2021 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 more than $2.4 million in FPL premium, up from $2.37 million last year, and about $222k in MML premium down from approximately $225k 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), 2019-2020 came in at $2,593,655.22, and with two months left in the pipeline is $2,296,687.11. We anticipate another $260k in renewal premium for the current contract period, which would then close out just over $2.5 million.

The total policy count for the program currently stands at 522, down from 598 last year, 750 the prior year and 700 the year before that, with the average premium per risk having increased by more than $500 to $4,896.98 in comparison to last year's figure of $4,337.21. The current average FPL premium is $8,407.98 compared to the prior period average of $7,467.889, and $5,529.00 and $5,300.44 for the periods preceding that. MML average pricing is up as well -- $955.61, $928.01, $871.71 and $852.38 for the last four contract periods.

The combined Gross Loss Ratio (GLR) for the entire program sits at 48.05% incurred and 53.60%, including reserves, since inception. That’s down from 54.5% last year. This combined with underwriters' 5% increased share of gross written premium has dramatically improved results for Atrium. This is due largely to the combined efforts of Dominion and Furman, Kornfeld & Brennan (FKB) to close out claims, dramatically reducing the reserve percentage. As it stands now, there remains only one potential claim open within the first 10 contract years, and no actuals. For the years beginning 2017 through the present there are 25 actuals and 25 potentials.

Rate increases implemented this year have contributed to improving results, but at a substantial cost in terms of lost renewals. The program has lost 76 renewals this year and 103 last year. New business writings has dropped off to a trickle.

This suggests that renewal retention, coupled with a concerted effort to write new business and 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 179 accounts in the last two years.

Accordingly, we recommend flat renewals for claim-free accounts, using the recently approved short-form application. A full application should continue to be required for accounts with claims. We would also like to put out non-binding, competitive indications for lost claim-free accounts subject to underwriter approval on a case by case basis. We would also suggest modification of the step rate factors in order to win more new business. Lower initial step rates spread over a longer period of time will help bring more low exposure premium into the program.

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.

Claims Experience & Handling

Pilot Program . As you know, FKB has been conducting a Pilot Program involving the assignment of certain claims to Lawrence Hilton of Legal Tender Services (LTS) and Paul Savage of EquityLaw PLLC (ELP). Thus far, we have enjoyed good success with the program, securing settlements below reserves, obtaining favorable venue, dispatching claims by way of dispositive motions, and positioning cases for attorney fee recoveries. Beyond that, incurred defense costs have dropped from $805,899 in 2018 to only $59,115 in 2019. Based on lessons learned thus far, Dominion has and will continue to present “Three Easy Steps to Liability Proof your Practice” to Professional Fiduciary Associations in Michigan, California, Arizona and Texas, as well as to the National Guardianship Association this fall. Topics include issues such as the following:

Standard of Care. 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, 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 cases we have handled, defense counsel proposed policy limit reserves in cases which we ultimately concluded presented low liability potential. Also, Insured’s counsel have estimated as much as $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, many of the cases we have handled thus far present 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 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, we recommend that underwriters seriously consider putting investigatory counsel on a monthly retainer to cap defense costs. Essentially all claims headed for litigation can and should be handled by retained investigatory counsel through discovery. The policy wording should be updated to reinforce this concept.

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.

Claims Handling Recommendations

Put Investigatory Counsel on retainer; and

Update the policy wording to clarify that Trial Counsel is only to be appointed after close of discovery.

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 is definitely enhancing retention. This coupled with the proposed lost account recovery program, and step rate modifications discussed above 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.