1. 2007 International Conference Washington, D.C. ~ November 7-9, 2007 Beyond All Limits: ECO/XPL and How It Impacts Primary, Excess, and Reinsurance Contracts

2. Beyond All Limits Panel Members MODERATOR: Adrienne Publicover, Partner Wilson Elser Moskowitz Edelman and Dicker, LLP Timothy Bolden, VP and Chief Compliance Officer AIG American General Dave De Berry, Vice President Hartford Financial Products Robert Dominiak, Vice President Travelers Bond & Financial Products Michael J. Kuckelman, Partner Warden Triplett Grier PA William McLaughlin, Senior Vice President Transatlantic Reinsurance Company

4. Overview Punitive damages, fines & penalties Excess liability judgments How to underwrite ECO/XPL Adjusting claims in THIS market Dynamics of risk transfer

5. Punitive Damages, Fines, and Penalties State Farm v. Campbell In 2003, this US Supreme Court expansion of Gore v. BMW was thought to be the answer to runaway punitive damages Is it so in 2007? Background facts of Campbell- Automobile case $50,000 liability policy Bad injuries / damages

6. Campbell History Jury: $2.6m compensatory and $145m punitive damages Trial Court: Reduced jury verdict to $1m compensatory and $25m punitive Utah Supreme Court: reinstated $145m punitive award US Supreme Court remanded as excessive Utah Supreme Court on remand: $9,018,785.75 (9:1 ratio)

7. Factors That Must Be Considered as a Result of Campbell 1. Degree of reprehensibility of conduct 2. Disparity between actual harm and punitive award 3. Difference between the punitive award and civil penalties in comparable cases

8. Excess Liability Judgments Oaks from Acorns: Claim Process  Claims operational reviews  Situational awareness “Special damage” claimants Claimant communications Geographical hotspots  Early access to claims counsel

9. Excess Liability Judgments Oaks from Acorns: Litigation Primary legal defense: Mercenaries or patriots? Discipline to assess Communicate  E&O carrier or Reinsurer’s role in case resolution: HINT: avoid having the first contact be at courthouse steps!

10. How to Underwrite ECO/XPL Company Profile - write established, well managed, financially strong companies Product profile and states of operation Claims handling best practices used and audited regularly Litigation history

11. How to Underwrite ECO/XPL (cont’d) Appropriate retention levels Reinsurance treaty response integrated into program Scope of professional services appropriate Monitor legal trends

12. Adjusting Claims

13. Key Safeguards for All Lines Clear thresholds (“red flags”) requiring supervisory intervention Formal training regarding Unfair Claims Practices Act Formal training regarding interpretation of insurance policies and training in the terms and conditions of the particular policies being adjusted Centralization of claims handling

14. Key Safeguards for All Lines (cont’d) Hierarchy of authority Internal audit processes Performance evaluations reward good- faith claim handling results Culture emphasizes customer friendly service Realistic claim inventory/adequate staffing

15. Additional Key Safeguards 3rd Party Claims  Training regarding scope of duty to defend  Denials require supervisory approval  Investigation protocols  Settlement protocols

16. Additional Key Safeguards (cont’d) Excess Lines  Watch lists (identification of potential large exposure claims)  Protocols regarding bordereau reporting

17. Claims Handling - Best Practices ?

18. When Things Go Wrong Claim gets “ugly” Will this new risk be transferred or shared? Responsibilities: - Insurance Company - Professional Liability Carrier - Reinsurer Which responds first - E&O or ECO/XPL?

19. Claims Department Behavior Formalized procedures and safeguards should be in place Impact of E&O polices and/or Reinsurance Treaties

20. The Future of Exemplary Damages Here to stay? Frequency & Severity

21. Takeaways Discipline starts at home Communication is critical - up, down, and sideways Awareness - of trends, of claim development, of handling and reporting protocols - is required in underwriting, claim handling, and excess/reinsurance levels Quality counts at every level

22. Audience Q & A

23. Thank you to … Tim Bolden Dave De Berry Bob Dominiak Mike Kuckelman Bill McLaughlin Adrienne Publicover