Andersen v. Superior Court

California Court of Appeal · 1998 · Criminal Law

Criminal LawAuditor liabilityNegligent misrepresentationInsurance regulationBilyRestatement 552Insurance Code section 900.2auditor duty

Facts

Arthur Andersen audited Cal-American Insurance Company's 1991 financial statements, issued an unqualified opinion, and the audit report was filed with the Insurance Commissioner as required by Insurance Code section 900.2. The Commissioner’s staff allegedly relied on that clean opinion and took no regulatory action, even though Cal-American was actually insolvent because significant assets shown on its balance sheet were pledged in related-party transactions and the pledges were not disclosed. When the Commissioner later discovered the true condition, Cal-American had become more deeply insolvent and unable to pay increased insurance claims, leading to conservation and then liquidation proceedings. The Commissioner, as liquidator, sued Andersen alleging that an accurate audit would have prompted earlier regulatory action and reduced losses to the estate.

Issue

Whether, under Bily, Restatement section 552, and Insurance Code section 900.2, an auditor of an insurance company may be liable to the Insurance Commissioner for negligent misrepresentation in an audit report filed with the Commissioner. Also, whether the Commissioner as liquidator is limited to asserting only the insolvent insurer's own claims, as an ordinary receiver would be.

Rule

An auditor auditing an insurance company owes a duty of due care not to make negligent misrepresentations to the Insurance Commissioner in the Commissioner's capacity as representative of policyholders and creditors when the audit report is filed pursuant to Insurance Code section 900.2. Under Bily and Restatement section 552, the Commissioner falls within the limited class of persons the auditor intends or is deemed to know will receive and rely on the report; however, professional negligence liability remains limited to the audit client unless the Commissioner was also the client.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Pine Harbor Assurance, a property insurer based in Sacramento, hired Norwalk Ledger Group to audit its annual GAAP financial statements. California law required the audit report to be filed with the Insurance Commissioner, the firm issued a clean opinion, department staff in Los Angeles reviewed it, and no intervention occurred until months later, when undisclosed encumbrances left the liquidation estate unable to satisfy a larger volume of claims.

If the Commissioner, as liquidator, sues the accounting firm for negligent misrepresentation based on the clean audit opinion, which is the strongest argument that the claim may proceed?

Explanation. Under the majority opinion, an auditor of an insurance company may owe a duty for negligent misrepresentation to the Insurance Commissioner when the audit report is statutorily required to be filed with the Commissioner and the Commissioner relies on it in carrying out regulatory duties. Restatement section 552 limits liability to a known or intended class, but the statutory filing requirement places the Commissioner within that class.