Justice Caroline Costello in the Irish High Court has ordered the administrators of Quinn Insurance Ltd (QIL) to make available to the insurer's former auditors PricewaterhouseCoopers (PwC) certain details on the administrators' claim that QIL's financial statements when PwC was its auditor materially understated technical provisions for the future cost of claims.
Judge Costello that the administrators' claim was the core allegation against PwC, which was QIL auditor from 2005 to 2008. QIL was put into administration in 2010 and since then more than €1.2bn has been drawn from the Irish State's insurance fund, resulting in a levy on ordinary insurance policies for years to come.
The administrators are suing PwC for alleged breach of contract and breach of auditing duty, both of which PwC denies.
QIL was the insurance arm of Sean Quinn's business empire, which collapsed as a result of Quinn's support of Anglo-Irish Bank in the late 2000s. Quinn had always maintained that the insurance operation should not have been placed into administration and that it was operationally profitable.
However, QIL's methods of calculating its technical provision were always unusual. It did not employ in-house actuaries, using instead Milliman Advisers Lt to calculate the required reserves. Milliman in turn relied on the data provided by QIL.
The administrators asked another company, Mazars, to re-estimate the technical provisions for 2005 to 2008, and Mazars concluded that the original estimates were "so far outside a range of reasonable estimates" that they could not have been conducted properly in accordance with the appropriate and relevant professional standards.
The administrators claim that PwC should have spotted this and that, if the auditor had done so, QIL would not have been able to forward €275m to other Quinn companies between 2005 and 2008, would have reduced the level of loss-making business it wrote between 2007 and 2010, and left its business in Great Britain and Northern Ireland.
PwC sought more and better details on the administrators' claims.
Judge Costello rules that, since the administrators had not said precisely what was wrong with the technical provisions as calculated by Milliman, PwC was entitled to details as to why it was claimed those provisions were materially underestimated. But PwC was not entitled to details on how Mazars conducted its re-estimation. PwC was entitled to more details on how QIL could have acted, had Milliman alerted it to the true state of affairs at the insurer, to reduce its eventual losses and perhaps avoid collapse.
The administrators have also claimed that the significant increase in the number of reopened claims files in 2007 and 2008 when compared with earlier years should have been a cause for concern at PwC. The former QIL auditor sough a breakdown of the number and value of the reopened files. Judge Costello rejected this on the grounds that the administrators' case was that the mere increase in numbers should have been a red flag. She noted that the administrators had agreed to provide specific figures for the underwriting losses claimed.
Quinn Insurance's ongoing operations, excluding healthcare, were bought in October 2011 by Liberty Mutual, which contributes 25% of its profits to the State-operated Insurance Compensation Fund.
In January this year run-off specialist Catalina agreed to take over the legacy business, which had net liabilities of €461m as of September 30 2014.