The joint administrators of Quinn Insurance Ltd (QIL), who are suing the firm's former auditors Price WaterhouseCoopers for some € 800m, have been ordered to provide additional details of their claim that QIL's financial statements "materially understated" the company's liability for insurance claims and contributed to its "enormous losses".
The administrators allege, if PWC had identified problems with QIL’s claims reserves between 2005 and 2008, it would have been apparent to QIL its business was in “a more parlous state” than it believed and certain actions would have been taken by QIL and/or the financial regulator.
The case arises from the placing of QIL in administration in June 2010 and the fact more than € 1.2bn has so far been drawn down from the State’s Insurance Compensation Fund to meet the deficit between the firm’s assets and liabilities.
PWC was the auditor of the firm for the years ending 2005, 2006, 2007 and 2008 and the administrators have sued it for alleged breach of contract and breach of duty in its auditing. It is also claimed PWC should have known QIL’s relevant financial statements and regulatory returns did not truly reflect the state of the company’s affairs for those years.
PWC denies the claims and, in a pre-trial application, sought more and better details concerning the claim the QIL financial statements for the years at issue materially understated the liability for insurance claims.
Ms Justice Caroline Costello today ruled PWC was entitled to certain additional particulars but not certain others.
The obligation to make provision for the future cost of claims in an insurance company’s annual accounts is known as “technical provisions” and the “core allegation” against PWC was, for the material years, the technical provisions were “very seriously understated”, the judge said. The administators wanted to make PWC responsible for the “enormous losses” QIL suffered due to the alleged serious under-provisioning of claims.
The QIL directors were obliged to prepare their estimates of the technical provisions and engaged an actuarial firm, Milliman Advisers Ltd, to estimate its technical provisions for the relevant years, she said. “Unusually”, QIL did not employ in-house actuaries and Milliman relied on the data provided by QIL and on its own professional judgment in assessing that data and selecting the appropriate methodologies, the judge said.
The administrators instructed another firm, Mazars, to re-estimate the technical provisions for the years between 2005 and 2008 and Mazars concluded the orginal estimates were "materially underestimated" and "so far outside a range of reasonable estimates" they "could not have been conducted properly in accordance with the appropriate and relevant professional standards". In this regard, the claim against PWC was that it could, and should, in the course of its audit, have realised there was the alleged serious under-estimation.
The administrators allege, had the problems been identified, QIL would have been unable to advance gifts of more than € 375m to Quinn companies between 2005 and 2008, reduced the amount of loss-making business written by it between 2007 and 2010, avoided losses of hundreds of millions and exited its Great Britain/Northern Ireland business.
Because it was unclear precisely what the administators allege was wrong with the tecnical provisions as calculated by QIL and Milliman, PWC was entitled to particulars concerning why it is alleged the technical provisions were materially underestimated, the judge ruled.
However, PWC was not entitled to particulars of how Mazars conducted the re-estimate of the provisions, she said. The case was not based on a direct comparison between the Mazars execrise and that carried out by QIL and Milliman and the Mazars exercise was a matter for evidence.
The judge further ruled PWC is entitled to further particulars of how QIL alleges, had it been alerted to the alleged underestimation, it would have adjusted its pricing model, increased its rates on loss-making lines, the identity of those loss-making lines and the precise effect of exiting the Great Briatin and Northern Ireland market in either 2006,2007 or 2008.
She refused PWC’s application for further details relating to an allegation an “extraordinary increase” in the number of “reopened” claim files between 2005 and 2008 should have alerted PWC to an internal control problem.
The administrators claim some 60,000 files were re-opened and the rise in the number of reopened claim files from 1,282 in 2005 to 22,051 in 2007 and 31,350 in 2008 should have caused concern.
PWC sought a breakdown of the number and value of the reopened files but the judge said such details were not necessary as the administators claim did not concern the reason the files were being reopened but rather the number of such files.
The administrators have agreed to provide PWC with specific figures for the underwriting losses claimed,the judge noted.
