Auditor to Pay $40 Million Settlement in Case of Failed Reliance Insurance

November 24, 2008

Pennsylvania Insurance Commissioner Joel Ario has announced a $40 million settlement with Deloitte & Touche LLP in connection with the firm’s auditing services for Reliance Insurance Co., which got into financial trouble and was taken over in 2001.

The settlement was in response to a 2002 complaint against Deloitte & Touche, which was Reliance’s outside auditor, that alleged among other things claims for breach of fiduciary duties, professional negligence and the recovery of preferential transfers.

When combined with the $45 million previously recovered from the Reliance parent companies, as well as the approximately $60 million recovered from the settlement of actions against the company’s former officers and directors, the grand total of recoveries in the Reliance estate total nearly $145 million from litigation brought by his department, according to Ario.

This settlement will benefit Reliance’s policyholders. The states with the largest number of Reliance policyholders were California, New York, Florida, Pennsylvania, Illinois and Texas.

The Pennsylvania department served as statutory liquidator for Reliance, which was licensed to write insurance in all 50 states. Reliance wrote primarily workers compensation, commercial auto, commercial liability and personal auto coverage.

“We have fought long and hard in this case, and we are pleased with this settlement,” Ario said.

Ario said that the case has spurred changes in insurance regulations to minimize the risks associated with the auditing of insurance companies. He said his department has been working through the National Association of Insurance Commissioners on new requirements related to auditor independence; corporate governance and internal control over financial reporting designed to promote the accuracy, and reliability of financial statements filed by insurance companies.

The changes being sought in financial regulation include strengthening risk-based capital requirements and adopting more stringent standards for actuarial opinions on the adequacy of insurance company reserves.

The insurance department took statutory control of Reliance on May 29, 2001; a liquidation order followed that October. On Oct. 15, 2002, the department, as the liquidator, filed a complaint in Commonwealth Court of Pennsylvania against Deloitte & Touche LLP, and its appointed actuary, Lommele. This complaint was originally captioned as “Koken v. Deloitte & Touche LLP et al” (Docket No. 734-MD2002) and is now captioned as “Ario v. Deloitte et al.”

A copy of the settlement agreement can be found at www.reliancedocuments.com.

Source: Pennsylvania Department of Insurance

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