Quinn Insurance Ltd v Pricewaterhousecoopers
| Jurisdiction | Ireland |
| Judge | Ms. Justice Costello |
| Judgment Date | 19 May 2015 |
| Neutral Citation | [2015] IEHC 303 |
| Court | High Court |
| Date | 19 May 2015 |
BETWEEN
AND
[2015] IEHC 303
THE HIGH COURT
Insurance & Reinsurance – Audit – Breach of contract – Underwriting losses – Understated financial statements and regulatory returns.
Facts: The plaintiff, an insurance company in administration, sought to recover from the defendant losses alleged to have been incurred as a result of the failure of the defendant to realise that the statements and returns prepared by them did not give a true and fair view of the state of the plaintiff's affairs. The plaintiff claimed that the defendant had breached their contract as well as their duty as an auditor. The defendant now sought an order directing the plaintiff to furnish further information in relation to certain aspects of the claim.
Ms. Justice Costelloheld that the motion for an order directing the plaintiff to furnish further information in relation to certain aspects of the claim would be granted in part. The Court observed that a party would be entitled to know the broad outline of the claim and the issues raised in the case; however, a party would not be entitled to know matters which did not relate to the matter at hand. Accordingly, the Court directed the plaintiff to reply to certain rejoinders, and refused the motion for others.
JUDGMENT of Ms. Justice Costello delivered the 19th day of May, 2015
1. The plaintiff is an insurance company. It was put into administration on 15 thApril, 2010. It has ceased to write new business. To date, the High Court has approved the drawing by the plaintiff of more than €1.2 billion from the Insurance Compensation Fund to meet the deficit between its assets and liabilities.
2. The defendant is a firm of registered auditors. For the years 31 st December, 2005, 2006, 2007 and 2008 ("the Material Period") the defendant was the auditor of the plaintiff and reported on the plaintiff's financial statements and separately on the plaintiff's regulatory returns.
3. The plaintiff has sued the defendant for breach of contract and breach of duty in or about its auditing of the plaintiff's books and records in the Material Period and separately in relation to its regulatory returns on the basis that the defendant ought to have known that the relevant financial statements and regulatory returns did not give the reported true and fair view of the state of the plaintiff's affairs for each year of the Material Period. It is common case that this will be an enormous, complex case, involving very difficult issues of fact and law and a potential claim for damages in the order of €800 million. For the purposes of this judgment, the relevant aspect of the plaintiff's claim against the defendant is the allegation that the financial statements materially understated the plaintiff's liability for insurance claims (otherwise known as the plaintiff's "Technical Provisions").
4. The defendant has brought a motion seeking an order compelling the plaintiff to provide further information in relation to certain aspects of the claim relating to the allegation that the Technical Provisions were materially understated. It seeks three categories of particulars as follows:
(a) Particulars relating to the plaintiff's re-estimation of the alleged under statement;
(b) Particulars relating to the alleged underwriting losses attributed by the plaintiff to the defendant and; and
(c) Particulars relating to the financial consequences of reopened claims.
5. As an insurance company, the plaintiff had an obligation to make provision for the future cost of claims in its annual accounts. These are referred to as the Technical Provisions. The future cost of claims is by definition an estimate. The core allegation in this case is that for the Material Period the Technical Provisions were very seriously understated and the plaintiff seeks to hold the defendant responsible for the enormous losses it has suffered as a result of serious under-provisioning for claims.
6. During the Material Period the defendant was engaged by the plaintiff to audit the financial statements prepared by the plaintiff and to audit the statutory forms of the plaintiffs annual return to the Financial Regulator. The financial statements were to include a total for the Technical Provisions that took account of all available information relevant to the estimation of Technical Provisions up to the date on which each set of financial statements was approved by the directors.
7. Mr. Tony Weldon of the defendant explained the exercise of estimating technical provisions of insurance companies in his affidavit of 3 rd March, 2015, as follows:-
2 "12 Very simply, an estimate of claims reserves is included in the financial statements and regulatory returns of any insurance company. This estimation of the required claims reserves is an estimate only and can obviously include allowance for thousands of claims, all with various unknown and known variables and all at different stages of progression. Estimating the Technical Provisions is an inherently uncertain exercise, which is heavily dependent on the exercise of professional judgement. The question that arises is whether an estimation falls within a reasonable range and auditing guidance generally emphasises that it is only if the estimate falls outside a reasonable range that a misstatement can be regarded as having arisen.
13 The exercise of estimating appropriate claims reserves is particularly complex for what are described as "long-tail" insurance claims, which formed a significant proportion of the Plaintiffs outstanding claims. These are-insurance claims which do not proceed to final settlement until a length of time beyond the policy year and indeed, potentially years after the expiration of the policy in question…
14 Information regarding the claims incurred with long-tail insurance emerges over time and accordingly there is a high degree of estimation. The nature of the legal process involved in settling claims also means that there can be large changes in the outcome of estimates, such as where the attribution of liability to one side or the other changes. When changes in the external environment are factored in as well, the consequence is that there is a high degree of uncertainty…
16 There are a number of methodologies that can be used by actuaries to estimate claim reserves, such as extrapolation from past claims data for a company, with respect to both paid claims and incurred claims which have not yet been paid, It is also possible to apply a toss-ratio method based or premiums and to combine a number of different methodologies....
17 In each year of the Material Period, the Plaintiff engaged Milliman Advisers Limited ("Milliman"), a highly reputable actuarial firm, to provide an estimate of its Technical Provisions.
18 In general, the most material and complex judgement affecting the annual regulatory returns far a non-life insurer is the adequacy of its booked Technical Provisions. In order to obtain additional confidence in the adequacy of the hooked Technical Provisions, a key requirement imposed on authorised non-life insurers is that the adequacy of the booked Technical Provisions is supported by a Statement of Actuarial Opinion ("SAO") signed by an appropriately qualified actuary."
At para. 31 Mr. Weldon ex plained:-
"Accordingly, the ultimate estimates are dependent on the following:"
(1) The appropriateness of the key data inputs;
(2) The selection of appropriate assumptions and actuaria, methods to apply to such input data; and
(3) The appropriateness of the conclusions drawn by the actuary from the application of each method and/or the combining of the results of different methods."
8. Thus in each year in the Material Period it was the obligation of the directors of the plaintiff to prepare their estimates of the Technical Provisions, Unusually, the plaintiff did not employ in-house actuaries. It relied upon the expertise of Milliman. The plaintiff therefore produced its estimates for the relevant years in the Material Period with the assistance of Milliman. Milliman relied upon the data furnished by the plaintiff but exercised their own independent professional judgement in assessing the data and selecting the appropriate methodologies to apply in these circumstances.
9. The final overall estimate of Technical Provisions depends upon the actuarial methodologies used, a variety of data sources and inputs, the assumptions applied and the professional judgement of the actuary.
10. Once the plaintiff, with the assistance of Milliman, produced their estimate of the Technical Provisions the defendant was obliged to audit this figure as part of the overall audit of the business of the plaintiff. To that end the defendant itself availed of actuarial expertise, an in-house branch of the defendant, PwC AIMS. However, its role was to audit the financial records of the plaintiff, not to audit the work of Milliman.
11. It is common case that actuaries exercise a considerable degree of professional judgment in calculating the Technical Provisions. The final overall estimate of Technical Provisions will depend upon the actuarial methodologies used, a variety of data sources and inputs, the assumption applied and the professional judgement of the actuary. It is also common case that there may legitimately be a range of results based on the same data, depending on the methodologies used and the individual...
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