Professional liability boom may be exported to Latin America

Rough Notes, Jan 1999 by Zinkewicz, Phil

PLUS meeting speaker says increasing investments in Latin America may set stage for growth in litigation

he area of professional liability has been a volatile one in the United States for the last few decades. The problems began in the early 1970s when the medical malpractice crisis erupted. By the end of that decade, directors and officers liability insurance became a problem and then, in the 1980s, the problem grew and moved into other lines such as architects liability and lawyers liability.

The professional liability market in the U.S. is still volatile today, with a society hell-bent on suing, sometimes even for the slightest of wrongs; and plaintiffs' attorneys are only too eager to accommodate litigants' desires to catch the brass ring for a free ride. In overseas markets, however, professional liability problems have not been so apparent. For one thing, overseas markets have not yet developed the "lawsuit mentality" that dominates this country. For another, other parts of the world do not have the equivalent of our contingency fee system which makes it easier to gain access to the court system.

There are signs, however, that things may be changing. This year, at the annual PLUS (Professional Liability Underwriting Society) convention, some speakers gathered to discuss professional liability in Latin America. One speaker was Robert A. Vernon, assistant vice president in charge of the Financial Lines Group for Reliance National Argentina. Said Vernon:

"As the world's financial markets become increasingly interrelated and dependent on one another, the risks of conducting business whether at home or abroad become more difficult to quantify. No longer can managers label their companies as being domestic or international, but rather must refer to the increasingly popular adjective 'global' when describing their business. It is generally understood that to effectively compete in this new global market, one needs to consider all of the different political, economic, and cultural issues of the world which could impact an organization.

"However, when considering the legal issues and, specifically, the potential liabilities of business, very often managers fail to apply that same global perspective. Litigation, historically, has not been much of a cross-border issue, mostly due to the differences in the legal systems and the specific laws governing a country's business environment. Today this is changing."

Vernon said that foreign direct investment is rising at drastic rates particularly in emerging economies, which naturally creates a heightened awareness and scrutiny of the activities of the local markets and specifically the people who manage them. For this reason professional liability insurance will become a necessity for all businesses participating in the global market, he said.

Vernon noted that professional liability standards are well-defined in economically developed countries such as the United States and parts of Europe and are considered to be "quite high" relative to other parts of the world. Is this professional standard expected to increase in other countries, specifically in Latin America? Vernon says "yes." He pointed to just one area as an example, directors and officers liability.

"The origins of directors and officers liability insurance can be traced back to London in the 1960s, where many nontraditional insurance products were developed," he said. "A few major corporations purchased insurance for their directors and officers to protect their personal assets in the event their company was not able or permitted to fulfill its indemnification agreements. As competition is inevitable, it wasn't long before other large insurance companies followed Lloyd's lead and began to write similar policies. The policies were generally for large limits over multiple years for relatively small premiums. The market grew modestly over the next several years as some directors and officers decided to purchase the coverage, or what was then referred to as `sleep easy' insurance because of the presumably low exposure. In 1984, the D&O industry saw its first major claim, which settled for somewhere in the area of $40 million. The severity of this case brought panic to the insurance market as insurers realized the underwriting criteria and pricing was way off. Most of the carriers who were underwriting D&O cut the product altogether and the few who remained drastically reduced limits and increased premiums.

"This single claim changed the face of D&O liability and the entire securities litigation environment in the U.S. and around the world," said Vernon. "Since 1984, the number of securities claims filed in the U.S. has increased dramatically. According to Securities Class Action Alert (SCAA), published by Investors Research Bureau, in 1997 alone, there were an estimated 187 federal filings and 57 state filings of securities action claims. The 1996 Watson Wyatt Worldwide D&O Liability Survey report stated that the average settlement value for a shareholder claim was $7,238,338. This number excludes defense costs, which run on average higher than $2 million per claim. There have been many efforts to curb the number of securities lawsuits filed in the U.S., most notably the Securities Reform of 1995, yet the number of claims filed annually in federal court has changed very little. Additionally, the number of state court filings has increased in an effort to circumvent the new Securities Act."