MANAGING EXPOSURE TO LITIGATION

1. MANAGING EXPOSURE TO LITIGATION Session 46: February 28, 2006 Session Producer: Maureen Lillis, RN, CCM Senior Vice President CHCS Services, Inc.

2. PANEL • Matt Cooper, Vice President & General Counsel, Genworth Financial • Scott Weathers, Partner, Huffer & Weathers, P.C. • Mike Abroe, FSA, MAAA, Principal, Milliman

3. TRENDS Matt Cooper, Vice President and General Counsel Genworth Financial

4. Five Trends In LTC Litigation #1 – Facility Denial Litigation (Nursing Home-Only Policies) • Gillogly v. GECA, 430 F.3d 1284 (10th Cir. 2005) • Milburn v. Life Investors Ins. Co. of America, No. 05-6099 (10th Cir. 2005)

5. Gillogly v. GECA, 430 F.3d 1284 (10th Cir. 2005) • Policy Language At Issue – A Nursing Home is “a facility or distinctly separate part of a hospital or other institution which is licensed by the appropriate licensing agency to engage primarily in providing nursing care and related services to inpatients and . . .” • Trial Court Result – Court granted plaintiff summary judgment on breach of contract and directed verdict for plaintiff on bad faith after trial. Jury gave plaintiff $4MM in mental anguish damages on $80K in contract damages. Plaintiff also received $1.3MM in fees and interest.

6. Gillogly v. GECA, 430 F.3d 1284 (10th Cir. 2005) • Appeal Result – Tenth Circuit reversed and rendered, finding that GECA was owed summary judgment on breach of contract: “Since [the facility] is specifically licensed as a residential care home and Oklahoma statutes require that the residents of [the facility] shall not routinely require nursing care, [the facility] is specifically designated by statute as something other than a facility that is “primarily engaged in providing . . . skilled nursing care and related services.” 405 F.3d at 1291.

7. Five Trends In LTC Litigation #2 – Rate Increase Litigation • Felzenberg v. The Travelers Ins. Co., No. 05-3084 (FSH) (D.N.J. January 6, 2006) • “Defendant’s affidavit . . . conclusively establishes that the premium rate increase was in conformity with the provisions of the insurance policy.” #3 – Rescission/Claims Fraud • Aging blocks resulting in more claims and more claims fraud • Claims fraud prosecution can result in bad faith counterclaims

8. Five Trends In LTC Litigation #4 – Post-Claim Benefit Eligibility Litigation • Taking policyholders off claim is tough (“Mom has only gotten worse”) • Set expectations at beginning of claim #5 – Reinstatements • Litigation over “unintentional” lapsation • Alleged failure to mail third-party notice

9. Five Ways To Avoid Litigation #1 – Customer Service, Customer Service, Customer Service • Litigation is often a customer’s only way to be heard • Apologize for screw-ups – Write like a real person, not a lawyer

10. Customer Service Case Study Montgomery, AL 36111 March 7, 2003 RE: Policy No. ________________ Dear Sir: I would like an update of my policy No. _________. I would like a current in-force illustration. I would like to know whether or not I am going to be required to pay additional premiums into this policy, beyond what I have already paid. If I do not pay any more premiums, when will this policy lapse, if at all? Will I be notified prior to the policy lapsing? If so, how will I be notified and when? If I must pay additional premiums into this policy to prevent it from lapsing how much would I have to pay to keep it in force through this year (2003) and each year thereafter for the next fifteen years? I appreciate your attention to this matter and look forward to receiving a response from you immediately. Please know that his matter is very important to me and I must receive a response from you so that I can make sure I do not lose my coverage. If you need to contact me, I can be reached at ___________. Sincerely,

11. Customer Service Case Study 03/27/03 RE: Policy Number: __________ Insured: _______________Dear Mr. ______________: Enclosed is the illustration requested for the above referenced policy. Values do not reflect any financial activity which has occurred since the case value date shown on the first page of the projection. If you have any questions, please write our Home Office or call us toll free at ____________. We appreciate your business and look forward to serving you. Sincerely, Customer Service Enclosures

12. Customer Service Case Study Montgomery, AL 36111 April 29, 2003 RE: Policy No. _______Dear Sir:I received your response on March 27, 2003, to my inquiry of March 7 concerning the above named life insurance policy. It is confusing and uninformative.I enclose an unscheduled premium in the amount of $______ to keep this policy from lapsing.Sincerely,

13. Customer Service Case Study Greensboro, North Carolina 27408 March 10, 2004 Matt, A company is only as good as those who work there. Somehow I suspect your involvement in a vase of beautiful flowers that were delivered to my Mom’s room. While she no longer remembers GE, she thoroughly enjoys flowers, especially pink ones, and was very happy to show off the flowers you sent her. May your road always run down hill. Sincerely,

14. Five Ways to Avoid Litigation #2 – Rigorous escalation process • All “lawyered up” complaints should be reviewed by legal (e.g., law firm letterhead, attorney cc, or obviously written by attorney) #3 – Early Case Assessment • Always know your documents and witnesses early

15. Five Ways to Avoid Litigation #4 – Litigation Avoidance Marketing Review • Marketing review is more than compliance – it is seeing things as a plaintiff’s lawyer and regulators see them #5 – Disclosures • Pre and post-sale disclosures can help mitigate litigation risks

16. Policy Rescission and Litigation BEST PracticesScott Weathers, PartnerHuffer & Weathers P.C.

17. RESCIND • Webster’s Dictionary: “Repeal, Cancel, Annul.” • Legal Rescission: “Material misrepresentation by insured which allows insurer to void policy.”

18. FRAUD Q: Is it necessary to show policyholder’s intent to defraud? A: It depends on where the policyholder resides.

19. Case Law / Statute • Alabama: Was it done with actual intent to deceive? • Colorado: Negligence does not relieve insured from the consequence of misrepresentation.

20. Procedure • Most states 2-year limitation • Flagging system? • Get it out of claims • Legal Review?

21. Bad Faith Scott’s definition: Failure to act reasonably. What is reasonable?

22. Bad States • Tort Reform • Recent Supreme Court rulings • Oklahoma statute

23. Bad Testimony • Stupid, stupid, stupid • She can eat soup • Fair maidens

24. Bad Lawyers • Who knows what • Property vs. Health • Witness preparation • Mock exams / trials

25. Actuarial Risk Exposure Mike Abroe, FSA, MAAA Principal, Milliman

26. Managing Exposure to Litigation Outline of Presentation Litigation against actuaries is increasing American Academy of Actuaries Various perspectives Consulting actuary Pricing actuary Company actuary Expert testimony

27. Litigation against Actuaries is increasing • Increasing frequency • High severity • Excess of limits cases • Pension funds under stress • Liquidators more litigious – outside consultants and management

28. Cultural Changes • Sarbanes-Oxley and other initiatives to enhance transparency and governance in the corporate world. • Financial economics • Disappearing boundaries between professions

29. Failure to comply with the Code, Qualification Standards and ASOPs may be considered malpractice. American Academy of Actauries

30. The Role of Professional Standards Code of Conduct Qualification Standards Actuarial Standards Of Practice Practice Notes Documented strong evidence of following professional standards is a key element in defending against any malpractice action

31. The Code of Professional Conduct ALWAYS applies! • Precepts are: • Precept 1 – integrity and competence • Precept 2 – qualification • Precept 3 – satisfying applicable ASOPs • Precept 4 – communications • Precept 5 – who did work for • Precept 6 – compensation • Precept 7 – conflict of interest

32. The Code of Professional Conduct ALWAYS applies! • Precepts are: • Precept 8 – control of work product • Precept 9 – confidentially • Precept 8 – misuse of work product • Precept 10 – courtesy and cooperation • Precept 11 – advertising • Precept 12 – titles and designations • Precept 13 – violations of code of conduct • Precept 14 – cooperate with disciplinary bodies

33. Qualification Standards Basic education Experience Continuing education PSAOs – public statements of actuarial opinion

34. Actuarial Standards of Practice

35. Actuarial Practice Note • PN = LTCI Compliance with the NAIC LTCI Model Regulation Relating to Rate Stability • Developed in response to rate stabilization legislation and NAIC LTCI compliance manual

36. Consulting ActuaryAccepting Assignments • Verbal agreement or handshake is risky • especially in litigious environment • where principal is unsophisticated • does not speak your language • Engagement letter or contract - formally defining the relationship can reduce risk: • Keep internal memoranda; and E-mails. • Prescreen - avoid bad clients; • Establish clear restrictions on use of work product; • Peer review - strive to avoid errors or misunderstandings; • Go slowly in high-risk situations.

37. Pricing actuaryAt risk for the following • Pricing • Initial filing • Rate increase monitoring • Rate increases • Consumer disclosure

38. Company actuary • Document – document – document • You represent company • Your actions may bind the company • Credibility

39. Expert Testimony • Some of the legal theories underlying lawsuits • Fraudulent pricing and marketing • Intentionally marketed underpriced product • Knew business was underpriced • Intentional misrepresentation of pricing • Actuarial expert also on other side