Current Developments in Tort Claims Claire Louis - PricewaterhouseCoopers LLP

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

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 productsand 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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