WASHINGTON — An insurance company owned by three of the nation's largest actuarial consulting firms has settled an antitrust suit that claimed the insurer and its owners tried to strong-arm other actuarial firms into imposing liability limit provisions on pension fund clients.
The suit was filed June 24 in the U.S. District Court for the District of Columbia; it was settled the same day.
In the suit, the Justice Department charged Professional Consultants Insurance Co. Inc., Burlington, Vt., with colluding to ensure industry-wide adoption of liability limit provisions in engagement letters with their pension fund clients.
The company is owned by Watson Wyatt & Co., Washington; Towers Perrin & Co., Valhalla, N.Y.; and Milliman USA, Seattle. The three consulting firms were not named as defendants in the suit but, as owners, must agree to the terms of the settlement.
PCIC is a captive insurer that insures only its three owners against malpractice suits.
Typically, liability limits cap — to one or more year's fees or a predetermined dollar amount — actuarial consulting firms' damages in case they're sued. The consulting firms then ask their clients to indemnify them for damages beyond the agreed-upon cap.
Under the settlement, which is in effect for 10 years, PCIC and its three owners agreed:
c To stop sharing information about liability limit provisions with each other and with other actuarial consulting firms;
c To establish an antitrust compliance office;
c To prohibit PCIC and its owners from agreeing among themselves or with other actuarial consulting firms about existing or potential liability limit provisions; and
c To appoint an independent antitrust lawyer to oversee compliance with the settlement.
The PCIC also must publish a notice of the settlement in Pensions & Investments' print and online editions within 60 days.
During the 10 years the judgment is in effect, Justice Department officials and their representatives may inspect all books and records of PCIC and its shareholders pertaining to the judgment and interview employees of PCIC and the three actuarial consulting firms.
The settlement does not preclude pension fund clients of the three actuarial firms from suing them for being pressured into adopting the liability limits, nor does it cover liability limits the three owners already impose on their pension fund clients.
"Public and private sponsors and administrators of pension funds and other employee benefit plans require no less than free and unfettered competition among their actuarial service providers," said J. Bruce McDonald, deputy assistant attorney general in the Justice Department's antitrust division.
When asked for comment, Milliman spokesman Jim Loughman said, "Milliman does not believe it has done anything wrong."
He added the firm "has not been named as a defendant in any action (by a client), and we welcome the clarifying guidance."
Mr. Loughman noted the settlement does not affect the liability limit clauses already secured from its pension fund clients, "nor does it prevent us from seeking such limitations going forward."
Not an admission
Spokesmen for Towers Perrin and Watson Wyatt referred to a statement by PCIC's law firm, Washington-based Howrey LLP, that noted the settlement is not an admission of guilt in violating federal antitrust laws.
"We elected to settle this matter in order to put a costly and distracting investigation behind us," said Sean F. Boland, partner at Howrey.
The Justice Department's documents detailing the settlement note that PCIC and its owners began including liability limit clauses in their engagement letters with pension fund clients as early as 1999.
"When PCIC members began to consider implementing (contractual limitations of liability) they recognized that unless and until (those limits) became a matter of widespread usage throughout the actuarial consulting profession, firms implementing (the limitations) would face client resistance and potential loss of business to firms that had not implemented" limitations of liability, the Justice Department's lawsuit states.
The suit said the three PCIC owners sponsored, organized and conducted a series of profession-wide meetings attended by senior members of five other, unidentified actuarial consulting firms. At the meetings, the attendees exchanged information about their plans to implement contractual limitation of liability clauses, and encouraged the other firms to adopt such clauses, the suit said.
Gene M. Kalwarski, an equity principal and head of Milliman's Washington office, resisted adoption of the clauses; he left to start his own firm, Cheiron Inc., McLean, Va., in 2002. When asked to comment on the suit and settlement, he said: "The complaint and settlement indicate to me that the business practices we objected to, that led to the founding of Cheiron in 2002, were unacceptable and not in the industry's best interests. However, it's unfortunate that this all had to be decided in this fashion. But at least the issue is behind us now, and we can look forward to our continued growth."
Experts say the settlement could prompt pension fund executives to more strongly resist liability limit clauses and indemnification agreements.
"It's certainly a good outcome for pension funds such as ours, in that it does put some brakes, or rather discourages, this kind of conduct that is undertaken at the expense of clients," said Michael R. Fanning, chief executive of the $8 billion Central Pension Fund of the International Union of Operating Engineers and Participating Employers, Washington. The pension fund balked when Watson Wyatt sought to add a liability limit clause in its engagement letter.
Antitrust lawyer Leiv Blad, a partner in the Washington office of Clifford Chance US LLP, said some actuarial consulting firms could reassess their contractual liability limit clauses. "There might be lawsuits that arise out of this."
However, he added, "The Justice Department is not saying that the clause is in any way unlawful. It's the means by which it was put into the contract that it is challenging."
Donald Trone, president of Fiduciary 360, a Pittsburgh-based fiduciary advisory firm, said the settlement was not a surprise. "I would say the first surprise was why legal counsel to PCIC thought they would get very far with the limits on liability."
Watson Wyatt's most recent annual financial report, for the year ended June 30 2004, states that "nearly 100% of the company's U.S. corporate clients have signed engagement letters including mitigation clauses, and initiatives to complete that process both in the United States and elsewhere are underway." The company has "disengaged" from consulting clients "where satisfactory engagement terms could not be achieved," the annual report notes.
According to the annual report, pending malpractice claims against Watson Wyatt include a lawsuit filed last July by the $554.7 million Iron Workers, Local 25, Novi, Mich., and damages in excess of $35 million from an unnamed pension fund client, also filed last July, for alleged mistakes in actuarial valuations for 2001 and subsequent years that understated the pension fund's liabilities and overstated its net worth.
No Milliman clients have filed suit against the company; a Towers Perrin spokesman could not comment.