2020 FPL/MML/MPL Binding Authority Narrative
Attorney/Client Privileged Communication
Thanks to the continued support of underwriters at Atrium, Dominion's binding authority, renewing December 1st, continues to enjoy good support, notwithstanding the substantial rate increase implemented last year. 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 remain intact.
Program Overview
Dominion currently writes nearly $2.37 million in FPL premium, down from nearly $2.5 million last year and about $225k in MML premium down from just under $250k in the MML at this time last year. Total written premium during the 2017-2018 contract period for all lines was $2,645,408.97, 2018-2019 was $3,197,524.14 (for 14 months annualized at $2,740,734.98), and 2019-2020 with two months left in the pipeline is $2,417,213.22. We anticipate another $160k in renewal premium for the current contract period, which would then close out just shy of $2.6 million.
The total policy count for the program currently stands at 562, down from 750 last year and 700 the year before, with the average premium per risk having increased by more than $1,000 to $4,641.73 in comparison to last year's figure of $3,636.90. The current average FPL premium is $7,467.889 compared to the prior period average of $5,529 and $5,300.44 for the period before that. MML average pricing is up as well -- $928.01, $871.71 and $852.38 for the last three contract periods.
The combined Gross Loss Ratio (GLR) since inception for all sections other than FPL is negligible. The highest among these is MML, which has fallen from just over 11% last year to below 10% this year. By contrast, the FPL program based on gross written premium from inception sits at 52.05% incurred plus 6.72% reserved for a total of 58.77%. Remarkably, the GLR for the entire duration of the FPL program is down from more than 62% to less than 59% in a single year. The program as a whole, inclusive of MML premium, has now dropped to less than 54.5%. This combined with underwriters' 5% increased share of gross written premium has dramatically improved results for Atrium. This is due largely to efforts by Furman, Kornfeld & Brennan (FKB) to close out claims, more than halving the reserve percentage from 14% last year to now under 7%, combined with their implementation of the claim defense Pilot Program to achieve a marked reduction in defense costs.
In addition, rate increases implemented this year have contributed to improving results, but not at a substantial cost in terms of lost renewals. The program lost 103 renewal accounts this past year, 71 of which were claims free and accounted for $303,715 in expiring premium. The average premium increase sought by underwriters on these accounts was 61.79%. An additional 32 renewals with claims, amounting to $314,191 in renewal premium was lost as well. The average premium increase sought on these accounts was 90%. Had we retained the claims-free accounts, the cumulative GLR could have been nearly a full percentage point lower.
This all suggests that renewal retention, coupled with a concerted effort to win back lost claims-free accounts, should be primary objectives for the coming year. In addition, we may even want to consider lost accounts with lightening-strike type claims, as we confidently look forward with the days of six-figure claim defense costs having come to an end, thanks to the promising results of the claim defense Pilot Program reviewed more fully below.
Underwriting
Rate Adequacy
FPL average rates are more than double the most popular domestic competition. In view of the falling GLR and revised claims handling strategy outlined below, implementing yet another rate increase this year should not be necessary and would be devastating to the book which already shed 103 accounts this past year.
Accordingly, we recommend flat renewals for claim-free accounts, using a short-form application. A full application should continue to be required for accounts with claims. We would also like put out non-binding, competitive indications for lost claim-free accounts subject to underwriter approval on a case by case basis.
Locale Modifiers
We have not noted any basis for adjusting Locale modifiers implemented this past year, especially since we are only one year out from those changes.
Large Claim Analysis
Remarkably, the following twelve claims, the only ones with total loss amounts surpassing $200,000 each, account for $5,297,761.31 of the $12,622,492.43 total FPL claims costs to date — incurred and reserved. That’s nearly 42% of the whole in twelve out of 403 total claims. It is encouraging to note that only four of these twelve are currently opened, and two of those are on the verge of closing within reserves. One claim fell out of the top twelve due to a favorable settlement well below the $200,000 mark, and one open claim moved up to take its place. The majority of these accounts have been culled out of Atrium's book, with only four of the twelve remaining.
Case
Year
Reserves
Monitor
Defense
Damages
Total
Error
Role
Cono v. Hersh
2010
$0.00
$71,946.11
$569,738.92
$70,000.00
$711,685.03
Intentional Wrong
Successor Trustee
Hanna v. Bautista
2017
$253,266.54
$37,122.75
$339,079.81
$0.00
$690,000.00
Death (non-ward)
Trustee
Whitmark v. PMR
2009
$0.00
$80,386.47
$339,079.81
$250,000.00
$669,466.28
Intentional Wrong
Successor Trustee
North v. Parks
2014
$0.00
$65,433.96
$231,092.75
$362,500.00
$659,026.71
Theft
Guardian
Forgery (Hance)
2015
$0.00
$92,292.95
$31,037.35
$473,683.31
$597,013.61
Theft
Fiduciary
Thale v. Brito
2017
$180,964.11
$18,241.60
$150,794.29
$0.00
$350,000.00
Accounting
Prior Trustee
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
$211,938.22
$17,120.78
$0.00
$80,941.50
$310,000.00
Theft
Fiduciary
Stack v. Hansen
2019
$88,406.40
$16,408.50
$145,185.10
$0.00
$250,000.00
Real Estate
Trustee
Simpson v. TSLG
2010
$0.00
$45,976.97
$74,830.59
$110,000.00
$230,807.56
Accounting/Fees
Prior Conservator
Malapetsas v. Hance
2010
$0.00
$32,778.33
$138,597.27
$34,000.00
$205,375.60
Accounting
Conservator
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 as well as Exclusion "P" was further modified last year to clarify that coverage applies 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. Wording changes have altered the crime cover to address this issue.
Wrongful Death . The remaining two cases in last year's top twelve were for wrongful deaths — one involving a ward and the other third parties. The former settled well under reserves and fell out of the top twelve, the other is essentially settled as well, only an issue regarding some unpaid attorney fees remain.
Real Estate . The final claim, which is new to the top twelve, involves a title defect, which the insured readily admitted would have been covered had she purchased extended title policy, which is generally available though not often purchased by sellers. In addition, one of the personal injury claims referred to above, grew out of the sale of real property. The realtor has contributed policy limits towards the settlement of the claim, but that only amounts to $50,000. So encouraging appropriate insurance for real estate sales would prudent. Perhaps a new application question along those lines would be in order.
Individual Trust/Estate Underwriting
Last year, after discussion with underwriters, we tabled the idea of introducing a new Trust/Estate Liability (TEL) Policy due to the profitability concerns that dominated binding authority renewal discussions. This year we would like to scale back that proposal to a TEL endorsement, rather than a whole new policy. Using the new application, for the past year, we have gathered information regarding the top ten accounts of each Named Insured by estate size. We propose offering $250,000 primary coverage for each of the 10 listed trusts/estates for an additional premium, partially offset by a reduction in the base policy premium. For example, we might charge a 100% endorsement surcharge along with a 50% reduction in the initial base premium used to calculate the surcharge. This approach will allow us to realize additional premium which the Named Insured can pass along to its clients, while reducing the premium the Named Insured is required to pay directly. The exact premium calculation may be subject to variety of considerations, such as:
Estate Sizes;
Asset Composition;
Beneficiary Makeup;
Years Under Management; and
Compliance Documentation.
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.
Policy Wording
Last year, we implemented sweeping changes to the FPL policy form. This year the only suggestions we have would be for the development of an independent contractor coverage extension endorsement, as that has been a sticking point with the competition, and a TEL endorsement along the lines discussed above.
Claims Experience & Handling
Pilot Program . As you know, the Furman, Kornfeld & Brennan firm (FKB) has been conducting a Pilot Program this past year involving the assignment of certain California claims to Lawrence Hilton of Legal Tender Services (LTS) and Paul Savage of EquityLaw PLLC (ELP). Thus far FKB has run five claims through the Pilot Program, two for consultations only, and three in which LTS has appeared as counsel of record or co-counsel in one instance. In handling these California FPL cases a number of claims handling insights have come to light which FKB, LTS and ELP have discussed at some length.
Standard of Care. First, the California Probate Code (“CPC”) codifies a “good faith” standard of care for fiduciaries. In two separate statutes, one for Trustees (§16440) and the other for Guardians and Conservators (§2401.3) the following identical standard is set forth immediately after a recitation of the grounds for fiduciary liability in the preceding subsection:
(b) If the [trustee, guardian or conservator] has acted reasonably and in good faith under the circumstances as known to the [trustee, guardian or conservator], the court, in its discretion, may excuse the [trustee, guardian or conservator] in whole or in part from liability under subdivision (a) if it would be equitable to do so.
Other CPC sections echo this same sentiment. For example, with regard to liability for interest payments §2401.5 repeats the foregoing verbatim. Also, §16040(b) expressly provides: “A trustee is not liable to a beneficiary for the trustee’s good faith reliance on [a trust’s] express provisions…,” and §2355 reads: “(a) If the conservatee has been adjudicated to lack the capacity to make health care decisions, the conservator has the exclusive authority to make health care decisions for the conservatee that the conservator in good faith based on medical advice determines to be necessary.”
Thus, in California, and likely in most, if not all, of the remaining States, the thrust of fiduciary liability defense efforts should be reasonable and good faith performance of fiduciary duties. Unfortunately, in all three cases LTS/ELP have defended thus far, the preceding counsel busily litigated on the basis of the appropriate handling of fiduciary duties, not that they were pursued in good faith . Obviously, the former burden of proof poses a much higher hurdle than the latter.
Advice of Counsel. Normally, good faith can be shown most readily by demonstrating that Fiduciaries adhered to advice of counsel and medical practitioners. However, where the counsel that rendered some or all of the suspect advice is retained as defense counsel (as is the case in all the pilot program matters except one), natural inclination draws the defensive strategy towards justification of the specific actions taken, not the underlying motives. Such counsel never even considered the advice of counsel defense. After all, to do so would be to second guess their own recommendations. Beyond that glaring blind spot, some counsel have candidly admitted that securing as much from Lloyd’s as possible constitutes their primary objective for disposing of the case.
Reserving Practices. Thus, not surprisingly, in two of the three cases we have handled, defense counsel proposed policy limit reserves in cases which we ultimately concluded presented low liability potential. In the other case, the Insured’s counsel estimated $150,000 to prepare for and appear at a pre-claim hearing, which was handled under the Pilot Program for a fraction of that amount. In that same case, the attorney which preceded the one LTS replaced actively lobbied the Insured to be installed as defense counsel "to make certain Lloyd’s paid the claim.”
Subrogation. Significantly, every one of the cases we have handled thus far presents substantial subrogation potential, which under the Pilot Program would be pursued on behalf of underwriters for costs — only taking a fee if the amount recovered were to exceed underwriters’ full outlay with respect to the claim plus subrogation costs (including any necessary research and writing performed by ELP). We estimate that successful subrogation actions on the three cases currently handled under the Pilot Program could reduce the GLR of the 14-year FPL program by more than one full percentage point. Imagine the savings that could be realized going forward if the good faith standard of care, coupled with the advice of counsel defense were routinely raised and subrogation pursued in all appropriate circumstances.
Defense Costs. Seeking cost savings by retaining counsel involved in the underlying case — essentially leveraging their familiarity with the factual and procedural background of the case — while tempting, often offers phantom gains, for the reasons detailed above. Certainly, instances do exist where local counsel can cost-effectively dispatch a frivolous claim. Beyond that though, we have found that prior counsel are often quite willing to assist with defense efforts gratis to aid their former client as well as to reduce their own potential liability.
Even where new counsel is retained to put up a defense, the institutional pressure in many firms to “work [churn] the case” distracts from the most direct path to resolution. Even though our Insured in almost all cases has a much better grasp on and documentation of the material facts than any claimant, perfunctory discovery efforts, often including costly depositions, has become an almost knee-jerk reaction. Sadly, many defense counsel defer the important work of really understanding the nuances of a case to when trial begins to loom large.
Although we have made significant progress over the last several years in the claims arena, both in terms of prevention and policy wording, we believe that there are significant savings yet to be realized by full implementation of the Pilot Program, especially in California which accounts for 60% of all claim expenses and 67% of all defense costs.
With regard to defense costs, last year we had proposed a Flat-Fee Defense (FFD) Program, which consisted of a fixed rate for three distinct stages of claim resolution: (1) Investigation/Settlement Phase ($5,000); (2) Dispositive Motion Phase ($2,500, $5,000, $7,500 or $10,000); and (3) Trial Phase ($10,000). Part way through the year we noted some inequities developing and pivoted to a No/Low Fee (NLF) program which has been quite successful. Essentially, there is no charge for LTS time and $150/hour for ELP time, plus costs. This appears to be working better for all concerned. LTS now takes the lead on all claim assignments and hands off discrete tasks to ELP as necessary. This way defense costs are kept to a minimum and ELP is not exposed to open-ended obligations.
Now that nearly all of the FPL insureds are on the most recent policy form, which includes Underwriters' right to designate pre-trial, investigatory counsel, the program is well-positioned to realize significant efficiencies in claim defense to realize dramatic savings in defense costs:
Although Underwriters retain the exclusive right to appoint defense counsel to represent the Assured during all pre-trial 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.
NLF counsel could more effectively develop a brief bank of relevant case law and forms, which now are dispersed among defense counsel nationwide. NLF counsel could also provide training regarding developing trends for Dominion underwriting personnel who for the most part work out of the same location. Collectively, NLF counsel currently hold licenses to practice law in New York, Utah and California. However, pro hac vice or reciprocal admissions could be obtained as the need arises. Significantly, nearly 80% of the total FPL claims are located in the Western Region where panel counsel is located.
Claims Handling Recommendations
Implement the new NLF program with the inception of the new binding authority.
Move as many existing claims to the NLF program as reasonably possible.
Hold monthly claims round tables to analyze claims developments and resolution strategies.
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.
While FPL competitors have been steadily improving their policy forms. Underwriters have answered with improvements of their own. We always work 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. This has been made easier by policy improvements over the past few years. For example, consider the Lloyd's FPL v. Allied MPL comparison which is provided to all Insureds considering a change between the two carriers.
In addition, the ease of renewal for claims-free accounts using a short-form renewal application approved by underwriters would definitely enhance retention. This coupled with the proposed lost account recovery program discussed above and TEL optional endorsement should place the program back on a profitable growth trajectory.
We genuinely appreciate underwriters continued support and look forward to improving the scope and profitability of these programs moving forward.