Cases & Deals

Vermont Insurance Commissioner as receiver of Ambassador Insurance wins U.S. Court of Appeals affirmance of $119.9 million jury verdict and $182.9 million judgment for auditing malpractice against PricewaterhouseCoopers

Client(s) Vermont Insurance Commissioner

On September 9, 2008, the United States Court of Appeals for the Third Circuit in Philadelphia affirmed a $119.9 million jury verdict and $182.9 million judgment entered in 2005 by a New Jersey federal trial court against the accounting firm PricewaterhouseCoopers, LLP ("PwC") on behalf of Jones Day client Vermont Insurance Commissioner. That verdict, characterized at the time by The Wall Street Journal as one of the largest ever handed down against one of the "Big Eight" accounting firms for audit failure, was in favor of the Vermont Insurance Commissioner as receiver for the insolvent Ambassador Insurance Company. Ambassador, a so-called "surplus lines" carrier, was ordered liquidated by a Vermont state court in 1984, leaving most of the 20,000 former policyholders and policy claimants with neither insurance coverage nor protection by state-created "guaranty funds." The Vermont Commissioner sued both the former president of the company, Arnold Chait, and Coopers & Lybrand as its outside auditor. Coopers, which later merged with the firm Price Waterhouse to become PwC, was found negligent for failing to properly audit the company's financial statements, and particularly its loss reserves, which negligence allowed the company to remain in business beyond the point of solvency. The company was subsequently seized by the Vermont state regulator and placed in receivership. The company has been in liquidation since 1987.

The judgment against PwC came after a nine week jury trial. The appeal raised, among others, issues concerning the scope of an auditor's liability when there are allegations of management misconduct, as well as questions concerning the availability and appropriate measure of damages available in auditing malpractice suits brought by insolvent corporations or their receivers. In one of the most important and extensive discussions of auditor liability by a federal appellate court in years, the Third Circuit sided with the receiver of Ambassador on both issues. The Court held that, under New Jersey law, misconduct of management cannot be asserted as a defense against the company by an auditor who participated in the misconduct. In addition, the Court clarified recent decisions concerning "deepening insolvency" damages by holding that an increase in the liabilities of a company, even if insolvent, is damage to the company and may be recovered from wrongdoers if negligence is proven.

Paulette J. Thabault, as Receiver of Ambassador Insurance Company vs. Doris June Chait, as Representative of the Estate of Arnold Chait; PricewaterhouseCoopers LLP, No. 06-2209 (3d Cir.)