• Succeed in Actuarial Consulting

Legal Primer for Independent
Consultants
David S. Rintoul
Brown, Paindiris & Scott
2252 Main Street
Glastonbury CT 06033
(860) 659-0700
drintoul@bpslawyers.com
www.bpslawyers.com
Prepared for:
Succeed in Actuarial Consulting:
Legal and Business Tools for the Solo & Small Firm Actuary
Society of Actuaries 2007 Annual Meeting
Washington, D.C.
With contributions from:
Emily Neustadt Paul Dorroh
Neustadt Consulting: The Leaders Resource Senior Vice President
(917) 656 6910 Marsh Affinity Group Services
http://NeustadtConsulting.com One California Street
EN@NeustadtConsulting.com San Francisco CA 94105
(415) 983 5650
paul.dorroh@marshpm.com
Lauren Bloom
General Counsel
Navy Mutual Aid Association
Henderson Hall
29 Carpenter Rd
Arlington, VA 22212
(800) 628-6011
laurenmbloom@aol.com
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SOA 2007 Annual Meeting & Exhibit; Session 78: Succeed in Actuarial Consulting: Legal and Business Tools for the Solo and Small Firm Actuary
 Table of Contents
I. Choosing an Entity .................................................................................................................. 4
A. The LLC Is the Entity of Choice 4
B. What about a sole proprietorship? 4
II. Get the Deal You Expect: What You Need to Know About Contracts............................... 5
A. Client Contracts 5
1. Business Issues........................................................................................................... 5
2. Professional Responsibility Issues ............................................................................ 7
Engagement Letters to Help Run Your Practice Well .............................................................. 7
By Anna Rappaport and Lauren Bloom,©2007 Lauren Bloom
B. Contracts & Agreements with Partners and Peers 13
1. Ad Hoc – Single Projects......................................................................................... 13
2. You Have a Partner: Now, What is the Deal? ........................................................ 14
(a) What Do you Need to Consider in Making a Deal? ...................................... 14
(b) What About a Minority Interest?.................................................................... 17
C. Agreements with Contractors 20
D. Agreements with Employees 21
III. Other Issues in Establishing a Practice .............................................................................. 23
A. Competing with a Former Employer 23
B. Office Leases 25
C. Tax Registrations 27
IV. You’ve Set It Up; Now Succeed and Prosper!.................................................................. 27
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 A. Networking: 27
Elegant Networking .................................................................................................................. 28
By Emily Neustadt Copyright 2007 Emily Neustadt
B. Liability Protection 32
Understanding Your Claims-Made Professional Liability Insurance Policy......................... 32
By Paul Dorroh and Mary E. Whisenand
© 1991 - 1997, Kirke-Van Orsdel, Inc. © 2000, Seabury & Smith
C. Managing Risk 39
Small Firms, Big Challenges:................................................................................................... 39
Managing Litigation Risk in Small Actuarial Firms
By Lauren M. Bloom
Biographies of Contributors.................................................................................................. 43
Many of the materials included in these materials first appeared in or are adapted from the
Independent Consultant Newsletter, published by the Entrepreneurial Actuary Section. The
newsletter is a great resource for an actuary who must depend on him or herself to succeed,
and subscriptions are free for members.
©2007, David S. Rintoul, except as otherwise noted
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 I. Choosing an Entity
A. The LLC Is the Entity of Choice
If you are forming an entity through which to conduct a consulting practice, you will
probably want to set up a limited liability company or LLC. Like a corporation, the owners
of a LLC are not personally liable for the obligations of the entity. Unlike a corporation,
however, there is no income tax payable at the entity level. All the income and other tax
attributes flow through to the owners like it was a partnership. Also, unlike in the past, a
LLC can offer as generous retirement benefits as a corporation. Depending on the ethics
rules that apply to the area of consulting in which you are operating, you may need to set up
a limited liability partnership, which is the same as a LLC except that liabilities for each
owner’s professional malpractice flow through to that owner. Other liabilities of the entity,
however, remain with the entity.
B. What about a sole proprietorship?
If you have a small part-time consulting practice, you may think you need to set up a
corporation or limited liability company. Anyone who spends more than five to ten hours a
week consulting, or who has a partner, should take the plunge and set up an entity. But what
if you have a client or two? What are the benefits and drawbacks of setting up a business
entity?
The pros and cons of various entities are discussed below, but for purposes of this section,
we’ll assume you would set up a limited liability company, or LLC. LLCs give the
protection from personal liability of an entity, but are taxed on a pass-through basis like a
partnership. The factors we will be discussing, however, generally apply to all types of
business entities.
• Cost to establish. Setting up an LLC is usually not expensive. In Connecticut, it
costs $60. You probably do not need a lawyer if you are setting up a single member
LLC.
• Continuing Costs. In Connecticut, there is an annual tax of $250 - $300 for most
business entities. Annual or biennial reports, along with a $75 annual fee, are also
required. Your state probably has similar fees.
• Taxes. Setting up an LLC will also bring you to the attention of the state and local
taxing authorities. You can expect that the agency that administers any sales tax in
your state will contact you shortly after you form the entity. We do not advise
dodging sales tax when you know it is due. The issue of sales tax on professional
services is frequently a disputed question, though. If you have a good faith
argument that your services are not subject to sales tax, it makes sense to avoid even
having a discussion of the issue if you can avoid it.
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 • Limitations on Personal Liability. The primary benefit of an LLC over a sole
proprietorship is that it shields you from personal liability for the obligations of the
entity. This is may not be a benefit to most casual consultants. Liability for
professional malpractice in most states is usually personal, even if performed
through an entity. Also, if you don’t have an office that the public visits, or any
open accounts with suppliers or service providers, there are unlikely to be other
liabilities from which you would need protection. If you lease any office space or
equipment, it is highly likely you will be required to give a personal guarantee
anyway.
• Using a Trade Name. A trade name is a business name other than your own name.
For instance, “Business Excellence” is a trade name; “The Offices of Roger Wilco,
Consultant,” is not. You can use an LLC to operate under a trade name. In most
states, however, you can achieve the same thing by establishing a “doing business
as” or a d/b/a. In Connecticut, you can do this by filing a Fictitious Name Certificate
with the local land records office. If you have concerns about giving out your social
security number out for tax identification purposes, you can get a tax identification
number for a d/b/a separate from your personal social security number by filing a
Form SS-4 with the IRS.
Creating more paper and complexity by setting up an LLC is not always necessary.
Consultants who have a small practice, working for a few clients or less than ten or fifteen
hours a week out of their home, may not need to set up any sort of entity.
II. Get the Deal You Expect: What You Need to Know About Contracts
A. Client Contracts
1. Business Issues
This topic covers the agreements you will enter into with your clients. These issues are
relevant as well to those with an established practice, but in starting out, it is important to
know what to look for when you are presented with a form contract by a future client.
Statement of Work. This is the guts of the agreement. If the statement of work is right, you
are far along the path of making sure the agreement will work for you. Do you know
exactly what you need to do at each stage of the project, and what the client is obligated to
pay you at each stage? If the client terminates the agreement early, do you have the right to
be paid for the work you have done at cancellation? What are the consequences of missing
a delivery date? If there are firm due dates for deliverables, are there similarly firm dates for
payment? If you are being paid at an hourly rate, does the agreement specify whether travel
or any overhead expenses are covered? If travel expenses are to be reimbursed, is pre-
approval of expenses required, and what type of back up is required? Does the statement of
work incorporate all material terms of any correspondence regarding the deal? It is likely
that once you sign a formal agreement, any agreements in correspondence or made in
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 conversations are likely to be unenforceable, so make sure everything is included in the
statement of work or scope of work provisions.
Non-Competition and Non-Solicitation. Non-competition agreements restrict your ability to
compete with your client. Non-solicitation agreements restrict your ability to sell to or
service your client’s customers. If you are performing consulting services directly for a
client, no such clause would be appropriate, since it’s unlikely that you will be competing
with clients in this area. Such agreements are commonly included in boilerplate contracts,
so they may be in the agreement even if they are not appropriate. If you are being hired as a
contractor by a firm to provide services to its clients, you can expect such a provision.
If the client won’t remove it or there are potential issues of non-competition, you need to
determine whether it is going to be enforceable. Each state’s laws vary, but such provisions
are enforceable in most states, depending on their terms. Non-solicitation clauses are more
likely to be upheld than non-competition clauses, particularly if they last only for the term of
the agreement. Even if the provisions are probably not enforceable, the threat of even a
baseless lawsuit can give your client an advantage in negotiating a resolution to any dispute,
and can deter potential clients from doing business with you. The greater the restrictions on
your right to do other business, either during the term of the agreement or on expiration of
the term, the higher compensation you should receive to compensate you for any loss
resulting from such restrictions.
Intellectual Property. If you are hired to create a deliverable, make sure that you will own it,
and not the client, when the job is done. If the client “owns” it, you will have no further
rights in the deliverable, and the company will be able to modify it, sell it or license it to
others at will. If the contract states explicitly that the project is a “work for hire,” then
everything you produce will belong to the client. If the term “work for hire” is not used, you
have a good argument that the client does not own the work.
If you don’t intend for the client to own the work, and you hope to use it for future clients,
make sure this is explicit, and that the words “work for hire” are not used. If the client
won’t own the product, you may have to negotiate a license and define the company’s right
to modify your product, sell it, or transfer it. Also, the agreement should set forth in an
exhibit any existing intellectual property that is similar or related to the product you are
developing for the client. You want to make sure that the client does not claim later that it is
part of the “work for hire.” If any of your preexisting intellectual property is used in the
deliverable, you should expect to grant the company a non-exclusive, paid-up, perpetual and
irrevocable license to use the intellectual property. You may want to try negotiating
additional compensation to reflect the fact that the client is getting the use of this pre-
existing intellectual property without having to pay for its development.
Choice of law and arbitration clauses. If the agreement has a choice of law provision that
states that the law of another state will apply to the agreement, or that any dispute must be
decided in a court of a distant jurisdiction, your cost to enforce the agreement will be much
higher than if local law and courts will govern. If the agreement provides for arbitration of
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 disputes, try to have the arbitration be local, and decided by a single arbitrator. The initial
costs of initiating arbitration are much higher than starting a lawsuit, so you want to try to
keep the expenses as low as possible.
Term of the Agreement. Does the term of the agreement automatically renew unless notice
is given prior to the conclusion of the term? What are your obligations and the client’s
obligations upon the expiration of the term of the agreement? If you will incur upfront
costs, such as obtaining equipment or making financial commitments to other contractors,
you should try to negotiate an upset payment if the client exercises a right to cancel the
agreement early in the term.
Use of Contractors. If you are going to subcontract some of the work, the agreement may
require that the company approve the contractor. If the subcontractor will be working at the
company’s site, you can expect to be required to provide evidence of liability insurance.
Some clients may require that you have workers’ compensation insurance, which is
generally not difficult to obtain, but can be expensive for a new employer, depending on the
state.
2. Professional Responsibility Issues
Introduction
By: David S. Rintoul
One of the most important ways to avoid professional responsibility and ethical issues is to
use detailed engagement letters, which can be part of the client contract or a separate letter.
Below is an article by Anna Rappaport and Lauren Bloom discussing issues that an
engagement letter should address.
Engagement Letters to Help Run Your Practice Well
By Anna Rappaport and Lauren Bloom,©2007 Lauren Bloom
The Basics
An important part of a successful consulting practice is having a clear understanding
between the consultant and client about what is expected by both parties. Using an
engagement letter is often an excellent way to document that understanding. This article
will provide some information about what might be included in an engagement letter and
suggestions on how to negotiate them with your clients.
The Code of Professional Conduct (Code) sets forth requirements with regard to Actuarial
Services performed by an actuary and governs the relationship between the Actuary and
Principal (the client or employer). The core of a typical engagement letter is a clear
definition of what it is that the actuary plans to do for the client, how the compensation will
be determined, and what the responsibilities of each party are. The description of the scope
of the engagement is important so that both parties are clear on what they have agreed on.
The Code sets forth some guidance as to how the actuary shall conduct the assignment.
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 While the guidance in the Code need not be repeated here, the actuary should comply with
the Code whenever the actuary provides professional services to a client.
Compensation and scope are usually related. Compensation may be an hourly rate, a
retainer, a fixed fee for a specific project, or some other basis. Where the compensation is
on a retainer basis or a fixed fee, it is normally very important to include in the letter what is
included in that fixed fee so that the client will understand exactly what the actuary will and
will not do. It’s also a good idea to specify any additional fees that will be associated with
the engagement, for example, reimbursement of travel expenses, copying costs, or the cost
of outside peer review. In addition to the type of work and additional fees involved, the
actuary might wish to include items such as: how many drafts of the work will be provided
within the fixed fee or retainer for review and comments. Anna usually provides for one or
two drafts with revisions when writing something that the client will give input to, and then
makes additional drafts available for an added charge. This can be particularly important if
you are working on something that may get public distribution, especially if the client tends
to provide many comments. Anna has had some past experiences where clients give
multiple comments, sometimes asking her to include material and then asking her later why
it was there. (Lauren has had similar experiences, and finds that providing drafts with
tracked, dated changes identified by their author can help manage the editing process.) The
actuary also may want to specify how many meetings (either in person or by conference
call) are included for the fee provided, so that additional meetings beyond those anticipated
when the project began would then involve an added charge.
The Nature of the Work – Actuarial or Non-actuarial?
An assignment might require the actuary to issue a formal actuarial opinion, or it might not.
Standards apply to actuarial opinions that do not apply to other types of advice the actuary
may provide. If the actuary is writing a report or doing research for publication, the client
many be providing editorial services. Anna’s approach is to make clear that she expects that
kind of editorial support. Lauren agrees that it’s often a good idea to have editorial services
available to support actuarial work, especially if it is anticipated that the work will be
published. The actuary can ask the client to provide editorial support, or retain an editor and
pay for the editorial services or build them into the price of the engagement. Where
something is going to be published with the actuary’s name on it, it is important for the
actuary to retain final sign-off of the version to be published. Where something is
published, is not an actuarial opinion, and does not have her name on it, Anna provides input
but the client may decide what they want to publish. Lauren would caution, however, that if
the actuary is concerned about the accuracy or completeness of the client’s version, the
actuary may want to reserve the right to withdraw from the engagement prior to publication.
Timing and Communication
The engagement letter also usually includes a schedule for when the work is to be done. If
the work requires exchange of information between the parties, the actuary may wish to
specify the completion date in terms of elapsed time after the actuary gets information rather
than a fixed date. It’s also often a good idea to include some idea about milestones within a
project plan so that both parties can see how things are going along. If a project involves
asking for information/asking questions along the way, the actuary may want to provide a
normal response time (one day vs. three days, etc.)
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 Another critical part of the scope is how the actuary and the client expect to communicate
with one another. Anna recommends that, if work is mostly going to be transmitted by e-
mail and there are not going to be in-person meetings, this be specified up-front. It is nice to
meet people face-to-face, but often they may be far away and in-person meetings can be
time-consuming and expensive. Lauren thinks it is usually wise for the engagement letter
to specifically describe the level of reliance on the client that the actuary expects and to
require the client to identify a contact person to whom the actuary can go with questions and
requests for information. It may also be advisable to state in the letter that the actuary may
not be able to complete the engagement without the client’s full support. If the actuary is
working cooperatively with the client and the client’s attorney, or with the client and another
actuary, the engagement letter usually should address the cooperative relationship and
explain how the actuary expects to proceed. If the actuary expects to be able to contact the
prior actuary, the engagement letter is a good place to state that expectation. It is probably
also prudent to identify who will receive the work product on the client’s behalf. If the
actuary wishes to reserve the right to meet or speak with a specific individual or entity (for
example, the President or Board of Directors of a client company), the engagement letter is a
good place to make that desire clear.
Are You an Expert or a Vendor?
Larger organizations hire a variety of outside people, some of whom are considered experts
and others who are considered vendors. They often have purchasing departments who deal
with vendors and have standard contracts that apply very poorly to your situation. At times
they may provisions that you can not or are unwilling to meet in these standard vendor
contracts including broad indemnification, requirements for large amounts and various types
of insurance, etc. While the adverse consequences that are possible under these
indemnification clauses are often very remote, they create risk for the actuary if he or she
accepts them.
For the individual practicing on their own, these conditions may be unacceptable. It is
important in such situations to be viewed as an expert, or it may be very difficult to reach
agreement.
Matching the letter to the assignment
It would be nice to have a standard letter that could be used regardless of the situation.
However, there are very different situations including the following:
• Working for an individual vs. working for a plan sponsor vs. working for an
insurance company vs. working for a professional association, or working as a
subcontractor
• Providing a statement of actuarial opinion
• Doing calculations where the client supplies the data
• Doing research/calculations where all information comes from public sources or
third party sources
• Giving a speech
• Writing an article for publication
• Providing peer review of someone else’s work
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 • Serving as an expert witness
• Providing advice on a research project where you are not the primary researcher
The description of work in the engagement letter usually should be tailored to the specific
nature of the engagement and expected work product. Lauren observes, however, that the
actuary may choose to keep the more general provisions of the actuary’s engagement letters
essentially identical.
Other things to think about
To keep life simple, it would be easy to stop with the core of the engagement letter.
However there are other issues that the actuary is usually wise to consider. Some of the
issues to think about are:
• How professional liability is managed in the actuary’s practice
• If speech material being written can be posted on the actuary’s website
• Whether there are any restrictions with regard to working for competitors
• Who will do the work and whether the actuary might be partnering with someone
• Who, other than the client, will see the actuary’s work? To what extent will third
parties foreseeably rely on the actuary’s work product? Is the client willing to
indemnify the actuary against third-party claims?
• Is the actuary’s work such that it can only be relied on in its entirety? If not, to what
extent is the actuary comfortable with having the work excerpted?
• Will outside peer review be necessary? If so, who will pay for it?
• What happens if the client decides to switch to another actuary? Will the actuary
want to refuse to cooperate from the successor actuary until outstanding fees are
paid? (Under the Code, an actuary can only refuse to cooperate with a successor
actuary based on the client’s non-payment of fees if the actuary has an agreement in
effect with the client before the client switches to the new actuary)
• If the actuary has to rely upon another expert who also serves the client (e.g., an
auditor, attorney, accountant), will the client agree to indemnify the actuary against
any error on the part of the other expert?
Management of professional liability
Some small actuarial firms have chosen not to buy liability insurance, often basing the
decision on a perception that clients may be less likely to sue if the actuary has no insurance
to offer a “deep pocket.” Most consultants, however, have such insurance, although the
level of coverage may or may not be sufficient to make a client whole if the actuary makes a
mistake. Regardless of whether the actuary has errors and omissions insurance, there are
various strategies that the actuary may wish to use to limit liability:
• Only accept assignments that are low risk, and do not have potential for significant
harm. Anna has chosen not to accept assignments requiring calculations. This is, of
course, an individual decision that depends tremendously on the individual actuary’s
tolerance for risk.
• Get indemnified by the party you are working with (see above). This may be an
appropriate strategy where, for example, you are hired as an expert witness.
• Agree to limits of liability so as to define your maximum liability
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 • Obtain client signoff on key methods and assumptions or even final signoff on the
work
• Add extra layers of quality control.
Each of these points will usually need to be individually negotiated with the client. Once
decided, the actuary will normally wish to include these points in the engagement letter.
What others say
Other professionals have similar issues. For example, a review of the standards for
Chartered Financial Planners certification provides guidance on the standards that apply to
CFPs. For the CFP professional, a written letter is required in advance of the engagement
setting forth the following:
“Specific parties to the engagement, including details of any legal and agency
relationships which may exist;
Assurance of protection of client confidentiality;
Specific personal financial planning services to be provided;
Attestation that any assumptions used in the planning will be disclosed in writing;
Duration of the engagement including frequency of contact, which may include
subsequent reviews;
The CFPs compensation arrangements with respect to this engagement;
Existing conflicts of interest and agreement to disclose subsequent conflicts of
interest if or when they do occur;
An explanation of qualifications, licenses and experience of individuals who will
work with the client;
Client’s responsibilities, including the full and timely disclosure of information;
The CFP professional’s responsibilities, and
Procedures for resolution of client claims and complaints with the firm.”
(Source, page 31, CFP Certification Standards, 2006, Financial Standards Planning Board)
The legal profession also requires its members to use engagement letters. The required
content of such letters varies from state to state, but generally includes a clear description of
the services to be provided, the fees to be charged, the schedule for completion of services,
and disclosure of any real or apparent conflicts of interest.
Within the actuarial profession, the Code speaks to some of the issues referenced by the
CFP, including conflict of interest, confidentiality, actuarial communications, and disclosure
of assumptions.
Small assignments
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 For the individual actuary and actuaries practicing in small firms, much of the work may be
small assignments. Neither the actuary nor the client can usually afford to spend huge
amounts of time coming to agreements about what the actuary will do, so it’s usually
preferable for the actuary to keep the engagement letters reasonably simple. This can be
challenging. Lauren suggests that it may be beneficial to start from a “standard”
engagement letter that is then adapted to the circumstances of a particular assignment. Even
if a fair bit of editing is required to conform the letter to the assignment at hand, it is still
usually simpler to edit an existing letter than to prepare one from scratch.
Pitfalls to be avoided
Each actuarial assignment is different, but some pitfalls appear more frequently than others.
For example:
• If a lawsuit is filed based on the actuary’s work, the client may claim that the actuary
promised results upon which the client relied, then failed to deliver them. A clear
statement in the engagement letter to the effect that the actuary will produce
projections but that actual events will likely unfold different from the projections can
make it more difficult for the client to succeed with this argument.
• The client may claim that the actuary made promises outside the scope of the
assignment. A clear description of the scope in the engagement letter, accompanied
by a statement that the engagement letter represents the actuary’s entire
understanding with respect to the engagement can help defeat this claim.
• The client may not understand exactly what the actuary expects to do. Again, a clear
statement of the scope of work and description of expected deliverables can resolve
any misunderstandings.
• The client may not be willing to let the actuary contact the predecessor actuary
because the client is trying to conceal facts from the actuary. If the actuary reserves
the right to contact the predecessor actuary in the engagement letter, that will quickly
bring the client’s intent to the surface.
• If the actuary does not reserve the right to refuse to cooperate with a successor
actuary in the engagement letter or other agreement with the client, Precept 10 will
require the actuary to cooperate with any successor even if the actuary’s fees have
not been paid.
The engagement letter is a valuable tool, both to define the terms of an engagement and to
provide a vehicle for resolving outstanding issues with the client. Consulting actuaries are
wise to use them.
Appendix
Check List –– Remember to think about
What will be done
What you will deliver
When will it be done
Timing
How you will communicate and with whom
What will you be paid and when
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 Managing liability
Intellectual property issues
Confidentiality
Any agreements about rights to work for others
Where you will get data
What client is responsible for and what you are responsible for
B. Contracts & Agreements with Partners and Peers
1. Ad Hoc – Single Projects
Working on a project with another independent consultant? Congratulations. You may
have just formed a general partnership.
Joining with a peer to do a project is a great way to handle a project that would otherwise be
too big, or for which you do not have all the expertise required. It can also relieve some of
the professional isolation a solo or small-firm consultant can feel. To make sure that you get
what you expect out of the deal, you need to keep some legal issues in mind, though. Many
issues are similar to those addressed in the articles in these materials. You will need to
address issues such as ownership of any intellectual property created for the project, and
non-solicitation of clients and possibly a non-compete. Take a look at the other section of
this primer for more background on these issues.
Some legal issues are unique when working on a project with a peer. You may see the
relationship with your peer as a one time, non-exclusive project. Each of you remains free
to seek other work without having to share any of the work or revenue from these other
projects with the others. Your expectations may be defeated if your peer or a court finds
that you didn’t just form a one-off deal, but instead have established a new business entity.
This can happen as a result of the law of partnerships