Actuarial Expert Witness Examines Insurance Company Liquidation

Case – Crowley v. Chait United States District Court, D. New Jersey.March 16, 2004322 F.Supp.2d 530

Background: Commissioner of Banking and Insurance for the State of Vermont, as receiver of insolvent surplus lines insurer, brought suit against its former managers for breach of fiduciary duty, and against accounting firm charging it with negligence in connection with audits of insurer’s parent company. Accounting firm filed motions to exclude testimony of plaintiff’s expert witnesses. This case arises from the liquidation of Vermont-incorporated insurer, Ambassador Insurance Company. Ambassador wrote insurance in the so-called “surplus lines” market, which offers insurance for high or novel risks for those unable to obtain insurance from the traditional, “admitted” marketplace. Coopers & Lybrand (“C & L”), now PricewaterhouseCoopers (“PwC”), audited the consolidated financial statements of Ambassador’s parent company, Ambassador Group, Inc., a public company. As a Vermont-domiciled entity, Ambassador was under the primary regulatory jurisdiction of the Plaintiff, the Commissioner of Banking and Insurance for the State of Vermont. After a sharp decline in Ambassador’s surplus (the excess of its assets over its liabilities), the Plaintiff ordered a one-week review by outside consultants and ordered Ambassador to take certain actions. When Defendant declined, the Plaintiff filed suit in Vermont state court to have himself appointed Receiver of the company. The Commissioner ultimately moved for authority to liquidate the company upon discovering that Ambassador was insolvent. This lawsuit has been filed against the estate of Ambassador’s CEO Arnold Chait and PwC, whose predecessor C & L served as auditor of Ambassador’s parent company. Plaintiff’s theory of the case is that Chait grossly mismanaged the company, ultimately bankrupted it and continued writing policies well after the company collapsed.

Expert Witness: On the condition of Ambassador’s loss reserves, two (2) actuary experts witnesses opined for Plaintiff: Susan Szkoda and Dale Ogden. Plaintiff alleged that the loss reserve estimates made by Ambassador were too low, and that Ambassador’s management was aware of this. As a result, he hired two (2) consultants to conduct independent examination of Ambassador’s loss reserve liabilities. Ogden determined the insolvency was too great and that Ambassador could not be rehabilitated. Their work purportedly showed that Ambassador’s loss reserve liabilities made the company virtually insolvent.

Daubert Challenge: Defendants asserted that the testimony of both Ogden and Szkoda should be barred on Daubert grounds. Specifically, they argued that Ogden and Szkoda are not qualified, that their testimony does not fit the disputed factual issues in this case, and that their methods are subjective, result-oriented, and inconsistent. Defendants admitted that Ogden and Szkoda are “qualified to opine on loss reserving methods and loss reserve adequacy but, because Ogden and Szkoda are actuaries, not Certified Public Accountants, they are therefore unqualified to opine on C & L’s audits of Ambassador and its loss reserves, even where the audits reviewed the work of statisticians.

Court analysis: Ogden and Szkoda were qualified to state whether or not someone who was looking in the right place and knew what they were doing would become alarmed at the state of Ambassador’s loss reserves. If, as Plaintiff asserts, C & L was negligent in failing to discover that Ambassador’s loss reserves were woefully inadequate, it was obvious that an actuarial assessment of those loss reserves is relevant. Whether Ambassador set its reserves properly or used proper actuarial methods at the time was certainly relevant not only insofar as it concerns defendant Ambassador, but insofar as it may be used to show that C & L’s audit of Ambassador failed to comply with Generally Accepted Auditing Standards. In addition, the court rejected the Defendant’s argument that the testimony was subjective because the expert who injects personal judgement in the course of offering his testimony is hardly grounds for excluding this testimony. Daubert never requires that any subjective judgement must be excluded. Therefore, the testimony was fully admissible at trial.