Bad Debt Reserving: A Lawyer’s Perspective on Determining Likelihood of Recovery

1. Bad Debt Reserving:A Lawyer’s Perspective on Determining Likelihood of Recovery David Weiss, Esq. White and Williams LLP Presentation for 2008 CARe Seminar on Reinsurance May 19 and 20, 2008

2. Legal Caveat • The material discussed in these slides and in this presentation are not necessarily identical to the views of the cosponsors of this seminar, nor of White and Williams or its clients.

3. Question: • You know you are going to have disputes with your reinsurer regarding a reinsurance claim. How do determine the likelihood of recovery/value of that claim, so that you can account for that in a bad debt reserve? Answer - Ask your attorney!

4. Things to Remember When Talking to Your Attorney • Privilege • You should treat any communications with counsel as being privileged and confidential. • Mark any writing to, from or for counsel, or about a conversation with counsel, with an “attorney-client privilege” legend. • Privilege is not necessarily an absolute protection, so be careful what you put in writing.

5. What Kind of Answer is theLawyer Going to Give You? • Depends on the nature of the dispute, and the depth of analysis the lawyer gives the question. • May just give an overall estimate for the case. • X% chance of winning • Out of $Y, we’re likely to collect $Z • May go through a litigation risk (decision tree) analysis to give a weighted value for the outcome of the case. • Ascribe a likelihood of prevailing on each issue in dispute • Determine the value of each possible outcome. • Multiply the probability of each outcome by the value of that outcome. • Total the weighted values of all possible outcomes to generate the weighted value for the case.

6. Factors That May Impact an Assessmentof the Likelihood of Prevailing • Forum for the dispute resolution • Court vs. arbitration • If court, state vs. federal court, and in what state • Quality of judges and jury pools • Impact on law applicable to the case • Who will decide the issues in dispute? • Arbitrators • Judge • Jury

7. Factors That May Impact an Assessmentof the Likelihood of Prevailing • Nature of the parties’ arguments • Highly technical • Equitable • Quality of Supporting/Opposing Evidence • Documentary record • Witness testimony • Fact witnesses • Expert witnesses • Support in case law or treatises (industry custom and practice)

8. Factors That May Impact an Assessmentof the Likelihood of Prevailing • Signals from intermediate rulings or discussions with party-appointed arbitrators • Secondary considerations that may affect the decisionmaker’s perspective • Rescission claim • Solvency implications for the parties • Interaction of effects of multiple issues • Availability of intermediate levels of relief • Quality of counsel for both parties • Amount at issue

9. Factors That May Affect Your/Your Counsel’s Assessment • Prior experience with litigating/arbitrating the issues, particularly with the given reinsurer • Conservative vs. aggressive viewpoint • Corporate atmospherics • Quality of counsel representing you