Koken v. Steinberg

• Decision Date: 20 May 2003
• Citation: 825 A.2d 723
• Court: Pennsylvania Commonwealth Court
• Parties: M. Diane KOKEN, Insurance Commissioner of the Commonwealth of Pennsylvania, in her official capacity as Liquidator of Reliance Insurance Company, Plaintiff, v. Saul P. STEINBERG, et al., Defendants. M. Diane Koken, Insurance Commissioner of the Commonwealth of Pennsylvania, Plaintiff, v. Deloitte & Touche, LLP, et al., Defendants. In Re: Preliminary Objections of Deloitte & Touche, L.L.P. and Jan A. Lomelle.

825 A.2d 723

M. Diane KOKEN, Insurance Commissioner of the Commonwealth of Pennsylvania, in her official capacity as Liquidator of Reliance Insurance Company, Plaintiff, v. Saul P. STEINBERG, et al., Defendants.

M. Diane Koken, Insurance Commissioner of the Commonwealth of Pennsylvania, Plaintiff, v. Deloitte & Touche, LLP, et al., Defendants.

In Re: Preliminary Objections of Deloitte & Touche, L.L.P. and Jan A. Lomelle.

Commonwealth Court of Pennsylvania.

Decided May 20, 2003.

Jerome R. Richter, Philadelphia, for plaintiff.

Jeffrey S. Saltz, Philadelphia, for defendant.

OPINION AND ORDER

COLINS, President Judge.

Deloitte & Touche, L.L.P. and Jan A. Lomelle¹ (Deloitte) have filed preliminary objections in the nature of a demurrer to the complaint filed against them by the Liquidator. For the reasons set forth below the Court overrules those objections.

Deloitte provided auditing and actuarial services to Reliance Insurance Company (Reliance) for a number of years up to and including 1999. Deloitte provided statements of actuarial opinion regarding the loss reserves carried by Reliance, conducted audits of Reliance's financial statements, and issued reports on those audits. Deloitte's services were performed pursuant to engagement letters countersigned by Reliance.

On January 17, 2002, Diane Koken, the Insurance Commissioner of the Commonwealth of Pennsylvania, acting in her capacity as the Liquidator of Reliance Insurance Company (Liquidator), served Deloitte with a subpoena to produce documents in relation to the liquidation proceeding. Deloitte claims to have produced more than 250,000 pages of documents from March 2002 through the summer of 2002. In June 2002, the Liquidator brought an action against certain former officers and directors of Reliance, alleging a series of statutory and tort claims based on allegations of a series of improper inter-company transactions that resulted in what the Liquidator terms the "looting" of Reliance.

In October 2002, the Liquidator filed this action against Deloitte, alleging that Deloitte had committed various torts and breaches of contract in connection with its audit and actuarial duties during the same time period covered by the complaint against Reliance. In her complaint against Deloitte, the Liquidator alleges that Deloitte "propped up Reliance's reported financial position, deflected regulatory scrutiny, and permitted Reliance to pay out cash to its unregulated parent companies and undertake additional policyholder obligations when Deloitte ... knew or should have known that Reliance was seriously financially troubled and was or would shortly be insolvent." (Complaint, ¶ 3). The result, according the Liquidator, was a one billion dollar overstatement of Reliance's financial condition that was a direct and proximate cause of harm to Reliance, its policyholders, and creditors.

The complaint against Deloitte contains seven counts. Count I alleges negligence and malpractice in the performance of actuarial services; Count II alleges negligence and malpractice in the performance of auditing services; Count III alleges breach of contract in the performance of actuarial services; Count IV alleges breach of contract in the performance of auditing services; Count V alleges misrepresentation; Count VI alleges negligent misrepresentation; and Count VII alleges aiding and abetting. Deloitte asks us to dismiss Counts I through IV and VI as they assert claims on behalf of persons other than Reliance and Count III, IV, V and VII in their entirety.

Preliminary objections may be sustained only if the law says with certainty that no recovery is possible. Foster v. Peat Marwick, Main & Co., 138 Pa. Cmwlth. 147, 587 A.2d 382 (1991), affirmed sub nom. Foster v. Mutual Fire, Marine and Inland Ins. Co., 544 Pa. 387, 676 A.2d 652 (1996). To sustain preliminary objections a complaint must be clearly insufficient to establish any right to relief, and preliminary objections will not be sustained if any theory of law will support a claim. Id. Any doubt should be resolved against the objecting party. Id.

Deloitte bases its argument for the dismissal of those parts of the claims for professional negligence, breach of contract, and negligent misrepresentation contained in Counts I through IV and VI that state claims for relief on behalf of others than Reliance on the grounds that privity must exist between parties before Pennsylvania law will allow recovery against an accountant for professional negligence and that the Liquidator cannot recover on behalf of policyholders and creditors because they were not in privity with Deloitte.² Deloitte also claims that Counts III and IV must fail because they state claims for breach of contract on behalf of policyholders and creditors without a showing that they are intended third-party beneficiaries.

We will not discuss Deloitte's arguments on this issue because in making those arguments Deloitte simply ignores the fact that it is now settled law in Pennsylvania that an insurance regulator is charged not only with representing the public interest but the interests of policyholders and creditors as well. Article V of the Insurance Department Act, 40 P.S. §§ 221.1-221.63 (Article V), clearly states, "The purpose of this article is the protection of the interests of insureds, creditors, and the public generally." 40 P.S. § 221.1(c). It also states, "This article shall be liberally construed to effect the purpose stated in subsection (c)." 40 P.S. § 221.1(b). Deloitte not only ignores the controlling statute in making its argument, it ignores this Court's very recent decision in Koken v. Fidelity Mutual Life Insurance Co., 803 A.2d 807 (Pa.Cmwlth.2002), and the Court's antecedent decision in Foster, above.³

In Koken, the Court, relying on its decision in Foster, discussed the purpose of Article V In this jurisdiction, our Court has said that Article V authorizes the rehabilitator to pursue actions on behalf of the insurer and on behalf of the policyholders and other creditors. Foster v. Peat Marwick Main & Company, 138 Pa. Cmwlth. 147, 587 A.2d 382 (1991) (Foster). In that case, we overruled the defendants' preliminary objections that were grounded on the purported failure of the plaintiff, the Insurance Commissioner as rehabilitator of The Mutual Fire, Marine and Inland Insurance Company, to state a cause of action for injuries to policyholders. The defendant there contended that Article V authorized her to bring actions "on behalf of the insurer" only. We noted that there, as here, the company was a mutual company and that therefore the policyholders were both the insureds and the insurers. We also cited Article V's stated purposes, among which is the protection of insureds and other persons, as well as the estate, and found that "a rehabilitator... may assert injury common to shareholders and general creditors and enjoys the authority to recover estate assets to which they will eventually look for recovery." 587 A.2d at 385. Such a holding comports with the stated purpose of Article V to protect the interest of insureds "through ... equitable apportionment of any unavoidable loss" Section 501(c)(iv), 40 P.S. § 221.1(c)(iv).

803 A.2d at 820 (emphasis omitted).

Counts I through IV and VI properly state a claim against Deloitte on behalf of the policyholders and creditors of Reliance.⁴

Deloitte next argues that Counts III and IV, which respectively allege breaches of contract to provide actuarial and auditing services, must be dismissed because they are mere restatements of the negligence claims and that they fail to state any claim in contract. The Court disagrees.

Deloitte first relies on a memorandum opinion of the U.S. District Court for the Eastern District of Pennsylvania, In re Official Committee Of Unsecured Creditors Of Corell Steel On Behalf Of Corell Steel v. Fishbein And Company, P.C., et al., Civ. A. No. 91-4919 (E. Dist of Pa.1992) (1992 WL 196768). Corell addresses, among other issues, whether an accountant may be sued in contract for failing to provide services the accountant agreed to provide. The court began its discussion by saying, "Failure to perform a service with the requisite level of professional care typically constitutes a claim of negligence, not breach of contract." The court does not make a determination on the issue because it concludes, "First, it is not clear under basic contract law that Corell's agreement with Fishbein, even as characterized by plaintiff, creates a cause of action in contract. Second, even if the agreement does create a cause of action in contract, plaintiff has failed to properly state a claim of breach of contract in accordance with Pennsylvania law." 1992 WL 196768, p. 5. This quotation upon which Deloitte relies in Correll is not instructive. The Correll court, however, quoting Sherman Industries, Inc. v. Goldhammer, 683 F.Supp. 502, 506 (E.D.Pa.1988), explained how contract and tort differ.

"[I]n order to distinguish a contract malpractice claim from a tort claim, the plaintiff claiming under a contract theory must raise an issue as to whether it specifically instructed the defendant to perform a task that the defendant failed to perform, or as to whether the defendant made a specific promise upon which plaintiff reasonably relied to its detriment."

1992 WL 196768, p. 6 (E.D.Pa.). The Court will explain below that Deloitte made specific promises to Reliance in regard to its loss reserves that Reliance relied upon to its detriment.

Deloitte next relies on another memorandum and order from the District Court. In Foster v. Alexander & Alexander Services, Inc. 1995 WL 27447 (E.D.Pa.), the court, using the quote from Correll, above, tells us, "Failure to perform a service with the requisite level of professional care typically constitutes a claim of negligence, not breach of contract." Id. at 6, and "An agreement to act with the legally required level of care cannot constitute...