Devco Premium Finance Co. v. North River Ins. Co.

• Decision Date: 18 May 1984
• Docket Number: No. AV-46,AV-46
• Citation: 450 So.2d 1216
• Parties: DEVCO PREMIUM FINANCE COMPANY, a corporation, Appellant/Cross Appellee, v. NORTH RIVER INSURANCE COMPANY, a foreign corporation; Paul G. Miller, Jr., Robert E. Holley, and Miller & Holley Chartered, a professional corporation, Appellee/Cross Appellant.
• Court: Florida District Court of Appeals

Page 1216

450 So.2d 1216

DEVCO PREMIUM FINANCE COMPANY, a corporation, Appellant/Cross Appellee, v. NORTH RIVER INSURANCE COMPANY, a foreign corporation; Paul G. Miller, Jr., Robert E. Holley, and Miller & Holley Chartered, a professional corporation, Appellee/Cross Appellant.

No. AV-46.

District Court of Appeal of Florida First District.

May 18, 1984.

Noah H. Jenerette, Jr., James H. McCarty, Jr., Karen K. Cole of Boyd, Jenerette Staas, Joos, Williams & Felton, P.A., Jacksonville, for appellant/cross appellee.

G. Kenneth Norrie and E. Allen Hieb, Jr. of Rogers, Towers, Bailey, Jones & Gay, Jacksonville, Robert M. Greco of Karon, Morrison & Savikas, Ltd., Chicago, Ill. and Rudolph J. Inman, Jr. of Inman & Landau, Jacksonville, for appellee/cross appellant.

MILLS, Judge.

We are asked in this appeal to determine whether an accounting firm is entitled to assert the defense of comparative negligence in a malpractice action instituted against the firm by a client. We agree with the trial court that the firm is entitled to assert such a defense.

Devco Premium Finance Company (Devco) served clients who desired to purchase insurance policies but who could not afford to pay the initial lump-sum premiums on those policies. Each client paid to the agent of the insurer a stated percentage of the lump-sum premium, generally 30 percent, and Devco then paid the insurer the remainder of the premium. In return for Devco's payment to the insurance company on behalf of the client, the client: (1) agreed to make monthly payments to Devco, amortizing the balance due on the premium plus interest; (2) assigned the unearned premium held by the insurance company to Devco as a security interest; and (3) provided Devco with a power of attorney. When a client failed to make a monthly payment, Devco used its power of attorney to cancel the client's insurance policy. Upon cancellation, the insurance company refunded to Devco the portion of the client's premium which was as yet unearned. Devco thereby protected itself from loss because the premium returned by the insurance company should always be greater than the amount owed by the client to Devco.

Timely notification to the client that he was in arrears on his payment and prompt cancellation of the insured's policy upon the insured's failure to become current in his payments were critical to the success of Devco. Because Devco did not subject its clients to credit checks and did not require the pledge of collateral, its only security lay in the interest which it held in the client's unearned premium. If it failed to promptly cancel the insurance policy of a client who defaulted on his payments, more of the premium would be earned by the insurance company, and Devco stood not only to lose its profit but also its initial investment.

Initially, Devco subscribed to a monthly computer service which provided it with reports of the aging of its accounts receivable. The reports showed the accounts receivable on which payments were 0 to 30 days overdue, 31 to 60 days overdue, and more than 60 days overdue. Devco received these monthly computer aging reports from 1976 through May 1980. On 1 June 1980, Devco began converting to an in-house computer system. Although the problem had existed before the conversion, the company soon began to experience severe problems with failure to properly cancel delinquent accounts. Although Dan Crisp, the President of Devco and a member of its Board of Directors, had available to him the monthly printouts with their aging schedules from 1976 through May 1980, he never reviewed them during that time.

Paul G. Miller and Robert E. Holley, certified public accountants, operating under the firm name of Miller & Holley, audited the financial records of Devco for the fiscal years ending 30 June 1979 and 30 June 1980. Mike Latimer, an employee of Miller & Holley, actually performed most of the audits.

During the 1979 and 1980 audits, Miller & Holley devised a statistical confirmation test to determine the number and size of doubtful accounts receivable. Latimer omitted numerous pre-1980 contracts from the sample used for this test even though those contracts were still outstanding and were included as accounts receivable on the company's financial statements. Miller & Holley relied upon the opinion of Gladys Tillman, manager of Devco, as to the collectibility of these pre-1980 accounts which were omitted from the confirmation sample used. Latimer selected 240 Devco accounts receivable to test by confirmation procedures in both the 1979 and 1980 audits. It appears, however, that in each year he in fact tested only 100 of the 240 accounts and neglected to test the remainder because he concluded, after completing the 100 accounts, that no problems existed. In fact, many of the accounts selected for testing were deficient. Of the 100 accounts actually tested by Latimer in one of the years, 80 were debit accounts on which payments from the client were owed. Of these 80 accounts, 27 were accounts on which the security--the unearned insurance premium--had been lost. Miller & Holley ignored the results of the statistical sample testing and instead established a doubtful accounts receivable allowance of .5% of the outstanding premium contracts receivable.

In June 1981, Dan Crisp learned for the first time that Devco was no longer a profitable operation. He had believed from his review of the Miller & Holley audits performed on 30 June 1979 and 30 June 1980 that Devco had sound accounts receivable and was a thriving business. Crisp first became aware of the serious delinquent accounts problem when an employee showed him a computer printout indicating that $500,000 worth of accounts receivable were delinquent more than 90 days.

Florida National Bank had extended $700,000 credit to Devco in reliance upon the audited financial statements prepared by Miller & Holley. The bank determined the line of credit which it would extend to Devco by calculating a percentage of the nondelinquent accounts receivable. In 1981, Edward M. Clay, a Florida National Bank Commercial Loan Officer, reported to the bank loan committee that $632,179.93 of the Devco accounts receivable previously presumed collectible were in fact over 90 days old and should not be considered as collateral. Clay then notified Devco by letter that it would need to infuse between $325,000 and $400,000 in additional capital to secure its line of credit. When Devco was unable to provide this additional capital, Florida...