BLJ
Spring
2003
2/26/03
3 :22 PM Page
3
From the Edito r
What's Little Malpractice
Among Friends ?
he essence of being a professional is a willingness to stand behind
your work, whether you're a doctor, a lawyer, or an actuary .Yet the
top actuarial firms-Mercer, Buck,Towers Perrin, and Milliman, to name
a few-recently began asking their pension clients to sign retainers
that essentially limit the firms' liability for their own mistakes .This is a
radical departure from the standard retainer, which stated only that the
firm would not be liable for errors caused by bad data provided by the
client or the expense of getting caught in the cross fire in a dispute
between the plan and a disgruntled participant .
Rather, this new liability clause amounts to an abdication of frill
responsibility for-in the words of one such agreement-the actuary's
own "negligence, recklessness, or misconduct in the performance of
services ." Typically, these new provisions cap an actuary's liability at
between one to five years' fees, depending on the firm and the client .
Consider the following scenario : An actuary is retained to project
the cost of an early retirement window for a $15,000 fee .The actuary
estimates $3 million-but after the plan amendment is adopted, the
real cost turns out closer to $30 million, a serious financial liability for
the employer caused, perhaps, by the actuary's malpractice . Should the
actuary get off the hook for a mere $75,000-five times the fee ?
Surprisingly, the Department of Labor (DOL) has conferred its bless ing on these limitation of liability clauses . Specifically, the DOL recently issued an Advisory Opinion to the Central Pension Fund of the
International Union of Operating Engineers and Participating
Employers stating that "most" limitations of liability provisions are nei ther per se imprudent nor unreasonable if they are limited to negligence, "unintentional malpractice" (is there any other?), or breach of
the retainer. An ERISA violation would occur only if the liability cap
also applied to fraud or willful misconduct by the service provider .
The DOL's position is that the selection of a vendor should be based
on numerous factors, including the candidate's capabilities, competen cy, quality, and the reasonableness of the fees.The potential risks to the
plan resulting from a limitation on liability should, according to the
DOL, be treated as just another consideration . The DOL maintains that
after assessing all of these factors and the alternative service providers,
limitation of liability is acceptable .
This is unfortunate .The DOL missed a golden opportunity to quash
limitation of liability clauses the bud, before they become standard
practice . Such clauses already are proliferating ; by giving its blessing
the DOL is helping to create a scenario in which such clauses ma y
BENEFITS LAW JOURNAL
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VOL . 16, NO . 1, SPRING 200 3
"This a rticle was republished with permission from Benefits Law Jou rnal, Vol. 16, No . I, Spring 2003), Copyright 2003, Aspen Publishers, Inc . All rights reserved. For more information on this
or any other Aspen publication, please call 800 -638-8437 or visit www.aspenoublishers.com ."
BLJ Spring 2003 2/ 26/03
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From the Editor
become ubiquitous, and employers, plans, and fiduciaries will have no
choice but to accept these limitations .
It is easy to understand where the actuaries are coming from, given
the sudden collapse of Arthur Anderson, the near demise of several law
firms during the S&L debacle, and other recent professional firm disas ters . In these litigious times, professionals face the constant threat of an
onerous judgment for professional malpractice . At the same time skyrocketing malpractice and errors and omissions premiums, as well as
higher deductibles, have made insurance coverage a significant busi ness expense for all professionals .
But, as a practical matter, a great deal must go wrong before an actu ary actually would be hit with a large liability. First, the actuary must be
found to have committed malpractice, and second, there must be mate rial damage. Next, plaintiffs must get past Mertins v. Hewitt and ERISA
preemption to bring a state court action or find an ERISA action for
appropriate equitable relief. In my 23 years of practicing law, I have
seen very few significant errors by actuaries, and those were quickly
settled without litigation .
Nevertheless, even given the slim odds that a limitation clause would
ever be invoked, such limitation remains unfair to clients and bad busi ness practice . When asked for advice, professionals should do every thing in their power to provide a correct, complete, and timely answer.
Beyond concern for the client, professional pride, and competitive
instincts, knowing that a serious mistake might cost an advisor his or
her house is a powerful incentive to get it right .
Some firms contest that actuarial fees often are disproportionately
low compared to the damage that could be awarded for making a seri ous mistake . But this is true for just about everyone from lawyers to cab
drivers .Think about it this way, would anyone go to a surgeon who lim ited his or her malpractice liability to five times the cost of an opera tion?
Selecting a vendor is not easy, as anyone knows who has sifted
through service proposals and listened to "dog and pony shows" in the
process of searching for an actuary,TPA, consultant, or money manager. Even with thorough due diligence, it is never clear whether the right
choice was made imtil the vendor has had a chance to perform for a
while . That uncertainty and the potential cost of wrong advice is one
more reason why an employer, plan, or fiduciary has a perfect right to
expect its advisor to stand 100 percent behind its work product .
Indeed, unlike actuaries, ethical constraints make it virtually impos sible for a law firm to limit its exposure for malpractice . This rule is
based on the tenet that attorneys have an inherent ethical obligation to
stand behind the advice they render.This obligation should apply to all
professionals .
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From the Edito r
The DOL should act quickly to reverse its position . The Department
need not construct a precedent setting argument that limitation of liability clauses are a per se violation of the exclusive benefit rule, impru dent, or a prohibited transaction. Since actuaries generally are not fiduciaries, this would be the more difficult path to take . The DOL should
simply state the obvious : A professional firm that is not willing to fillly
stand behind its work product should be presumed inferior to one that
is. Even the remote possibility of loss to the plan should provide a significant competitive edge to those firms willing to take responsibility
for their mistakes .
Until the DOL changes its tune, employers and others searching for
a service provider should avoid any professional seeking to duck its
legal liability for malpractice . That is, until there is no alternative .
David E. Morse
Editor-in-Chief
Kirkpatrick & Lockhart LL P
New York, NY
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VOL . 16, NO . 1, SPRING 2003