By Henry Gottlieb
New Jersey Law Journal
January 29,
2007
A Mercer County judge has given
a boost to New Jersey's attempt to hold Pricewaterhouse Coopers liable for more
than $45 million in losses by the insolvent Home State Insurance Co
Superior Court Judge Paul
Koenig found as a matter of law that PWC audits of Home State before the state
took over the company in 1997 violated statutory accounting principles.
Barring a successful appeal, the
bench trial scheduled for April will be limited to whether the accounting
giant's actions were the proximate cause of the state's loss and, if so, the
amount of damages.
PWC argued that whether the audits were based on the proper standards is a fact
question requiring expert testimony. But such testimony is irrelevant because
the statutory standards under which Home State was required to operate are what
the Department of Banking and Insurance says they are, Koenig ruled on Jan. 26
in Suter
v. Pricewaterhouse Coopers, Mer-L-1742-01.
According to DOBI Commissioner Karen Suter's complaint, PWC's audits allowed
Home State to overstate its capital and surplus by at least $3.3 million in 1993
and by even higher sums in 1994 and 1995.
If Home State's dismal balance sheet at the end of 1993 had been reported
accurately, the company would have been taken over then at a lesser loss, rather
than in 1997 when the losses had deepened, the suit says. In addition to the
alleged loss of $45 million caused by the delay, the state is seeking interest
and legal fees.
Home State had 40,000 private passenger and 1,000 commercial auto policies in
effect when it failed. The state's Property Liability Insurance Guaranty
Association has paid $69 million in claims for Home State insureds.
The DOBI's counsel, David Mazie of Roseland's Mazie Slater Katz & Freeman,
argued in the summary judgment motion granted by Koenig that PWC failed to
recognize that Home State was not using statutory principles in accounting for
Home State's income and payments to reinsurers. The standards are promulgated by
the National Association of Insurance Commissioners.
Instead of crediting Home State for its share of commission income shared by
reinsurers when the payments were made, Home State counted the income as its own
when the policies were written, DOBI says. "Home State's accounting was clearly
inconsistent with one of the primary objectives of the Statutory Accounting
Principles, that of not recognizing income until it is actually earned," Mazie's
brief says.
Just as bad, the company reported profits from arrangements with reinsurers, but
not losses, resulting in the reporting of phantom income. "PWC breached the
standard of care by failing to require that Home State include all appropriate
ceded losses and loss expenses in the profit sharing calculations, which allowed
Home State to erroneously report millions of dollars of income," the brief says.
Mazie and defense counsel William Reilly of McCarter & English decline to
comment, so it is not known whether PWC plans to appeal.
Reilly argued that a company's commission of accounting errors does not prove
that the auditor violated professional standards. He argued that the issue of
whether PWC violated standards is not a question for summary judgment in favor
of the plaintiff, who is also the rule-maker.
"There is no precedent for affording any deference, let alone binding weight, to
the self-serving advocacy positions of the DOBI," the defense brief says.
Given conflicting views by each side's experts, "summary judgment is improper in
those circumstances, and plaintiff cannot make it otherwise by asking her own
agency to weigh in and tip the scales in her favor in the litigation," the brief
said.
The state has already recovered from another professional working for the
insurer.
In March 2005, Home State's actuary, Miliman & Robertson of Seattle, paid $7.5
million to settle a claim that it was responsible for too-low calculations of
what had to be set aside for property and casualty reserves. If the proper
calculations had been reported, the state would have found out in 1993 that the
company was shaky and would have acted immediately, the complaint said.
