnesses:

•   Not to be brilliant
•   Not to be persuasive
•   To be UNDERSTOOD
•   To be REMEMBERED
  This Is Difficult Because You
 and the Jury Do Not Speak the
         Same Language

• The jury is not allowed to speak or ask
  questions, so you must break the
  communication barrier alone.
• You cannot “test” the jury.
• You will be contradicted.
You Have An Expert
    Interpreter:

  Your Attorney
                  Jury Studies
• “Clarity of presentation was the most important
  factor.”
• “Jurors were more influenced by an expert‟s ability to
  convey technical information in a comprehensible
  manner and to draw firm conclusions than by
  education or credentials.”
• “The most believable witnesses were those who
  could present the information understandably.
  Experts who were very technical and complex were
  not persuasive.”
       “Juror Assessments of the Believability of Expert Witnesses: A
        Literature Review.” 36 Jurimetrics Journal 371.
• “When jurors hear simple, clear testimony
  from experts, they make their decisions
  based on the arguments presented. But
  when experts give complicated explanations
  and use jargon that jurors can‟t follow, jurors,
  without realizing it, rely on the expert‟s
  credentials to make a decision.”
       “Has the Jury Decided? What Juries Use to Make Up
       Their Minds.” Frontiers, October 1997.
Example of how to educate a
 jury about basic reserving
         concepts
A BAD EXAMPLE
         Points to Remember

•   Define all terms using simple words
•   Give simple examples from jurors‟ lives
•   Don‟t assume anything
•   Directional words are confusing
•   Use charts
A BETTER EXAMPLE
        Automobile Policies
» Covers January 1-December 31, 2001



       100 ACCIDENTS
          Reported
          2001 Year End

On December 31, 2001, the actuary
  knows:
• How many claims were reported.
• How many reported claims were paid.
• How many reported claims have not
  been paid yet.
            Paid Claims
• Accident occurred
• Accident reported
• Claim filed
• Claim paid or “closed”
 Example: minor “fender bender”
 in March 2001. Repair bill paid
 in 2001.
Claims Adjusters Set Reserves
For Reported Claims That Have
       Not Been Paid:

     Open Case Reserves
      Open Case Reserve
• Accident occurred
• Accident reported
• Claim “pending”
 Example: Accident with property
 damage and minor injuries in August
 2001. Lawsuit filed. Outcome still
 pending at end of 2001.
    Reserves Actuaries Set

• Incurred But Not Reported claims
  (IBNR)
• Supplemental Development (changes in
  case reserves)
      IBNR “Incurred But Not
            Reported”

• Accidents which have not yet
  been reported
Example: December 2001 accident.
Not yet reported. Claim likely filed in 2002.
  Supplemental Development on
        Case Reserves
• Accident occurred
• Accident reported
• Case reserve set
• New information
  Example: Accident with minor injuries in
  August 2001. Lawsuit filed, case reserve
  set. Plaintiff then has back surgery and
  complications.
Writing Actuarial Work Product
       for Juries to Read
Consider the Audience and the
     Use of the Material
• First goal -- to avoid a judge or jury ever
  needing to read your work product.
• Arbitration and mediation are better forums
  for actuaries.
• Consider the likely readers‟ access to data,
  actuarial knowledge, and information about
  the company
• Also LIMIT the audience and use of the
  material.
       Standard Language AKA
            “Boilerplate”
• Boilerplate language is a term most common these days in the
  legal profession. Interestingly, the term arose from the
  newspaper business. Columns and other pieces that were
  syndicated were sent out to subscribing newspapers in the form
  of a mat (i.e. a matrix). Once received, boiling lead was poured
  into this mat to create the plate used to print the piece, hence
  the name boilerplate. As the article printed on a boilerplate could
  not be altered, the term came to be used by attorneys to refer to
  the portions of a contract which did not change through
  repeated uses in different applications, and finally to language in
  general which did not change in any document that was used
  repeatedly for different occasions.
• -Take Our Word For It, Sept. 28, 1998
      In Praise of Boilerplate

• Boilerplate language in reports has won
  cases.
• Boilerplate language in reports has avoided
  cases.
   Good Boilerplate Examples
• Actuaries do not audit data
• Actual results will vary from estimates, and the
  variation may be significant
• Results can be impacted by the validity of the
  assumptions
• Readers should have actuarial background or
  assistance to assess the conclusions of the
  report
• Report assumes that the reader has familiarity
  with operations of insurance company
     The Risks of Boilerplate
• Using boilerplate without thinking about
  its meaning
• Dismissing that language in testimony
  as “oh, that‟s just boilerplate.”
• Missing the opportunity to write about
  the specific causes of variability and
  specific data concerns
   Expressing the Concept of
          Variability
• Do not convey a sense of precision
  which does not exist
   » point estimates vs. range estimates
   » rounding to significant digits
• Explain sources of variability in plain
  language
• Use graphs where appropriate
           Practical Steps

• Have a non-actuary review the narrative
  section of a report for understandability
• Take a course in business writing
• Avoid the temptation to just update the
  numbers in the prior year‟s report
• Present information in multiple forms --
  charts, text and graphics
Label a Draft “DRAFT”
•Creating actuarial work product is a
dynamic process.
•Lawsuits occur years later when it is
difficult to create a timeline of events
and expectations
•Legal duties and jury expectations
will be lower when everyone
recognizes that work is still a draft.
  Tips For Reducing Claim
         Exposure
• Know the audience and the
  intended use of your work.
• Caveat and disclaim.
• An oral understanding is as good
  as the paper it‟s written on.
• Limit liability and third party use.
        SOME CONCLUSIONS
• Write reports with an eye to how the report
  will appear if your estimates turn out to be
  incorrect.
• Testifying is a unique set of skills. Those
  skills can be learned, but you cannot assume
  that your normal business communication
  skills are the right skills for talking to a jury
• Arbitration is a better forum for actuarial
  disputes. You can define who will hear your
  disputes.

				
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