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The Actuary The magazine of the Institute & Faculty of Actuaries

Actuaries and the law

THERE HAVE BEEN very few reported cases of professional
negligence involving actuaries.
However, actuaries are not litigation-proof.
Claims certainly have been made against
actuaries and will continue to be made, even if the settlement
of such claims before trial means that the
number and size of claims may remain confidential.
Actuaries will often be attractive targets for would-be
litigants, and reasons for this include the following:
°ª By the time legal proceedings are started, it may no
longer be possible to sue those primarily responsible
for any financial loss, eg companies may have gone
into liquidation.
°ª Plaintiffs (or claimants under the new civil procedure
rules) tend to go against defendants with ‘deep
pockets’, ie professionals backed by professional
indemnity insurance.
°ª It is enough to show that an actuary caused the
financial loss it does not matter if others were also
equally responsible. Under English law there is no
direct apportionment of blame. If a particular defendant
caused the loss then that is enough. A claimant
can choose to pick on just one out of a number of
potential defendants.
This article focuses on actuaries working in the occupational
pensions field although many comments are
of more general application.
Cases in question
Actuaries can be sued:
°ª in the High Court (NRG v (1) Ernst & Young (2) Bacon
& Woodrow (1996));
°ª in the county court;
°ª following a complaint to the pensions ombudsman
(eg 1999 Minworth case F00265, where the ombudsman
decided that the actuaries in question were
‘concerned with the administration’ of the scheme
and therefore fell within his jurisdiction).
Pensions actuaries can be found liable to the trustees
of a scheme, the employer, and/or the members. There
are considerable opportunities for making mistakes in
such a technical area. For example, the actuary may
misread asset information and as a result overstate the
value of the assets, or he/she may be inadvertently
tempted to advise on the meaning of the scheme rules
and end up giving what is construed to be legal as
opposed to actuarial advice.
In order successfully to bring a claim against an actuary
a claimant must show that there is a legal cause of
action and that a loss has been caused. Examples of
some causes of action which can be used to pursue
claims against actuaries are given below.
Breach of contract
Where there is a contract between an actuary and a third
party (typically between an actuary and the scheme
trustees), if the actuary breaches that contract and causes
loss, the trustees can sue the actuary. Where the actuary
contracts to undertake a particular task, the contract
may specify what standard or duties are expected. Failure
to comply with what the contract specifies can qualify
as a breach of contract. Over and above that, even if
the contract is silent, there is an implied contractual
term that the actuary will exercise reasonable care and
skill in carrying out his/her functions.
In the context of a pension scheme, although the actuary
may have a contract with, say, the trustees, there
will often be a relationship between the actuary and
other persons in the scheme, eg the members or the
employer. Since historically only a party to a contract
has been able to sue another, the law has developed
other courses of action which allow, in certain circumstances,
persons affected by the actions or omissions of
others to bring claims. The actuary therefore may also
owe a duty of care outside the contractual relationship
and be open to a claim in negligence or negligent misstatement.
The Contracts (Rights of Third Parties) Act
1999 also confers rights to sue on third parties who are
benefited by contracts between others.
Constructive trust claims
This is an extremely complex area of law. However, of
particular relevance to those working in the pensions
industry is the potential claim of ‘knowing assistance
in a breach of trust’. Broadly speaking, a defendant can
be liable for assisting a third party to commit a fraud,
breach of trust, or breach of fiduciary duty. Typically in
a pension scheme context (and the common theme of
much of the Maxwell litigation), it may be said against
a professional involved in the pension scheme that the
professional must have realised that a breach of trust
was taking place (or at best deliberately shut his/her
eyes to the obvious) and is therefore liable for ‘knowing
assistance’. However, it is very hard to establish
such claims.
Establishing a case
The basic test to decide whether there is a valid claim is:
°ª whether there has been a breach; and
°ª if so, did that breach cause a loss?
How will the court decide whether the actuary
breached the contract, or is liable under some other
cause of action? The normal test is whether the actuary
exercised reasonable skill and care in carrying out
his/her functions. In normal circumstances, both sides to any contested case will call expert witnesses, experienced
actuaries who will give an opinion as to whether
the defendant has fallen short of the standards generally
expected of professionals in that field.
Guiding principles
One or two principles likely to be applied to actuaries
can be found from cases involving other professionals.
For example, are all actuaries to be judged equally?
Does a newly qualified actuary have to meet the same
standard as someone practising for 30 years? This issue
has often cropped up in
cases involving doctors.
The courts have not
always approached this
issue in a consistent
way. Broadly, there are
certain objective standards
which any actuary
would have to meet, but
more experienced or
specialist actuaries may
have higher standards
imposed on them. However,
where the defendant
is a company or a
firm, the organisation
may be found to be at
fault for failing properly
to supervise its more
junior members of staff.
There are some medical
negligence cases in
particular where the
courts have imposed a
higher standard on the
medical profession than
a majority of the profession
itself followed at the relevant time, ie the courts
have decided that something most doctors were doing
at a particular time could still be construed as negligent.
Principles in such an extreme form perhaps are
unlikely to be applied to actuaries. Nevertheless, it is
not necessarily an answer to a professional negligence
claim to simply say, ‘but everyone does this’. The
courts may well decide that the profession ought to
have higher standards.
Proving a loss
Generally speaking, a person bringing a claim against
an actuary will have to show that the actuary’s act or
omission caused a loss to the claimant. This can be a
difficult issue in a pension scheme case.
Take as an illustration the situation where there is a
contract between the trustees and the actuary: the
actuary gives negligent advice and steps are taken in
accordance with that advice which result in a deficit in
the scheme. If it is a balance of costs scheme, then the
deficit should be amortised over a period of time
unless the employer becomes insolvent. There might
therefore be no loss at all to the trustees, but the
employer will have to make good the deficit. It is the
employer who has suffered the loss but the contract is
between the actuary and the trustees. The courts have
created a number of devices whereby a remedy may be
granted to the employer in such circumstances.
The actuary may be able to rely on the ‘causation’
defence. This is a frequently used defence in professional
negligence claims. The argument deployed is
that even if the actuary had given the correct advice
the client would not have followed it. Therefore the
advice did not cause the
loss. This is a second-tier
defence the defendant
actuary would usually
far rather argue that
his/her advice was correct
than that his advice
made no difference!
As mentioned earlier,
the claimant can decide
which of a number of
defendants to sue. For
example, where an actuary
and the solicitor
both advise on the pensions
schedule to a sale
agreement and the
advice is negligent, it
may not be clear who is
responsible for a particular
area. The client
decides only to sue the
actuary. Can the actuary
pass on any of the liability
to the solicitor? The law provides a mechanism
whereby a defendant can seek a contribution or an
indemnity from a third party that it believes is wholly
or partially responsible for the loss claimed by the
claimant. So if you consider that you have been
unfairly selected as a defendant you can go on the
offensive against the relevant co-professional. If you
do point the finger at your co-professional, the court
will decide how the liability should be apportioned
between you on the basis of what is ‘just and equitable’,
having regard to the extent of each person’s
responsibility for the damage in question.
What if the actuary believes that the client is partially
to blame, eg if the client was responsible for providing
the raw data for carrying out the valuation or if it gave
unclear instructions? There is a defence of ‘contributory
negligence’ which can be run. However, such defences
are fairly rare in the context of professional negligence.
The client has usually hired the professional adviser
because he or she does not possess that skill himself,
and it is not an attractive argument to run that the
client should have spotted the adviser’s mistake.