Minutes before Mr Justice Peter Kelly called up the €1 billion case against PricewaterhouseCoopers (PwC) by the administrators of Quinn Insurance (QIL), the heavens above the court's glass roof darkened and the rain came hammering down. Was this a dark portent for the biggest damages claim in the history of the State?
The case pits PwC against QIL's administrators, Michael McAteer and Paul McCann, partners at PwC rival Grant Thornton. PwC was auditor to the insurance company from 1996 until its dismissal in 2010 by the administrators, who took control at the request of the financial regulator.
In documents opened yesterday in court, McAteer argued that PwC missed the significance of huge guarantees given by QIL subsidiaries to cover debts at the wider Quinn group. He argued this contributed to an €800 million shortfall in its reserves, and accused PwC of failing in its duty by not warning QIL’s board or the regulator.
In a statement yesterday afternoon, PwC shot back. It said McAteer’s affidavit contained “factual inaccuracies, misrepresentations of the facts and assertions with which we fundamentally disagree”, and that it will defend the case. The stage is set for a fascinating battle of the bean counters.
In addition to the usual audited accounts prepared by every company, insurance firms must submit other audited documents to the regulator “that specify the level of the insurer’s reserves and its available solvency margin”. Also, property assets can constitute a maximum of only 15 per cent of an insurer’s technical reserves. McAteer said they accounted for a quarter of QIL’s €1.8 billion reserves and this, along with the guarantees’ effects, helped create a hole in Quinn’s reserves.
'Quasi-actuarial assessment'
As is now known, QIL did not have an internal actuary to assess its reserve requirements. Management "performed its own quasi-actuarial assessment", employing outside actuaries to vouch for it. McAteer dismissed this as "a desktop mathematical exercise" that did not absolve PwC of its obligations.
He recalled QIL’s collapse – how it breached insurance rules between 2005 and 2008 by allowing property owned by its subsidiaries to guarantee debts of the wider Quinn conglomerate, varying between €655 million and almost €1.3 billion. Had they been called in, they would have wiped out a chunk of reserves putting customers at risk.
McAteer argued that QIL also routinely underestimated the reserves it needed. He criticised it for appointing senior staff “without any experience in the insurance industry” and lamented “gifts” by it to the wider Quinn group of €385 million between 2006 and 2008.
Then he turned his guns on PwC, cutting to the core of the administrators’ case against their industry rival. McAteer accused it of wrongly giving QIL’s 2005-2008 accounts a clean bill of health and of failing to discuss the guarantees with the QIL board or management. He said it didn’t even attempt to establish if QIL had kept the regulator informed.
In 2010, as we all now know, the sky fell in on QIL. Financial regulator Matthew Elderfield heard of the guarantees and the administrators seized control. They plugged the reserves by drawing down €1.1 billion from the industry’s insurance compensation fund (ICF). This could eventually rise to €1.65 billion. The strain on the ICF led to a 2 per cent levy. Insurance customers could end up paying for Quinn’s mess for the next 20 years.
If PwC had done its job properly, McAteer argued, the company’s board or the regulator could have “compelled” QIL to take corrective action and avoid giving out the €385 million “gifts”.
Proceedings were originally issued in February 2012 but a writ was not served on PwC until earlier this month. Kelly noted that a delay of that magnitude would normally spell "doom" for an application to come before the Commercial Court. But he accepted McAteer's explanation that the priority was to first stabilise and sell QIL's operations, most of which were bought by Liberty Mutual in 2011.
Mammoth task
The preparation of the case so far has already been a mammoth task, Kelly accepted. McCann Fitzgerald had to step aside as the administrators' solicitors this year, after discovering a potential conflict of interest in preparing the case. McAteer also described how he had to look abroad for insurance experts to properly assess the shortfall at QIL.
The case promises to be one of the most complex overseen by the Commercial Court. Discovery orders are expected to come to 40 million documents.
A statement of claim is due to be filed by September 20th, both sides agreed. McAteer told the court that if the QIL administrators win, they may seek “circa €1 billion” from PwC for professional negligence and breach of contract.
Even by accountants’ standards that would be a crippling bill.
