2019 FPL/MML/MPL Binding Authority Renewal

Attorney/Client Privileged Communication

Thanks to the support of underwriters at Atrium, Dominion's binding authority, renewing October 1st of each year, continues to enjoy wide acceptance across the United States. This is due in part to key partnerships with professional associations such as the National Guardianship Association (NGA) and the Professional Fiduciaries Association of California (PFAC) through which Fiduciary Professional Liability (FPL) insurance is offered, as well as the American Association of Daily Money Managers (AADMM), which offers our Daily Money Manager Liability (MML) policy to its members.

Although these programs remain on a trajectory of continued premium growth, we believe that trend can be accelerated with better profitability by means of enhancing existing offerings, introducing new lines of coverage, and improving claims handling practices as outlined below. Because this document delves into issues surrounding litigation strategies, and includes counsel's observations, we assert attorney/client privilege to its contents.

Program Overview

Dominion currently writes nearly $2.5 million in premium in its FPL program and just under $250k in the MML program. Total written premium during the 2017-2018 contract period for all lines was $2,645,408.97. As of July 1, 2019, gross written premium for the 2018-2019 binding authority contract period sits at $2,065,759.34, with three months of business left in the pipeline.

The total policy count for the program currently stands at 750, up from 700 last year, with the average premium per risk having increased by more than $100 to $3,636.90 in comparison to last year's figure of $3,527.21. The current averge FPL premium is $5,529 compared to the prior period average of $5,300.44. MML average pricing is up as well from $852.38 to $871.71.

The combined Gross Loss Ratio (GLR) since inception for all sections other than FPL is negligible. The highest among these is MML, which stands just over 11%. By contrast, the FPL program based on gross written premium from inception sits at 48% incurred plus 14% reserved for a total of 62%. Of this figure, incurred monitoring costs account for 13%, defense for 23% and indemnity for 13%. Deterioration in the 2014 and 2015 FPL years, with current GLRs just over 71% and 73%, respectively, has raised concerns regarding the FPL program's continuing viability. When combined with the MML program the GLR for FPL and MML together from inception drops to 45%. Even so, improved underwriting and claims handling, especially of the FPL book, must be a top priority. The underwriting guidelines and new Flat-Fee Defense (FFD) program outlined below have been designed with this end in mind.

Section Summary

Fiduciary Professional Liability (FPL) currently accounts for $2,498,854 in booked premium. The prior contract closed out with $2,390,496.97. Thus FPL writings are projected to close out the contract period in excess of $100,000 over last year.

Daily Money Managers Liability (MML) program continues to expand steadily. Our in-force policy count has topped 276 with gross written premiums on that book standing at $249,216. Although we did have one negative year, this book continues to be profitable.

Miscellaneous Professional Liability (MPL) placements this year remain modest. Nevertheless, this capability provides an important tool for exploring new promising classes.

Business Surety Bond (BSB) has had minimal writings under this section, yet it continues to be an important discussion point with Daily Money Managers. We would suggest a marked reduction in the premium for these bonds to boost sales.

Data Consultants Liability (DCL) writings have been quite disappointing. Even so, we would like to continue to include this line in the binding authority for the coming year as we consider better ways to approach this market.

Proposed New Sections , discussed below, consist of a Fiduciary/Care Management (FCM) liability form which essentially combines the MML and FPL programs in such a way as to mesh with a new Trust/Estate Liability (TEL) program for individual trusts, estates or powers of attorney.

Underwriting

Rate Adequacy

FPL average rates are still more than double the most popular domestic competition. As the revised claims handling strategy outlined below offers great potential for cost savings, implementing yet another rate increase this year should not be necessary. Moreover, the additional premium flow that will likely be generated by the individual trust/estate policy option discussed below will act as an imbedded, organic rate increase.

Consideration should, however, be given to increasing and standardizing the application of claims loadings. Such surcharges should be applied based upon the insured's loss ratio, calculated as gross premium, net of any deductible paid, against the incurred, not reserved, defense and indemnity payments within the past 5 years, not including monitoring expenses. Also, in view of the new Flat-Fee Defense program discussed below, incurred defense costs should be capped at $25,000 in the loss ratio calculation. In this regard, we would suggest that once the loss ratio breaches designated thresholds, claims loading would triggered. For example, 100 could be set at 10%, 200 would be 20%, and so on up to 100% for a loss ratio of 1,000 or more. Thereafter, the loading would reduce by 5% per year from 25% down, 10% per year from 50% down and 20% per year from 100% down, until entirely eliminated. Currently, 82 claims which are less than 5 years involve an insured with a loss ratio of more than 100.

Locale Modifiers

Attention should also be given to the locale modifiers . Those zones with GLRs in excess of 100 should be considered for a rate increase once modified for outliers. For example zones CT-1.25000 and NV-1.00000 are highly skewed by claims against a single Assured within each of those territories. Those with GLRs below 50 should be considered for a rate decrease. In this regard, please note that CA-2.25000 has a GLR of 47. By maintaining the 2.25 locale surcharge, the program is losing significant premium otherwise available in this highly lucrative market.

Large Claim Analysis

Remarkably, the following twelve claims, the only ones with total loss amounts surpassing $200,000 each, account for $5,111,247.33 of the $11,696,893.67 total FPL claims costs to date — incurred and reserved. That’s nearly 44% of the whole in twelve out of 380 total claims. The fact that the April Parks claim increased the 2014 GLR from 38.22% to a whopping 71.41% highlights the impact a single large claim can have on annual contract performance. Likewise, the Hance Check Forgery matter may ultimately increase the 2015 results from 40% to 73.47%. Even reserving the Bautista wrongful death claim at $500,000, rather than the arguably applicable $250,000 General Liability limit, increases the GLR of the entire program since inception by more than a full percentage point.

Case

Year

Reserves

Monitor

Defense

Damages

Total

Error

Role

Hanna v. Bautista

2017

$554,114.64

$14,235.50

$176,649.86

$0.00

$745,000.00

Death (non-ward)

Trustee

Whitmark v. PMR

2009

$0.00

$80,386.47

$339,079.81

$250,000.00

$744,466.28

Intentional Wrong

Successor Trustee

Cono v. Hersh

2010

$0.00

$71,946.11

$569,738.92

$70,000.00

$711,685.03

Intentional Wrong

Successor Trustee

Forgery (Hance)

2015

$512,707.16

$89,924.95

$18,111.55

$87,756.34

$708,500.00

Theft

Fiduciary

North v. Parks

2014

$66,176.26

$64,740.96

$182,580.13

$362,500.00

$675,997.35

Theft

Guardian

O'Connor v. Cicerone

2011

$0.00

$63,101.81

$200,764.47

$49,235.53

$313,101.81

Accounting/Fees

Trustee

McPherson v. Watson

2015

$0.00

$19,363.29

$104,420.92

$187,500.00

$311,284.21

Accounting/Fees

Trustee

Keck v. Compass

2017

$245,388.82

$12,909.38

$0.00

$51,701.80

$310,000.00

Theft

Fiduciary

Esquiro v. Bowerman

2014

$53,119.28

$12,185.00

$170,164.02

$0.00

$235,468.30

Death (ward)

Guardian

Malapetsas v. Hance

2010

$25,929.40

$32,694.33

$138,597.27

$34,000.00

$231,221.00

Accounting

Conservator

Simpson v. TSLG

2010

$0.00

$45,976.97

$74,830.59

$110,000.00

$230,807.56

Accounting/Fees

Prior Conservator

Thale v. Brito

2017

$132,493.95

$10,402.60

$62,103.45

$0.00

$205,000.00

Accounting

Prior Trustee

Accounting/Fee Claims. More than a third of these claims arise out of allegations of flawed accounting and excessive fees. The 2015 modification to the definition of a Claim to mean "a demand received by any Assured for money or services outside the Ordinary Course of Business " addresses this exposure in part. This definition should be further modified to clarify that it only applies a claim for Damages , not merely correcting an accounting. In addition, although Exclusion "P" unequivocally precludes coverage for "an accounting" or "return or reimbursement of fees", the coverage buy back appears to have been too broadly applied to cover the cost of redoing allegedly inadequate Professional Services . As suggested below, the accounting buyback should be rewritten to apply exclusively to irreparable, consequential Damages arising out of faulty accountings, not the cost of correcting a faulty one.

Theft/Intentional Acts . Another quarter of these claims arise out of the theft of client funds, which should normally be covered under a crime policy, not a professional liability one. Prior efforts to introduce and subsequently refine the crime endorsement has addressed this issue. As discussed more fully below, a modicum of included crime coverage, with the option to purchase higher limits up to no more than $100k will actually serve to remove coverage ambiguities, strengthen underwriter's coverage position, and enhance the marketability of the new policy form. Interestingly, claims based on allegations of intentional wrongs make up another two of these twelve claims. Their handling could be improved through the adoption of these suggested policy changes as well.

Wrongful Death . The remaining two cases are for wrongful deaths — one involving a ward and the other third parties. Strategies for reducing these exposures include the elimination of the Bodily Injury and Property Damage (BI/PD) buyback to exclusion D, coupled with a small base BI/PD sublimit. In addition, the maximum BI/PD additional limit should be restricted to a maximum combined exposure of $100,000.

Interestingly, none of these cases involve the quintessential negligence claim. As alluded to above, it makes sense to isolate these largely peripheral exposures (which ironically have resulted in the greatest losses) to a single $25,000 aggregate included sub-limit of liability. In addition to the supplementary coverages already set forth in section I.C-N, additional coverages sublimited coverages should include General Liability, Hired/Non-Owned Auto, Crime, and Cyber Liability. Assureds will expect options to purchase higher limits, but the maximum should be restricted to $100,000, including the $25,000 aggregate base, to which no deductible would apply. However, the normal deductible would apply to any higher purchased limits.

Notably, a number of these cases involve successor or prior trustees that have been attacked by previous or succeeding fiduciaries. Accordingly, a question should be added to the application form regarding whether any member of the Applicant firm has been appointed the successor to a fiduciary who was terminated for cause. Also, with respect to crime exposures a question regarding whether anyone within the Applicant has been accused of or charged with any crime or offense involving moral turpitude should be added as well.

Individual Trust/Estate Underwriting

The advent of the Trust/Estate Liability (TEL) Policy, discussed below, will now afford Underwriters the ability more granularly to evaluate and rate each trust and estate on such criteria as:

Estate Size . The TEL underwriting module generates rates based in part upon trust/estate administration fees, just as with the traditional FPL policy. Beyond that, trusts/estates with combined assets above the $2 million level should receive additional scrutiny for possible additional surcharges. This will turn in part on Asset Composition, discussed below.

Claims History . The claim loadings discussed above, should be apportioned between the Fiduciary's base Financial/Care Management (FCM) liability policy and any implicated trust or estate. If the Fiduciary has resigned, the surcharge should be applied entirely to the FCM policy.

Asset Composition . Asset classes held in trust should be carefully scrutinized. In most jurisdictions, liquid assets must be managed under applicable Prudent Investor statutory principles. Real property is subject to a variety of risk factors, including issues surrounding disposition, appraised value, family squatters, on-site bodily injury hazards, inadequate property insurance, and sentimental value. Closely-held business assets can be complex and problematic to the extent a fiduciary is drawn into day-to-day operational issues. The valuation and care of collections, rare art, classic cars and the like can become contentious as well. Care should be taken to examine significant recent or anticipated action with respect to property, such as impending or recently completed property sales, incurring extraordinary expenses (e.g. end of life), business hirings or firings and other such issues.

Beneficiary Disposition . The fiduciary's relationship and course of dealing with settlors and beneficiaries can bear on the likelihood of claim activity as such individuals are often the most likely claimants. A record of regular, substantive contact with stakeholders bodes well for risk avoidance.

Years under Management . The extent of a fiduciary's relationship with the beneficiaries of a trust or estate, can be a an important factor in either mitigating or exacerbating the potential risk of liability. High trustee turnover can be an important indicator of a contentious situation.

Compliance Documentation . Policies, procedures and compliance documentation can also mitigate risk in that it tends to render a fiduciary's professional services more uniform and defensible. Adherence to or departure from such standards can influence the risk profile of the account. A requirement of periodic compliance audits may be appropriate under certain circumstances, especially in connection with high asset values which may have higher exposure and for which audit fees may be more justifiable.

Breadth of Advisor Experience . Trusted, experienced, and well vetted advisors can add significant value in terms of risk mitigation. Accordingly, underwriters should assess the quality of advisors engaged by the Assured.

Each of the above factors certainly have relevance to existing and past claims. Going forward, we may well be able to provide additional insights regarding these and perhaps other pertinent factors relating to appropriate fiduciary risk selection. Beyond that we are willing to undertake a thorough examination of the nearly 400 prior and existing FPL and MML claims to see if we can further develop: (1) appropriate underwriting guidelines, (2) improved methodologies for tracking key risk indicators, and (3) risk management training materials. Significant work in this area has already been done, but there may be some hidden gems yet to be discovered. In the meantime, the following underwriting guidelines would be appropriate:

specific trusts/estates may be tagged for individual underwriting based on the FCM application listing or other sources of information available to underwriters, which may disclose factors such as high asset values, prior claims, business operations and the like;

claim loadings as described above should be allocated equally between the FCM and any implicated TEL policies;

a 1% loading may be applied cumulatively for each discrete risk factor identified by underwriters in their review of the trust/estate application;

the combined premium for a particular Assured's FCM and TEL policies should only fall below the prior year's premium level under very rare occasions of significantly changed circumstances; more often than not the aggregated premium should be substantially higher than the expiring FPL policy;

normally in order for a trust/estate previously insured under a TEL policy to be afforded primary tail coverage under an Assured's succeeding FCM policies, a 1-year or 3-year tail priced at 100% and 150% of expiring premium, respectively, must be purchased prior to the Assured's resignation.

Having taken a sampling of Assured's case loads, it has been noted that insuring every fiduciary case of some firms will not be practicable because of the sheer number of individual cases. Aggregating limits beyond a reasonable point would not be prudent because a common mistake propagated throughout an Assured's entire case load could trigger coverage under many policies simultaneously. Accordingly, restricting the aggregate combined limits on all TEL and FCM policies issued with respect to any one Assured to perhaps no more than $5,000,000 should be the aim. At a $250,000 limit per policy, that would mean any one Assured could have no more than 20 Lloyd's policies applicable to its case load, including its own FCM policy.

Policy Wording

We suggest consideration of the following policy revisions:

In order to implement the FFD program, amend section I.B.1 to read as follows:

The Underwriters shall have the right and duty to defend, subject to the Limits of Liability , any Claim against the Assured seeking Damages which are payable under the terms of this Insurance , even if any of the allegations of the Claim are groundless, false or fraudulent. Although Underwriters retain the exclusive right to appoint defense counsel to represent the Assured during the initial pleading stages of any litigated Claim seeking Damages which are payable under the terms of this Insurance , Underwriters shall not formally appoint trial counsel without the consent of the Named Assured , such consent not to be unreasonably withheld.

Also, consider making appropriate adjustments to offer first-dollar defense.

To enhance underwriter’s investigatory rights, amend section I.B.3 to read as follows:

The Underwriters shall have the right to make any investigation they deem necessary, including, without limitation, any investigation or examination of the Assured under oath with respect to the application and statements made in the application and with respect to coverage.

Delete coverage I.K (Conference Cancellation) to avoid potential aggregation of losses were an association conference cancellation to effect many Assureds at once.

Add supplemental coverages for General Liability (GL), Hired/Non-Owned Auto, Crime, and Cyber Liability.

Make all supplemental coverages subject to a $25,000 aggregate sublimit, with no applicable deductible.

Allow Assureds to purchase additional limits (subject to the policy deductible) of $25,000 or $75,000 for GL, Crime and Cyber, thus bringing the potentially available limit for each of these to either $50,000 or $100,000, including the $25,000 base limit.

To further enhance the simplicity and scope of coverage eliminate Exclusion L which is overly broad and duplicative of Exclusion P.

Delete the phrase "independent third party escrow agent" from exclusion O.

Add the following covered capacities:

Escrow Agent,

Interpleader Administrator,

Co-Fiduciary,

Court Visitor,

Court Facilitator, and

Trust Protector.

Modify exclusion P to read as follows:

to any Claim arising out of any disputes involving an accounting, return or reimbursement of fees, commissions, costs or expenses paid to the Assured ;

While this exclusion applies to the cost of initially preparing or subsequently correcting a trust or estate accounting, it does not exclude coverage for any irreparable, consequential Damages resulting from allegedly related acts, errors or omissions in the rendition of Professional Services by the Assured .

Modify the following definitions to emphasize that coverage is provided for Damages , not mere demands for money:

" Claim " means a demand received by any Assured for money Damages or services outside the Ordinary Course of Business including the service of suit or institution of arbitration proceedings against the Assured .

" Damages " means a monetary judgment, award or settlement, and shall include:

compensatory damages;

damages calculated as a multiple of compensatory damages (where insurable by law);

punitive or exemplary damages (where insurable by law);

pre-judgment interest; and

post-judgment interest that accrues after entry of judgment and before we have paid, offered to pay or deposited in court that part of judgment within the applicable Limit of Liability .

However, Damages shall not include any amounts for which the Assured is not financially liable or for which there is no legal recourse against the Assured , the costs and expenses of complying with any injunctive or other form of equitable relief, the reimbursement of fees, the payment of sanctions, surcharges, criminal penalties or any other matters that may be deemed uninsurable under the law.

To comply with monitoring counsel’s suggested modifications related to crime cover, revise section VIII. INNOCENT ASSURED to read as follows:

Whenever coverage under this Insurance would be excluded, suspended or lost:

because of any exclusion relating to criminal, dishonest, fraudulent or malicious acts, errors or omissions by any Assured , and with respect to which any other Assured did not personally participate or personally acquiesce or remain passive after having personal knowledge thereof, or

because of non-compliance with Clause XI Notice of Claim or Circumstance that may lead to a Claim , with respect to which any other Assured shall be in default solely because of the failure to give such notice or concealment of such failure by one or more Assureds responsible for the loss or damage otherwise insured hereunder,

the Underwriters agree that such insurance as would otherwise be afforded under this Policy shall cover and be paid with respect to those Assureds who did not personally commit or personally participate in committing or personally acquiesce in or remain passive after having personal knowledge of (a) one or more of the acts, errors or omissions described in any such exclusion; or (b) such failure to give notice, provided that if the condition be one with which such Assured can comply, after receiving knowledge thereof, the Assured entitled to the benefit of Clause VIII shall comply with such condition promptly after obtaining knowledge of the failure of any other Assured hereunder to comply therewith.

With respect to this provision, the Underwriters' obligation to pay in such event shall be in excess of the Deductible and in excess of the full extent of any assets of any Assured to whom the exclusion applies. Coverage under this Innocent Assured section shall only apply to Claims not otherwise subject to coverage under any crime bond endorsement offered to the Named Assured by Underwriters , whether purchased or not. However, subject to the terms and conditions of the Policy the Innocent Assured section will apply to criminal, dishonest, fraudulent or malicious acts, errors or omissions by any Assured not subject to coverage under any crime bond endorsement offered to the NamedAssured by Underwriters . In no event shall the Underwriters' obligation to pay exceed the Limit of Liability stated in Item 3 of the Declarations. Additionally, in no event shall the Underwriters' obligation to pay Claim Expenses exceed the Limit of Liability stated in Clause VI.D of the Policy .

Amend Q. Theft Coverage. in the Crime Endorsement to read as follows:

To pay on behalf of any Assured not complicit in any alleged Theft perpetrated with the alleged complicity of any other Assured , Damages and Claims Expenses , in excess of the "per Claim" Deductible , and in excess of the full extent of the recoverable assets of any complicit Assured , which any non-complicit Assured shall become legally obligated to pay because of any Claim first made against an Assured and reported in writing to Underwriters during the Period of Insurance or Extended Reporting Period (if applicable) arising out of any alleged Theft perpetrated with the alleged complicity of any Assured during the Ordinary Course of Business on or after the Retroactive Date set forth in Item 6 of the Declarations and before the end of the Period of Insurance .

High Revenue Accounts

As discussed in prior years, the premium levels for Lloyd's and competing carriers diverge significantly at higher levels of firm revenue. Consequently, in order to attract and retain larger accounts, we agreed to consider additional credits for firms with

premiums in excess of $7,500 annually. Typically, these larger practices have more experienced fiduciaries, better internal policies and procedures, and better trained staff. These are the accounts we want to retain. The flexibility underwriters have extended in the past with respect to these accounts has translated into higher retention rates. Accordingly, we suggest that we continue this practice of rate relief for large accounts.

Training . Dominion's in-house underwriting staff and producers will receive thorough training in the above program enhancements. In addition, Dominion will continue its analysis of claim trends in order to continuously refine its underwriting, claims handling and risk management training programs. This ongoing analysis will include a continuing in depth review of not only new, but past claims as well, gleaning what additional lessons they may have to offer.

Additional Underwriting Recommendations:

Consider requiring credit scores and adjusting premium accordingly.

Increase premium on high-risk exposures, by transitioning FPL to TEL accounts and applying claim surcharges.

Monitor locale/claim surcharges, increasing where the GLR exceeds 100% and decreasing where it falls below 50%.

Claims Experience & Handling

As noted above, the FPL GLR from inception is 48% incurred plus 14% reserved for a total of 62%. Of this figure, incurred monitoring costs account for 13%, defense for 23% and indemnity for 13%. Improvements in claims handling necessarily aims to reduce monitoring and especially defense costs, while containing indemnity payments.

Accordingly, we recommend that beginning with the inception of the new October, 2019, binding authority a new defense program designed to cap defense fees at no more than $25,000 per claim be adopted. As envisioned, the new Flat-Fee Defense (FFD) program would consist of a three-phase, flat-fee structure as follows:

Investigation/Settlement Phase ($5,000) . This phase would include the following legal services:

Review initial claim documents;

Calendar filing deadlines/key dates (if any);

Interview the insured(s) as well as friendly witnesses;

Gather documentary evidence from the insureds/public sources;

Prepare a timeline of relevant events in declaration/affidavit format;

Conduct a preliminary analysis of liability and damages issues;

Acquire supplemental materials to refine factual narrative;

Finalize factual narrative with documentary evidence;

Initiate settlement discussions/make "998" offer;

Prepare/file responsive pleading, if needed;

Prepare/serve discovery requests; and

Evaluate discovery responses.

Dispositive Motion Phase ($2,500, $5,000, $7,500 or $10,000) . If settlement cannot be achieved during the initial FFD Investigation/Settlement Phase, dispositive motions may be pursued. These would potentially include motions for judgment on the pleadings, summary judgment, partial summary adjudication and the like. The flat fee for this phase would be determined by consultation between monitoring and panel counsel during the preceding phase. Depending upon the complexity of the matter the fee, would range from $2,500 to $10,000 for this phase. An additional $500 dollar appearance fee would apply for attendance at court/discovery proceedings required during this phase, including oral argument, if necessary.

Trial Phase ($10,000) . In the event that the matter proceeds to trial, The Assured would be afforded input into the selection of defense counsel who would take any necessary deposition testimony and make good use of the materials generated in the preceding Dispositive Motion Phase to prepare for trial, as well as further settlement/mediation efforts. Panel counsel would normally be available to provide these services at the low rate shown above. However, even if they are not approved by the Assured , their prior work will have contributed significantly to trial preparation efforts. Settlement efforts will continue up to and throughout trial. This phase would not include any retrial or appellate proceedings—which would be rare. In addition, litigation costs, including expert witness fees, would apply in addition to the FFD fees outlined above.

It is envisioned that under the direction of Furman, Kornfeld & Brennan (FKB) Paul Savage of EquityLaw PLLC (ELP) and Lawrence Hilton of Legal Tender Services (LTS) would serve as panel counsel working under the FFD arrangement. Paul Savage, who has extensive experience in handling complex tax and accounting issues, could serve in an expert witness capacity in appropriate cases. He would also take the lead in initial claim work up. Mr. Hilton would normally act as trial counsel and serve as the primary contact for settlement discussions.

As noted above, the maximum, aggregate fee that would be charged for any single claim may be as low as $25,000. This maximum fee is half the amount of the average defense costs charged under the FPL program to date. The retrospective impact the FFD approach would have had on FPL defense costs had it been implemented from program inception is illustrated in the table below.

Defense

Category

Claim

Count

Total

Fees

Average

Fees

Adjusted

Total

Adjusted

Average

$0-$5k

13

$30,153

$2,319

$65,000

$5,000

$5k-$25k

45

$590,557

$13,123

$590,557

$13,123

$25k +

34

$3,637,069

$106,973

$850,000

$25,000

Totals

92

$4,257,779

$46,280

$1,505,557

$16,365

Based on the foregoing numbers the cumulative GLR for the FPL program, including full current reserves would have been 47%, rather than 62%. To the extent this approach can be implemented with respect to the defense of existing actual and potential claims reported under the current and prior binding authorities, the projected 63% FPL GLR may be improved by as much as two percentage points.

Monitoring costs can also be reduced by this streamlined approach. No longer will FKB have to review and process a complex variety of invoices for legal fees and costs. Defense fees will simply be earned up front at the beginning of each phase and charged against the Dominion bordereaux.

Implementation of the FFD program will necessitate policy wording changes. First, Underwriters will need to assert the right to appoint defense counsel. However, this change can be softened by perhaps considering first dollar defense and allowing Assureds to retain their own counsel at their own cost and expense or at the expense of the trust or estate implicated in the claim.

Monitoring and panel counsel recently conducted an instructive experiment with the FFD program in the case of Vorsatz v. Lassahn . Panel counsel was retained to do the initial work up and make settlement overtures. Accordingly, Mr. Savage reviewed voluminous documents and prepared a draft declaration outlining the pertinent facts. Under the FFD program, marshaling the facts early on will always be a top priority. Too often, detailed factual analysis is deferred until after the initial pleading stage, at significant additional expense.

Meanwhile, Mr. Hilton conducted several interviews with the Assureds, obtained additional documentation and prepared an initial draft settlement letter to plaintiff's counsel, which included an offer within the policy's deductible amount. Panel counsel also recommended that the complaint be answered, that written discovery be propounded, and that if settlement efforts were unavailing, a motion for summary judgment be filed for a flat fee of $2,500, 60-days after the original filing date, which is the earliest date allowed by statute.

By contrast, the Assured's local counsel recommended that the complaint be attacked by way of demurrer on purely technical grounds—predictably deferring addressing the claim on the merits until a later stage. The demurrer approach can often lead to a costly iterative process of the court granting leave to amend followed by yet another demurrer, over and over. Nevertheless, the Assureds found this suggested approach appealing because local counsel set dismissing the Assureds out of the case in their personal capacity as their top priority, even though this would leave the case intact against the insured entity. Local counsel also placed a $25,000 to $40,000 price tag on the cost of bringing a summary judgment motion. In addition, they voiced their view that such a motion would of necessity have to follow a full round of depositions.

This experiment thus laid bare the stark contrast between these two competing litigation strategies. The FFD approach seeks the most efficient, expeditious, and low cost path to claim resolution. Whereas, a more traditional litigation strategy tends to pursue a somewhat lethargic, piecemeal and costly course of action, with repeated continuances and delays. In part this is due to the fact that, generally speaking, when a new lawyer is introduced into the claims handling mix, additional charges and delay accrues to bring that new counsel up to speed and also as a result of the tendency of firms to "work the case" enough to realize an often unspoken minimum fee per file. Ideally, the first attorney to touch the file would work it through to conclusion whenever possible.

Introducing the concept of panel counsel working under a per-claim cap on defense costs addresses a number of additional problems encountered to date. For example, carriers offering low wasting limit policies always run the risk of extra-contractual liability for not defending and settling the claim within the available limits. This problem was recently highlighted by the Bautista claim which may ultimately only have a $250,000 limit available of which $160,000 in defense costs has already been consumed. With a $25,000 cap, Underwriters may want to explore the concept of first-dollar defense. Such a feature, while seemingly counterintuitive, would draw significantly more premium into the program at little additional cost. Over the entirety of the FPL program first-dollar defense would have cost underwriters $185,000. Moving forward if Underwriters were to reserve to themselves the ability of make settlement offers within the deductible amount without the Assured's consent, this would tend to enhance the potential for early settlement and ensure that deductible amounts are put to good use.

In addition, panel counsel could more effectively develop a brief bank of relevant case law and forms, which now are dispersed among defense counsel nationwide. Panel counsel could also provide training regarding developing trends for Dominion underwriting personnel who for the most part work out of the same location. Collectively, panel counsel currently hold licenses to practice law in New York, Utah and California. However, pro hac vice or reciprocal admissions could be easily obtained as the need arises. Significantly, 78% of the total FPL claims are located in the Western Region where panel counsel is located.

Claims Handling Recommendations

Implement the new FFD program with the inception of the new binding authority.

Move as many existing claims to the FFD program as reasonably possible.

Hold monthly claims round tables to analyze claims developments and resolution strategies.

Roll out policy form changes in support of this suggested new claims handling program.

Marketing

There has been growing pressure from competing brokers to shop our fiduciary accounts widely. Nevertheless, we are always sure to highlight Lloyd's advantages over the competition. This has been made easier by policy improvements over the past few years. In addition, the ease of renewal using the new short-form renewal application approved by underwriters has been very well received by the insureds and undoubtedly has contributed to higher retention rates.

FPL competitors have been steadily improving their policy forms. We have worked to position our Lloyd's offering as the preeminent program for professional fiduciaries—differentiating ourselves on quality rather than price. Steady, prudent program improvement such as the additional coverages discussed above is important to maintaining that claim.

In order to write more low risk accounts and make the higher premiums that must be charged for fiduciary risks more palatable, we suggest a new policy type— Financial/Care Management (FCM) liability insurance. This policy would have a relatively low initial rate included low hazard practice areas of Bookkeeper, Daily Money Manager and Care Manager. Primary and/or excess Fiduciary coverage could be added for significant additional premium. When a prospect first comes to the Dominion Website, pricing for the low-cost base policy would be presented. The applicant would then be able to add and/or remove coverage for these additional professional services, as well as increase limits for General Liability, Cyber and Crime cover above the $25,000 combined aggregate limit for supplementary coverages discussed above in real time. For example, this worksheet would allow the applicant to compare the cost of primary fiduciary coverage against that of excess fiduciary coverage.

The FCM policy would dovetail with the Trust/Estate Professional Liability (TEL) policy which has been under consideration for some time. Recent technical enhancements to the Dominion website make it possible for the insured to easily add and manage coverage for individual trusts/estates/powers and thus allocate premium for such to the entities thus insured.

The TEL program presents a significant opportunity for growth. The concept is to offer existing FPL insureds the opportunity to secure additional coverage for the trusts, estates and powers they administer. Thus each existing insured could spawn a number of additional new policies. Of course, we plan to maintain the current FPL product as it currently exists, but also add this new product. Adoption rates could be further enhanced by offering surety coverage options on an estate/trust basis as such coverage is often required by the trust document, statue or court order. Pricing should be set such that three standard TEL policies attached to a FCM policy would match the current pricing of an FPL policy. Additional TELs would represent additional new premium into the program that otherwise would not have been generated. As many fiduciaries manage dozens of trust and estates, the potential for premium growth is significant.

Additional Marketing Ideas:

Add a new FCM offering which allows for easy comparison of policy types.

Improve retention of claims-free accounts through loyalty and claims-free credits.

Consider offering first dollar defense forms in conjunction with the new FFD program.

Further reduce account renewal friction by automated renewal of claims-free accounts.

Increase acquisition of low-risk writings through competitive pricing/coverage enhancements.

Consider offering TEL policies excess of competitor primary policies to expand the potential market.

We genuinely appreciate underwriters continued support and look forward to improving the scope and profitability of these programs moving forward.