1. Current Developments in Tort Claims Claire Louis - PricewaterhouseCoopers LLP November 14, 2005 Casualty Actuarial Society Baltimore, Maryland

2. Key Topics Tort claim drivers Major areas of tort liability –Asbestos –Securities litigation –Medical malpractice –Drug products and medical devices Status of federal and state tort reform 1

3. Key Topics Tort claim drivers Major areas of tort liability –Asbestos –Securities litigation –Medical malpractice –Drug products and devices Status of federal and state tort reform 2

4. Tort claim drivers U.S. –Culture of blame –Contingency fees –Plaintiffs bar and judiciary –Promotion of attorney services –Technology –Expanded bases of liability –Tort reform erosion –Media –Medical advances and medical cost inflation 3

5. Tort claim drivers International –Differences in legal and structural systems –Loser pays winner’s attorney fees: After the Event insurance –European social insurance: greater medical and financial benefits –Traditionally, contingency fees not allowed Maintenance and champerty –England and Wales: “success fee” arrangements Courts and Legal Services Act of 1990 and related legislation Allowed in all civil proceedings except family cases Still exception rather than the rule Based on solicitor’s costs, not damages –EC Move to harmonize different legal systems Elements of civil and common law system Strict liability still new –New Zealand and Switzerland have abolished tort law system 4

6. Key Topics Tort claim drivers Major areas of tort liability –Asbestos –Securities litigation –Medical malpractice –Drug products and medical devices Status of federal and state tort reform 5

7. Asbestos More than 8,400 businesses affected Original projected costs - $8 bn –Total projected costs - $300 bn Original projected claims – 60 mm –Total claims to date – 770 mm –Total projected claims – 3.3 bn 6

8. Asbestos Since 1981, ten attempts to pass federal asbestos legislation S.852 – Fairness in Asbestos Injury Resolution Act of 2005 –$140 bn over 30 years –Would eliminate virtually all existing and future cases –Lacks support from insurers, certain defendants, and other interest groups –Insurance industry concerns include lack of finality, exigent claim issues, and orphan share funding 7

9. Asbestos State asbestos reform –Legislative Ohio Asbestos Reform Bill (Sept 2004) –Intent is to give priority to the truly sick –First state to require actual impairment under objective medical criteria –Already there are attempts to circumvent 8

10. Asbestos State asbestos reform –Legislative Texas (Sept 2005) –Requires a report from a qualified physician stating a diagnosis of mesothelioma or other cancer –Specific X-ray and PFT criteria must be met –Expedites malignancy cases for trial –Prohibits reliance on reports or opinions produced by labs linked with law firms 9

11. Asbestos State asbestos reform –Legislative Florida (July 2005) –Sets minimum medical criteria –Requires that qualified doctors read X-rays –Protects the rights of those who become sick in the future 10

12. Asbestos State asbestos reform –Judicial Inactive dockets (IL, NY, WA; Baltimore, Boston, Chicago) –Favorable experience –Defer and protect unimpaired claims until individual develops an impairment –Must meet medical criteria –Sick receive priority –Relieves docket congestion –Preserves scarce financial resources 11

13. Asbestos Federal asbestos reform –Federal MDL Thousands of unimpaired claims dismissed 20,000 Jones Act cases dismissed (1996) –Few claims reinstated –Evidence of “manifest injury” Administrative dismissal of mass screening cases (2002) 12

14. Asbestos International –Focus is serious disease cases: escalating mesothelioma rate in the UK (3.8 X higher than U.S) –Claimants fearful of judicial system –Burden of proof difficult to satisfy –Claimants were socially marginalized –Possible national solution sought in UK –European Asbestos Conference Sept 2005 –2005-2006 EU Year of Action on Asbestos 13

15. Asbestos U.S. insurance issues –Dramatic decrease in new filings; increase in severe case filings –Few surviving matrix agreements Battles fought case-by-case Stricter proof requirements More trials –Insurers looking for finality: Push for buy-outs of Tier Two and Three players CSAs for relatively minor defendants –Bankruptcies: in general, has not caused the acceleration in insurance pay-outs once feared –Silica Plaintiffs bar repackaging asbestos cases as silica cases Rate of filings jumped 2002-2003 Favorable developments in Texas 14

16. Key Topics Tort claim drivers Major areas of tort liability –Asbestos –Securities litigation –Medical malpractice –Drug products and medical devices Status of federal and state tort reform 15

17. Securities litigation In 2004, securities litigation became global: securities litigation, securities regulatory investigations, and enforcement actions increased substantially around the world U.S. private securities actions increased More litigation, investigation, enforcement activity against foreign private issuers than ever before Skyrocketing settlement costs Regulation, regulatory enforcement, and securities litigation 16

18. Globalization of securities litigation In 2004, 29 foreign filers listed on foreign exchanges—the highest number in one year-- were sued in U.S. private securities class actions: a 90% increase from 2003 22 of the cases involved allegations of accounting irregularities and financial fraud –Parmalat –Ahold –Royal Dutch Shell Adoption of IFRS and SOx 404 compliance 17

19. U.S. private securities actions 203 private securities actions filed in 2004: 16% increase Drivers –New SEC rules and regulations –New PCAOB rules –Effects of private class actions and court decisions: Enron, WorldCom, HealthSouth Effects of SOx still to be felt 18

20. 2004 settlement trends in U.S. private securities class actions Increasing trend in high-dollar settlements 104 cases settled for $5.4 bn ($2.8 bn excluding WorldCom) Average settlement value: $27.6 mm (up 18% from 2003) Median settlement value: $7mm (up 25% from 2003) 19

21. Drivers of U.S. private securities class action settlements High level of market capitalization Role of retirement fund and pension fund fiduciaries and institutional investors as lead plaintiffs in class actions Intersection of private securities class action claims with financial restatements Severity of accounting scandals and financial frauds 20

22. Regulation, enforcement, and securities litigation Securities class action litigation not just a U.S. phenomenon, e.g., France and Netherlands Reach of regulatory enforcement crosses borders Convergence of generally accepted accounting principles: IFRS and US GAAP Greater coordination among securities regulators worldwide International cooperation agreements to facilitate enforcement and prosecution Joint investigation protocol between U.S. and other countries Adoption of SOx-like regulations and reforms by international regulators 21

23. Future securities litigation trends Steady increase in number of private securities class actions and regulatory enforcement actions Continuing significant increase in dollar values of private securities class action settlements Significant increase in Section 10(a), SEC (and others) investigations, internal corporate investigations leading to more restatements, more regulatory enforcement actions, more private securities litigation 22

24. Key Topics Tort claim drivers Major areas of tort liability –Asbestos –Securities litigation –Medical malpractice –Drug products and medical devices Status of federal and state tort reform 23

25. Medical malpractice Trend toward higher verdicts and median awards Severity increasing in serious injury cases Sharp rise in defense and administration costs Nursing home litigation continues strong –MS, FL, AL still “hot spots” –Wilkes & McHugh may be moving on –Fewer trials, more settlements –Operator financial difficulty increasing insurer risk 24

26. Medical malpractice Drivers of med mal claims –Not just a tort system issue –Other factors Sicker, older population Greater expectations for medical care Breakdown in doctor-patient relationship Incidence of medical error 25

27. Medical malpractice Prospects for reducing med mal claims –Increased diagnostic testing –Peer review and disciplining –Improved communications with patients –Technology 26

28. Medical malpractice Reform –National med mal reform defeated in 2005 –Certain recent reforms appear to be working: caps on awards appear the most effective –Not infrequently, medical mal reforms are challenged and overturned or circumvented 27

29. Medical malpractice State approaches to med mal reform –Advance notice of claim –Statute of limitations –Joint and several limitations –Compulsory ADR –Expert affidavit –Limited attorney fees –Modification of collateral source rules –Damages caps: pain and suffering, punitive, total –Periodic payments 28

30. Key Topics Tort claim drivers Major areas of tort liability –Asbestos –Securities litigation –Medical malpractice –Drug products and medical devices Status of federal and state tort reform 29

31. Drug products and medical devices Current claim drivers –Fast-track FDA approval –Direct to consumer marketing: erosion of learned intermediary defense –Off-label promotion of drugs –New drug delivery technologies –Clinical trials –Product counterfeiting –Quality control (Ortho-Evra patch) –Aging of population 30

32. Drug products and medical devices Limiting drug and medical devices product liability –Proposed federal legislation Pre-emption of punitive damages against manufacturers of FDA-approved drug products Healthcare providers shielded from liability –Federal pre-emption of state tort claims FDA intervention in private lawsuits involving drugs or medical devices –State tort reform initiatives 31

33. Key Topics Tort claim drivers Major areas of tort liability –Asbestos –Securities litigation –Medical malpractice –Drug products and medical devices Status of federal and state tort reform 32

34. Tort reform: current efforts –Federal Intent is to address lack of uniformity at the state level Class Action Fairness Act of 2005 – Feb 2005 Lawsuit Abuse Reduction Act –State Extent of reform varies by state Current focus is on damages caps, joint and several, punitive damages, collateral source rule –Tort reform effectiveness No single reform offers the perfect solution Damages caps appear to be the most effective means to reduce the number of lawsuits and the value of awards In the end, what matters most for insurers is predictability 33

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