I. Introduction

An actuary is "that professional who is trained in evaluating the current financial implications of future contingent events." ¹ Using mathematical skills to define, analyze and solve complex business and social problems, the actuary designs insurance and pension programs and is responsible for their financial soundness. These programs create long-term financial obligations of an enormous magnitude dependent on the actuary's forecasts of probabilities and economic developments. ²

As a professional, an actuary's performance must confirm to certain standards of care or he will risk malpractice exposure. In essence, these standards of care are the same as those applicable to other professions - they require the actuary to use due care and diligence and to follow generally accepted actuarial principles. ³

In the past, actuaries were rarely named as defendants in lawsuits and it was even more rare for a court to find an actuary liable.⁴ However, recent changes⁵ have brought the actuary into the public's eye - partially because of the profession's increased visibility in political forums ⁶ and partially because of the emerging law of actuarial malpractice. Consequently, actuaries are finding themselves as defendants in lawsuits more frequently ⁷ and with the increased exposure there is a clear need for lawyers to be conversant in the principles of actuarial malpractice.

Because there is little generally available literature on the structure of the actuarial profession, this article will first provide these key background considerations: (1) that under law, actuaries are deemed to be professionals; (2) the various professional actuarial societies and their designations; (3) the nature of the actuary's liability exposure; and (4) generally accepted actuarial principles. The article will then discuss: (5) the general principles of professional malpractice and the specific principles of actuarial malpractice including recent case development; and then finally, (6) consider the Employee Retirement Income Security Act of 1974 ⁸ and its relationship to the actuary's liability.

It should be noted at the outset that the term "actuarial liability" can be used in two ways: (1) in the financial/accounting sense, and (2) where through a negligent act or omission, an actuary subjects himself to legal attack. The latter definition will be the focus of this article.

II. Prefatory Considerations

A. Actuaries as Professionals

Any discussion of actuarial malpractice assumes that the law considers an actuary to be a professional and hence subject to standards required of all professionals. We believe the case law supports this conclusion.

Historically, the recognized professions (and hence, those that have been subject to malpractice considerations) have been law, medicine (including its various branches and dentistry) and the ministry. ⁹ More recently, principles of malpractice have been applied to, among others, the professions of accounting, ¹⁰ architecture,¹¹ and engineering. ¹²

It is certain as well, that actuarial work qualifies as a profession. Indeed, state courts have so held in defining actuarial work. One case defined an actuary as: "a person skilled in mathematical calculations whose profession is the calculation of insurance risks and premiums." ¹³ In another case, an actuary is defined as: "(o)ne whose profession is to calculate insurance risks and premiums . . ." ¹⁴

Indeed, actuarial work meets the traditional professional criteria of a calling involving a "special knowledge of a branch of science or learning." ¹⁵ As we shall see, the courts have not only declared the practice of actuarial science to be a profession, but have applied malpractice principles directly to the actuary, ¹⁶ leaving the matter unambiguous.

B. Actuarial Designations and Professional Societies

Any evaluation of actuarial liability and malpractice must be accompanied by an understanding of the rather unique array of actuarial societies and their underlying designations. The necessity for this understanding is heightened by the fact that the states do not license actuaries in a fashion similar to other professions and the federal government does so only in a limited fashion in a narrow area of practice. ¹⁷

In the United States, there are four major designation-granting professional actuarial organizations: the Society of Actuaries (Society), the Casualty Actuarial Society (Casualty Society), the Conference of Actuaries in Public Practice (Conference), and the American Academy of Actuaries (Academy). ¹⁸

The society was formed in 1949 by a merger of the Actuarial Society of America (founded in 1889) and the American Institute of Actuaries (founded in 1909). ¹⁹ Today, the Society has about 8,000 members, including Canadian members, ²⁰ and is the largest actuarial organization in the United States. Affiliation with the Society is as an Associate, (the designation: A.S.A.) ²¹ or Fellow (F.S.A.). ²² An Associate has successfully completed the first five examinations. A Fellow has successfully completed ten exams. Society affiliation is generally recognized to connote expertise in actuarial applications in the life insurance and the pension and health areas under some circumstances.

The Casualty Society was organized in 1914 as the Casualty Actuarial and Statistical Society of America. It adopted its present name in 1921.²³ In the early part of the twentieth century, the evolution of worker's compensation laws required the application of actuarial principles to sickness, disability, and casualty events. The differences between these problems and those of traditional life insurance led to the formation of the Society.

Today, affiliation with the Casualty Society is recognized at two levels, Associateship (A.C.A.S.) upon successful completion of seven examinations²⁴ and Fellowship (F.C.A.S.) upon successful completion of all ten exams.²⁵ Standing in the casualty Society is generally recognized to connote expertise in property and casualty actuarial considerations. Indeed, the casualty Society is the branch of the actuarial profession that promotes actuarial and statistical science as applies to insurance other than life. ²⁶

The Conference was established in 1950. The organizational emphasis of the Conference is upon consulting actuaries, and its membership includes individuals from all areas of actuarial expertise whose professional work is substantially limited to consulting. ²⁷

There are three classes of active membership in the Conference: Associate (A.C.A), member (M.C.A.), and Fellow (F.C.A.). ²⁸ An Associate must have attained membership as an Associate or Fellow of the Society, or of the casualty Society, or Fellow of the Canadian Institute of Actuaries, the Faculty of Actuaries or the Institute of Actuaries or alternatively have attained membership of the American Academy of Actuaries before January 1, 1979. In addition, as Associate must have at least five years of experience in responsible actuarial work. ²⁹

A Member of the Conference must: (1) be substantially employed in full-time consulting actuarial work as an actuary of a federal, state or local governmental unit or full-time as an enrolled actuary and; (2) have a position of substantial actuarial responsibility and; (3) have either, (a) attained membership as an Associate of the Society or the casualty Society or (b) as a Fellow of the Society, casualty Society, the Canadian Institute of Actuaries, Faculty of actuaries in Scotland or Institute of Actuaries or alternatively have attained membership of the Academy by January 1, 1979; and (4) have at least five years of experience in responsible actuarial work with at least three of those years spent engaged in activities described in (1) above. ³⁰ A Fellow must meet requirements numbers (1), (2), and (3(b)) above, and have at least twelve years of responsible actuarial experience. ³¹

The Academy was formed in 1965 as a national accrediting organization by its three underlying constituent organizations: the Society, the casualty Society, and the Conference. Admission into the Academy includes both an examination requirement and an experience requirement. The examination requirement is met by showing the attainment by exam of either an Associateship or Fellowship in the Casualty Society or the Society, or Fellowship in the Conference or the Canadian Institute of actuaries, Faculty of actuaries in Scotland or the Institute of actuaries. In addition, the examination requirement can be met by showing status as an enrolled actuary under ERISA.³² Persons who belong to the Academy are authorized to designate themselves as "Members of the American Academy of Actuaries" and to append to their names the initials "M.A.A.A." ³³

The current Academy experience is "three years of . . . responsible actuarial work." ³⁴ "Responsible actuarial" work is defined as "work, performed in the United States, which has required knowledge and skill in solving practical actuarial problems in any of the following fields: life and health insurance, group insurance, social insurance, pensions, or property and liability insurance." ³⁵

As a single body designated to represent all actuaries of all specialties, the Academy makes public statement and offers the profession's positions on the entire range of actuarial issues both at the state and federal level including Congress. ³⁶ The other critical and universal function of the Academy is in the area of professional ethics and standards. By informal agreement among the Society, casualty Society and the Conference, the Academy promulgates professional ethics (Guides and Opinions), and the professional standards relating to work product (Recommendations and Interpretations) which though applicable to Academy members, have profession-wide significance because of the high percentage of membership overlap. The Academy currently has approximately 7,000 members. Moreover, the Academy is the only major professional actuarial organization which admits actuaries whose sole professional designation is that of enrolled actuary under ERISA.

Finally, under ERISA, the Joint Board for the Enrollment of Actuaries issues a license to qualified individuals granting status as an "enrolled actuary". ³⁷ This status is a requirement for performing actuarial services under ERISA, ³⁸ and is granted upon passing two exams, EA1 and EA-2. EA-1 is the same as the Society of actuaries' exam number four. ³⁹ EA-2 is identical to Part 7-E, Section A of the Society's exam. ⁴⁰

In addition, three significant foreign designation-granting societies to which many American actuaries belong are worthy of mention: the Canadian Institute of Actuaries (granting the designation F.C.I.A. for Fellows; it also recognizes Correspondents and Students), the British Institute of Actuaries (granting the designation A.I.A. for Associates and F.I.A. for Fellows), and the Faculty of Actuaries I Scotland (granting the designation F.F.A. for Fellows). ⁴¹

C. Nature of Liability Exposure

Having both determined that actuaries are professionals as well as explored the various professional designations, we next focus on what an actuary does that can expose him to liability. ⁴² The critical determinant of the extent of exposure for the actuary is, of course, the nature of his employment.

Thus, the insurance company actuary, the government actuary, the in-house corporate actuary and the university instructor of actuarial science have relatively minor exposure in contrast to the actuary engaged in a consulting practice. The actuarial consultant is specifically holding himself out to the public as an expert in the actuarial field and as a result, has rather significant exposure.

Examples of the type of errors or omissions that could lead to substantial liability exposure in the pension area for the actuary are: (1) erroneous benefit determination for individuals, or for all participants in a valuation, (2) erroneous minimum funding calculations leading to an excise tax penalty, and (3) overstatement of maximum deposit leading to a carry over and a loss of the alternative use of money.

In the termination and merger area, exposure relates to erroneous determination of liabilities for plan termination, plan amendments, mergers or acquisitions which result in decisions that might not otherwise have been made. Besides the data errors of which the actuary may be aware, there are those of which he is unaware. Courts have held that the professional has a responsibility to challenge a clients information or data if it appears questionable. Indeed, the essence of the allegations in In re Equity Funding Corp. of America ⁴³ was not that the accountants and actuaries knew that the data was erroneous but that by using due care they should have known. ⁴⁴

In addition, an actuary could also incur liability for not indicating to his client the risks involved. By analogy, treating physicians in medical malpractice cases have been held liable even though they performed an operation in a reasonable and proper manner, simply because they failed to advise the patient beforehand that there were substantial risks related to the procedure.⁴⁵ Courts have held that by failing to advise the patient of the risks, the physician in effect took away from the patient the right to make an intelligent choice not to undertake the operation. ⁴⁶ If the actuary quite reasonably advises a client that his best estimate of the cost of a pension plan is seven percent of gross pay, but fails to advise the client that the actual cost may be substantially more or less than that, and if for unforeseeable reasons the actual costs are eleven percent of pay, the actuary might be subject to lawsuit for not fully disclosing the possibility and significance of a possible deviation from his forecasts. Finally, an actuary risks liability exposure from unwarranted delays which result in penalties, lost opportunities or wrong decisions.

D. Generally Accepted Actuarial Principles

Similar to the accounting profession, generally accepted actuarial principles are standards and practices that have been recognized by the profession and the courts as appropriate for application in specific actuarial contexts.

Generally accepted actuarial principles have been recognized in law. In United States v. Consumer Life Insurance Company,⁴⁷ the United States Supreme Court, in a case involving the determination of an insurance company's reserves for federal tax purposes concluded that the proper calculation of reserves should be carried out "under accepted . . . actuarial standards . . .".⁴⁸

In United States v. Zazove,⁴⁹ a case involving insurance reserves and benefits, the Supreme Court determined that the appropriate level of reserves should be determined "under accepted actuarial principles . . ." ⁵⁰ State courts have similarly recognized the existence of generally accepted actuarial principles. ⁵¹

Having noted the legal recognition of the principles, we next examine their sources. Under informal agreement between the principal actuarial societies in the United States, the American Academy of Actuaries has undertaken the standard writing function for the profession. Its annual Year Book ⁵² contains Guides, ⁵³ Opinions, ⁵⁴ Recommendations, ⁵⁵ and Interpretations.⁵⁶ These provisions are believed to represent the professions' codified portion of generally accepted actuarial principles. ⁵⁷

The provisions themselves range in scope and complexity from Guide 1(a), which provides that "the actuary will act in a manner to uphold the dignity of the actuarial profession and to fulfill its responsibility to the public," ⁵⁸ to Interpretation 6-B entitled, "Choice of actuarial reserving Methods and Assumptions for Participating Policies Sold by Stock Life Insurance Companies." ⁵⁹

Finally, as with all professions, standards of practices must be reconciled with applicable provisions of law. Of note here are the various provisions of ERISA which impose statutory requirements on the enrolled actuary. ⁶⁰ Nonetheless, even ERISA recognizes generally accepted actuarial principles: Section 103(a) of the Act requires actuarial reports to utilize "such assumptions and techniques as are necessary [to enable the actuary] to form an opinion as to whether the contents . . . are . . . reasonably related to the experience of the plan." ⁶¹ The American Academy of Actuaries requires that if the actuary deviates from certain standard practices he must explicitly qualify his report to disclose to his client that the calculations were performed using a technique other than that identified as acceptable for the circumstances at issue. ⁶²

One issue worth discussion is the determination of applicable actuarial principles when either the profession has not codified a principle or no statutory provision applies. Perhaps the most authoritative pronouncement in this area is Opinion A-7 of the American Academy of Actuaries. ⁶³ That Opinion is based on the Academy's Guide 4(b)⁶⁴ which requires the actuary to "exercise his best judgment to insure . . . that the [actuarial] methods employed are consistent with the sound principles established by precedent or common usage within the profession." ⁶⁵

Opinion A-7 states that sound actuarial principles and practices emerge from the utilization of generally accepted concepts described in recognized actuarial textbooks and actuarial literature including the professional journals ⁶⁶ and study notes for candidates for membership in the Casualty Society, the Conference, the Society and their predecessors.

In addition, that Opinion requires that an actuary working in a specialized field take into consideration the recommendations and interpretations of the relevant Practice Committees of the Academy including the Committees on Life Insurance Financial Reporting Principles, Property and Liability Insurance Financial Reporting Principles, Pension Actuarial Principles and Practices and Dividend Principles and Practices.

III. Professionals and Malpractice Generally

Before examining cases dealing specifically with actuarial malpractice, perhaps a brief review of general principles of malpractice will be instructive. When a professional advises his employer or client or others with whom he is in privity of contract,⁶⁷ a duty to exercise due care arises. ⁶⁸ Though professions differ, professionals are generally held to the same standard of skill. ⁶⁹ That standard requires that when a professional is rendering services for compensation he must use reasonable care and competence. ⁷⁰ A failure to discharge that duty will subject the professional to liability for negligence. ⁷¹ In performing duties, a professional does not guarantee correct judgment, only that in formulating his judgment and work product he exercise reasonable skill and competence in good faith without fraud; this is true for physicians, accountants, attorneys, actuaries, and other professionals. ⁷²

While not an insurer against damage to his client, a professional may be held liable on grounds of "negligence to one with whom he is in privity or with whom he has a direct contractual relation for . . ." ⁷³ damages which naturally and approximately⁷⁴ flow from his failure to use the necessary amount of skill and care.

In most cases,⁷⁵ a malpractice action is brought under an expressed or implied contract theory. This is the usual case where a professional is hired by a firm or a client to perform a skilled service. If the service is not performed completely, contract law generally allows recovery for all damages proximately caused by the breach. ⁷⁶ Tort law holds that one is responsible for the consequences of his acts and where his act causes damages to another, he is liable. ⁷⁷ A tort action could be brought when a third party who had no contractual relationship with the professional was nonetheless harmed by relying on his work. Generally, only gross negligence or fraud by the professional would be sufficient for a third party to bring a successful tort action. ⁷⁸ Often professionals will disagree as to the proper techniques to apply in a given instance. In this case, the law only requires that the professional use the technique he deems fairly applicable to the situation presented. ⁷⁹ In the past, when a court judged a professional's acts, it would evaluate the degree of knowledge, skill and judgment usually possessed by members of that profession in the community where the action arose. ⁸⁰ Recently, as professional literature has become much more readily available to all practitioners, courts have looked less to local standards and instead have evaluated the general standard of care within the profession. ⁸¹ Experienced experts in a specific area of a field are held to even higher standards than professionals who have only a general knowledge of the subject. ⁸²

IV. Actuarial Malpractice

The general law of malpractice has been applied to actuaries in a manner similar to that of other professions. We have stated that in the past, cases of actuarial malpractice were rare, but the emerging trend today illustrates that plaintiffs do not hesitate to name an actuary as a defendant nor the courts to impute liability where the facts warrant.

A. Actuarial Malpractice Cases

Three major cases will be discussed which illustrate the depth and scope of liability that can attach to an actuary's work product. Equity Funding ⁸³ is perhaps the most noteworthy case involving actuaries. The case grew out of an alleged massive securities fraud perpetrated over an eight year period by the Equity Funding Corporation of America (EFCA) and its subsidiaries. ⁸⁴ EFCA was a small financial services institution that had ostensibly grown into a powerful corporation managing over a billion dollars in assets. ⁸⁵ This dramatic growth was subsequently exposed as a fraud and EFCA immediately filed for bankruptcy. ⁸⁶

Investors in the company sued outside individuals and firms that knew or should have known about the fraud. ⁸⁷ Among those sued were certified public accountants for EFCA, banks that had given credit to EFCA, and an actuarial firm that did work for one of EFCA's subsidiaries, Equity Funding Life Insurance Corporation (EFLIC). ⁸⁸

The actuarial firm had issued reports and opinions indicating EFLIC's reserves, premiums and actuarial calculations were in order. ⁸⁹ In fact, more than one-third of EFLIC's recorded life insurance policies were fictitious entries. ⁹⁰ In its pleadings, the plaintiffs alleged the actuarial firm had committed common law negligence, fraud and breach of fiduciary duties under the Securities Act of 1933 ⁹¹ and the Securities and Exchange Act of 1934, ⁹² by not discovering the fraud.

The major portion of the case was eventually settled out of court for a total of $53 million. ⁹³ The actuarial firm paid $3 million of this amount. ⁹⁴ In the aftermath of the litigation one of the actuaries employed by EFLIC was given a two-year jail sentence ⁹⁵ and he and another actuary were expelled from their professional organizations. ⁹⁶ This litigation suggests that actuaries, like other professionals, must use due care and have a duty to investigate when they encounter circumstances which would prompt a similarly situated professional to undertake a more critical inquiry.

In a precedent-setting Canadian case, ⁹⁷ a life insurance company and its actuary were sued for breach of contract, negligence and breach of fiduciary duties for two errors made by the company's actuary. ⁹⁸ In the pleadings, plaintiff British Columbia Automobile Association (BCAA) prayed for $500,000 in damages. ⁹⁹ After the trial, during which four actuarial consultants gave expert witness testimony, BCAA was awarded $295,000 and costs. ¹⁰⁰ During the course of the litigation, there was not a dispute that the errors had been made - only a question of whether there were resultant damages and if so, whether they could have been mitigated. ¹⁰¹

A presentation made by the defendant actuary to BCAA on the effects of a proposed amendment to the BCAA's pension plan contained two "serious errors" according to the judgment. ¹⁰² According to the court, one was that although the actuarial presentation purported to use salaries at January 1, 1977 levels, the calculations underlying the presentation were in fact based upon salaries at January 1, 1976 levels. ¹⁰³ Thus, the costs for indexing the plan's benefits were based on salaries a year out of date.

The second actuarial error noted by the court related to the calculations the actuary made in the presentation to BCAA.¹⁰⁴ In the calculation, the full earnings of the employees were used instead of their pensionable earnings which were usually $1,800 less on an annualized basis. ¹⁰⁵ The court held that the contributions made to the original plan were overstated; that BCAA thought there was more money going into the plan than there actually was. ¹⁰⁶ Indeed, the actuary projected a $12,500 annual saving for BCAA, instead the amendment cost an additional $50,000. ¹⁰⁷ Damages were calculated by considering the lump sum additional cost to BCAA of adopting a plan that was more generous than it would have otherwise adopted had it known the true costs.

This case suggests: (1) a damage formula for actuarial malpractice, and (2) the willingness of at least Canadian courts to apply traditional malpractice considerations to actuaries.

A recent case commented on the consequences of actuarial miscalculation as it affected the costs of benefits in a pension plan. In Saffo v. Occidental Life Insurance Co., ¹⁰⁸ pension recipients sued their former employer for reducing their benefits. ¹⁰⁹ Benefits were reduced by the employer-sponsored plan when Occidental realized that it had assumed the risk of paying more in benefits than it received in contributions. ¹¹⁰ Occidental's actuaries had erroneously determined that the plan could support a certain level of benefits and Occidental guaranteed this level to the union. ¹¹¹ When Occidental tried to amend the plan and reduce benefits, it was sued for actuarial malpractice and breach of contract for failing to inform the Internal Revenue Service of the proposed change. ¹¹² The Eighth Circuit Court of Appeals found that Occidental had breached its contract and that it was liable for actuarial malpractice, fraud and breach of fiduciary duty. ¹¹³ The court ordered Occidental to pay into the plan what it had initially promised and to pay the benefits that it had withheld when it tried to reduce its payments. ¹¹⁴

B. Actuarial Liability to Third Parties

Although actuaries may not be held liable upon the theory of ordinary negligence to third parties with whom they have no contractual relationship or for whose special use they did not know their report was made available, ¹¹⁵ an actuary may, upon a theory of fraud, be found liable to such third parties for false financial statements, where he has reason to know or believe that the statement will be relied upon, and fraud may be inferred from conduct amounting to gross negligence. ¹¹⁶ Under such circumstances fraud pre-supposes not only an untrue statement but also a fraudulent intent or reckless disregard for the truth. ¹¹⁷ A mistake in a "reserve statement" which is the result of mere negligence is usually not a basis for recovery by a third person, ¹¹⁸ but a representation certified as true to the knowledge of the actuary when there is no knowledge, a reckless misstatement, or an opinion based on grounds so flimsy as to lead to the conclusion that there is no genuine belief in its truth, is a sufficient basis for finding liability. ¹¹⁹

An example of a case where there was no fraud on the part of the actuary and therefore no liability to third parties not in privity is Dill v. Wood Shovel and Tool Co. ¹²⁰ In this case, third parties relied on allegedly negligent actuarial advice concerning the amount of payments to be paid into a pension fund and sued the fund's actuaries. The United States District Court for Ohio held that although the issue of third party liability had not arisen before in an actuarial setting, it had in an accounting case and the principle of not allowing third parties to recover absent fraud by the professional, was equally applicable. ¹²¹ Therefore, the claim by the third party against the actuarial consultant was properly dismissed. It should be noted that this case was decided before ERISA was enacted and before plan actuaries had to act on behalf of all plan participants. ¹²² If the case had been brought after ERISA the actuaries may have been found liable to participants and beneficiaries harmed by the erroneous advice.

C. NAIC Actuarial Opinions

In addition to general consideration of actuarial malpractice, specific actuarial opinions merit consideration. The key public financial report for United States insurance companies is the annual statement blank¹²³ of the National Association of Insurance Commissioners (NAIC). ¹²⁴ The blank is used exclusively for financial reporting purposes by all fifty states.

Recently, a statement of actuarial opinion has been added to the Life and Accident and Health Blank as well as the Property and Casualty Blank. The actuarial opinion for both blanks requires the actuary to: (1) state that he is qualified to render the opinion, (2) describe the subjects on which the opinion is to be expressed, (3) describe the scope of his work, (4) express any qualifications he may have about his opinion, ¹²⁵ and (5) state that the items he examined were calculated in accordance with generally accepted actuarial principles. ¹²⁶

The key components of these actuarial opinions relate to the status of the insurer's reserves. The critical element of the balance sheet for both life and property casualty insurers is also the status of reserves; the liability exposure of the actuary who authors the opinion is significant. Not only would the actuary be liable to the direct users (the insurer and affected regulators) for an erroneous opinion, but the actuary would also be liable for damages incurred by third parties not in privity who relied on his opinion. This follows because at the time the actuary wrote his opinion he knew that it would become a public document and outsiders would rely on it. ¹²⁷

It may be possible for the actuary to minimize liability by qualifying the NAIC opinions. Both opinions have provisions which permit the actuary to qualify the opinion. ¹²⁸ If the actuary relies on underlying information that cannot be readily verified, he may create a successful defense by explicitly stating such qualifications. Research has failed to locate any reported cases of an actuary being sued for an actuarial opinion which turned out to be inaccurate because the underlying material he used was inaccurate and where his defense was that he had disclaimed any knowledge of the material's accuracy. In a closely parallel situation in the accounting profession, C.I.T. Financial Corp. v. Glover, ¹²⁹ accountants were sued over an audit they had performed which listed the value of a company's collateral substantially higher than it was actually worth. Other parties relied on the over-valuation and suffered damages as a result. The accountants, however, had asserted in their audit report appropriate disclaimers qualifying their general assertions about the company's collateral and its financial stability. The United States Second Circuit Court of Appeals held that the disclaimers were warnings sufficient to exculpate the accountants of any liability. ¹³⁰ This discussion of course, presupposes no fraud on the actuary's part and an absence of suspicious circumstances which would lead a reasonably prudent professional to further investigate. ¹³¹

V. ERISA

A discussion of actuarial liability is incomplete without consideration of ERISA, which became law in 1974. It constituted a massive, complete overhaul of the federal laws relating to affected private pension plans. Every existing employee retirement plan had to be revised to avoid loss of qualified status. ¹³² Stricter duties and responsibilities were mandated for all professionals including actuaries who service such plans. These added responsibilities concern, inter alia, plan qualification, reporting requirements, and professional and fiduciary duties. In addition, enforcement provisions and a new regulatory board were created to regulate affected actuaries.

Actuaries who provide services for plans under ERISA are subject to certain sanctions if they do not meet its statutory requirements. Specifically, ERISA creates civil and criminal causes of action against individuals, including actuaries, who violate its provisions. ¹³³ ERISA also imposes special status on any person who performs certain functions for a plan and holds them to higher standards of independence and accountability. ¹³⁴

A. Joint Board for the Enrollment of Actuaries

As discussed earlier, ERISA created a professional called an "enrolled actuary." To regulate the enrolled actuary ERISA also created the Joint Board for the Enrollment of Actuaries. ¹³⁵ The function of the Joint Board is to establish admission requirements for actuaries who wish to perform services for plans under ERISA. The Joint Board promulgates standards and requirements for actuaries of all employee pension benefit plans covered by ERISA and enrolls those qualified to practice before the Department of Labor and the Internal Revenue Service. ¹³⁶ Actuaries who qualify are known as enrolled actuaries. In addition to enrollment, the Joint Board has the power to suspend or terminate enrollment of any actuary if it finds that such individual: "(1) has failed to discharge his duties under this Act or (2) does not satisfy the requirements for enrollment as in effect at the time of his enrollment." ¹³⁷ Of particular interest are the following sections of the Joint Board regulations: Section 901.20, which sets standards for actuarial services; ¹³⁸ and sections 901.30 and 901.31 which provide the authority for and the grounds for suspension or termination of enrollment. ¹³⁹

B. Plan Qualifications and Reporting Requirements

The Act requires all employee benefit plans to appoint at least one administrator who will have complete responsibility for the operation of the plan and will be deemed a fiduciary. ¹⁴⁰ As a fiduciary, the plan administrator is subject to liability for another fiduciary's acts and must not engage in certain transactions. ¹⁴¹

ERISA states that all qualified plans must expressly provide: (1) a procedure for establishing and carrying out a [sound] funding policy (2) a description of how responsibilities for the operation and administration of the plan will be allocated, (3) a procedure for amending [the] plan, and (4) the basis on which payments are made to and from the plan. ¹⁴² In addition, the administrator must engage an enrolled actuary to prepare the materials comprising the actuarial statement. ¹⁴³ The actuary is required to submit certain reports to the Department of Labor and the Internal Revenue Service. ¹⁴⁴ These yearly actuarial reports must contain a complete actuarial statement describing the plan year prepared by the enrolled actuary and filed by the administrator within 210 days of the close of the year. ¹⁴⁵

C. Professional Responsibilities

In addition to reporting requirements, ERISA increases the accountability and visibility of the actuary. Plan actuaries must act on behalf of the plan and use unbiased, independent judgment when selecting actuarial methods and assumptions. ¹⁴⁶

One new responsibility the actuary incurs under ERISA is the duty to perform an actuarial valuation of the plan at least once every three years, or more frequently if necessary to support his opinion, and include it in the actuarial report. ¹⁴⁷ The actuarial report is a comprehensive document which lists all pertinent financial transactions of a plan over a one year period. ¹⁴⁸ The actuary must assert that to the best of his knowledge the report is complete and accurate and he must also certify the amount of any contribution necessary to reduce the accumulated funding deficiency to zero. ¹⁴⁹ The Act further requires the actuary to justify any changes he makes in the actuarial assumptions ¹⁵⁰ or cost methods ¹⁵¹ and to certify that all costs and liabilities are "determined on the basis of actuarial assumptions and methods which, in the aggregate, are reasonable and (taking into account the experience of the plan and reasonable expectations) . . ." ¹⁵² The Secretary of the Treasury may challenge the reasonableness of the actuary's choice of assumptions and methods, as they bear on the plan's actual experience. ¹⁵³ In addition, any change in the funding method of a plan must be approved in advance by the Secretary of the Treasury. ¹⁵⁴ Finally, the Act requires that when an actuary prepares a statement he acts on behalf of all plan participants. ¹⁵⁵ All of these requirements, coupled with the fact that all reports and certifications are subject to public disclosure and examination make the actuary's role much more visible, and raise his accountability.

D. The Actuary and Fiduciary Duties

ERISA imposes very strict duties on all "fiduciaries" of a plan. ERISA defines fiduciary as anyone who exercises discretionary authority or control over plan management or disposition of assets or anyone who had discretionary authority or responsibility in the administration of a plan. ¹⁵⁶ Under this definition an actuary could easily be a fiduciary even though his job description or title implied that he had no such authority.

The actuary's conduct could place him within the definition of "fiduciary." A court will deem him to be one if he, specifically, (1) exercises discretionary authority or control regarding management of a plan, (2) exercises authority or control regarding management or disposition of a plan's assets, (3) renders investment advice for a fee with respect to the assets of a plan or has any authority to do so, or (4) has any discretionary authority in the administration of a plan. ¹⁵⁷ As a result an actuary could unwittingly fall into a fiduciary status merely by giving general financial advice to an employer-client who accepts it, thus giving the actuary some "control" over the plan. Consequently, where possible, avoiding fiduciary status under ERISA is critical because of the laws of co-fiduciary liability. ¹⁵⁸ If an actuary is a fiduciary he has a duty to monitor the conduct of co-fiduciaries, and can be liable for their breach of duty.

ERISA also provides that, in addition to any other liability which the actuary may have under the Act, a fiduciary is liable for a breach of fiduciary responsibility to another fiduciary with respect to the same plan if he knowingly participates in or tries to conceal an act or omission by the other fiduciary that the actuary knows is a breach. ¹⁵⁹ A fiduciary is liable for any loss that results from another fiduciary's breach of duty that the first fiduciary caused by his failure to comply with the fiduciary provisions of the Act. ¹⁶⁰ In addition, if a fiduciary has knowledge of a breach by another fiduciary, the first fiduciary will be liable unless he makes reasonable efforts to remedy the breach. ¹⁶¹ In order for co-fiduciary liability to attach, the Act requires that the fiduciary know the other person is a fiduciary with respect to the plan, and that he committed an act which the first fiduciary knows to be a breach. ¹⁶² This co-fiduciary provision may allow an actuary to be held liable for the acts of a non-actuary fiduciary.

E. Prohibited Transactions and Parties-In-Interest

In addition to responsibility for co-fiduciary acts, a fiduciary must not cause the plan to engage in prohibited transactions. ¹⁶³ These include prohibitions against: (1) selling or leasing property to the plan, (2) lending or borrowing between the plan and a party in interest, (3) furnishing of goods or services between the plan and a party in interest, (4) receiving by a party in interest assets from the plan, ¹⁶⁴ or (5) acquiring any employer securities or real property which causes the plan to hold more than ten percent of the assets in such securities. ¹⁶⁵

ERISA defines party-in-interest as someone closely connected with an employee benefit plan, such as any fiduciary or employee of a plan or anyone performing a service for a plan. ¹⁶⁶ Actuaries could be defined as parties-in-interest since they perform a service for plans. Parties-in-interest, however, are prohibited from engaging in transactions prohibited by ERISA and one of those prohibitions includes, as mentioned above, performing services for a plan fiduciary or the plan. ¹⁶⁷

In addition to the liability for fiduciaries and parties-in-interest, an actuary may be subject to civil penalties. These penalties are in the form of excise taxes ¹⁶⁸ which can be levied against any disqualified person ¹⁶⁹ who participates in a prohibited transaction. ¹⁷⁰ These excise taxes are nondeductible. If an actuary's error caused a plan to pay an excise tax, he could be liable to plan beneficiaries for any tax paid.

F. Enforcement Provisions

To insure adherence to its requirements, ERISA created a statutory cause of action to allow civil, and in some cases criminal, suits to be filed against violators. Section 502 ¹⁷¹ gives a participant or beneficiary the right to bring a civil action to recover benefits due to him under the plan; to enforce his rights under the plan; or to enjoin any act which violates any provision of any plan. This section allows a plaintiff to sue a plan's actuary absent any breach of contract or tortious act.

Other enforcement sections allow the following actions to be taken. The Act provides that anyone who willfully violates any reporting and disclosure requirement is subject to a criminal penalty, either a $5,000 fine and/or one year in jail. ¹⁷² It should be noted that anyone convicted of certain crimes, including violations of ERISA, is prohibited from serving as an administrator, a fiduciary, an officer or a consultant to any employee benefit plan for five years after the end of his imprisonment. ¹⁷³ Additionally, plan administrators face civil actions and fines if they fail to timely file an actuarial report. ¹⁷⁴

Finally, the Secretary of Labor may reject an actuarial report if he finds that such filing is incomplete or that there is a material qualification in the actuary's opinion. ¹⁷⁵ As mentioned before, the Joint Board is empowered to disenroll a plan actuary for failure to discharge his duties, provided the actuary is given proper notice and a hearing. ¹⁷⁶

VI. Summary

Courts have begun holding actuaries to the same standard of due care and competence as applied to other professionals in their work. In view of this and the increased responsibilities and visibility created by ERISA, actuaries can expect to be named as defendants in lawsuits with increasing frequency. Courts are more willing to hold actuaries liable for their errors and these errors can have costly and far-reaching implications.

The law imposes a duty on actuaries to investigate the accuracy of information supplied to them when a reasonable professional similarly situated would have investigated. Generally accepted actuarial principles have been recognized by the courts and adherence to them is required by the Academy and NAIC unless adequate justification is provided. An actuary's potential liability could extend to parties not in privity with him if there is fraud by the actuary, the actuary knows the public will rely on his work, or if the action is brought under ERISA.

The enactment of ERISA raises the requirements relating to the actuary's independence and accountability to new levels. It also put actuaries on notice that the giving of general financial advice to a plan may well be enough to be deemed a fiduciary, and thus liable for another fiduciary's acts. In addition, ERISA clearly spells out the transactions that actuaries, as parties-in-interest, may not engage in, and provides stiff enforcement provisions to ensure compliance.