A ten-minute stroll from Spencer Dock, across the Liffey and along the low-rise, glass offices of Dublin’s docklands, separates the world’s second-largest professional services firm, PwC, from rivals Grant Thornton.

This is Ireland’s financial district; unimposing for the most part. Yet contained within this half-mile stretch is a negligence lawsuit worth €900 million pitting the two accountancy giants against each other.

It is the biggest and among the most complex damages claims to come before the Irish courts, involving a pool of some 40 million documents. The litigation costs alone could top €60 million.

The genesis of the dispute is the demise of Quinn Insurance Limited (QIL) a decade ago. Owned by the former billionaire tycoon Sean Quinn, the no-frills insurer aggressively sought market domination until the discovery of a €1.1 billion shortfall, mostly in its core reserves, exposed the truth and brought the business crashing down. QIL had been living on borrowed time.

Now the insurer’s former auditors PwC are in the spotlight over one of the largest collapses in Irish corporate history.  

The case against them is being brought by joint administrators of QIL, Michael McAteer and Paul McCann of Grant Thornton. The collapsed firm is suing for alleged breach of contract, negligence, and breach of duty over PwC’s auditing of certain aspects of the business and in respect of meeting regulatory requirements. This €900 million lawsuit is the only asset remaining on the books of Quinn Insurance.

PwC intends to vigorously contest the claims. 

While the row is a private battle about money and financial loss, it is also about reputation and public accountability.

A new ruling from the Court of Appeal means QIL will have to pay approximately €15 million upfront just to fire the starting gun on the case.

The court case promises a deep dive into the culture of Quinn Insurance and the Quinn Group. What were the problems? Why weren’t they recognised earlier? Who bears the burden of responsibility? What are the appropriate auditing standards when it comes to a major insurance body?

Initiated in 2012, the long-awaited Commercial Court case may finally go to a full hearing in the next year. However, a new ruling from the Court of Appeal means QIL will have to pay approximately €15 million upfront just to fire the starting gun on the case. 

Overturning a High Court decision from 2018, Justice Marie Baker granted PwC security for its estimated €30 million defence costs. Given QIL’s cash-strapped position, this is basically a legal comfort blanket for the auditor. PwC now knows that if it successfully defends the case (and the liquidated Quinn Insurance is left with literally nothing), it won’t be stuck with the bill.

Given that QIL is on government-backed financial life-support, through the Insurance Compensation Fund, will the requirement by the Court of Appeal to lodge such a substantial amount of money derail the case? 

A brief history of Quinn Insurance

Part of what was once the multi-billion euro Quinn Group, QIL was set up in 1995 and grew rapidly. Initially, it offered only private motor policies in Ireland and Northern Ireland, before branching out its offering to include employer’s liability, product liability and professional indemnity liability.

The Quinn point of difference was price. Using a low-cost model, the insurance product worked out cheaper than its rivals.

But there were problems for the ingenue insurer. In 2000 and 2001, QIL made losses and breached regulations by failing to meet the margin on solvency requirements. Corrective measures were taken, and the firm returned to profitability in 2002.

By 2006, the peak of the boom, Quinn had brought its knockdown price insurance products to Britain, the Netherlands, Belgium and Germany.

While QIL reported large profits in 2007, all was not well in the business. The rapid pace of expansion took its toll on the firm’s capital. There were significant investment losses, unapproved intercompany loans and substantial gift payments to other Quinn Group entities. Costly acquisitions like Bupa Ireland healthcare are alleged to have left Quinn Insurance perilously close to insolvency as the economic crash hit.

In 2010, the house of cards came crashing down.

In 2008, QIL sustained bruising losses. The financial regulator stepped in again, this time restricting the firm’s investments. On foot of a review by Milliman Advisers Limited, a firm that provided actuarial services to QIL, the regulator banned the insurer from offering professional indemnity cover and from writing any new insurance business in the UK. Representations were made on behalf of Quinn and the ban was lifted in a matter of weeks.

As a regulated entity, Quinn Insurance was required to hold sufficient reserves to fund potential future claims. The business relied on assets contained within eight of its subsidiaries, including the Quinn Hotel group, to meet those funding obligations.

But under a three-year financing deal with UK bank Barclays in 2005, the same assets were offered up as guarantees to secure €1.2 billion of borrowings in the wider Quinn Group. The deal meant QIL could no longer rely upon the unencumbered assets of its subsidiaries to shore up its reserves. The assets now had strings attached.

In 2010, the house of cards came crashing down.

The High Court appointed Michael McAteer and Paul McCann of Grant Thornton as joint administrators of the business after the financial regulator reported a chasm in the company’s finances. It seemed starkly apparent that the loan securities given by subsidiaries of QIL had undermined the insurer’s solvency margins.

The administrators tried to put some shape on the remnants of the business. In 2011, QIL was taken over by US insurer Liberty Mutual in a €1 deal.

There were wider repercussions as the public had to pick up the tab for the €1 billion-plus shortfall in Quinn Insurance through the State’s Insurance Compensation Fund. The High Court was then informed that the figure could rise as high as €1.65 billion. The fund has had to claw back money through a two per cent levy slapped on every non-life assurance product in a tariff that the public is still paying to this day.

QIL’s business model had proved too good to be true.

In 2012, the QIL administrators launched their lawsuit against former auditors PwC which had received around €6 million for services delivered to the wider Quinn Group. The damages claim, roughly €900 million, is  – as previously stated – the one remaining asset on the books of Quinn Insurance.

A settlement agreement was reached between QIL and the Central Bank in 2013, long after the departure of the Quinn family and their trusted lieutenants. The insurer put its hands up to a host of regulatory breaches. A €5 million fine was waived because the firm was in administration and was being propped up by public money.

The role of PwC

Section 35 of the Insurance Act 1989 obliges the auditor of an insurer to report to the financial regulator without delay any material defects in the financial systems of the business or any scenario which is likely to materially affect the insurer’s ability to fulfil its obligations to policyholders.

When McAteer and McCann got their hands on QIL’s books, the full scale of the irregularities at Quinn Insurance began to surface. The insurer’s technical provisions, the reserve covering the potential cost of future claims, had been significantly and materially understated, not only in 2008 but in every financial year dating back to 2005, in breach of EU reporting obligations.

Yet the professional opinion of auditors PwC for the years in question is that proper books of account were kept at Quinn Insurance. In this respect, the company was given a clean bill of health on the basis of information supplied to it by Quinn.

The main claim of negligence made by the administrators against PwC is that an early red flag could have prevented catastrophic loss and damage.

McAteer and McCann allege PwC was aware of the existence of the cross-guarantees in QIL’s subsidiaries but failed to identify the serious implications for the insurer’s reserves.

By not reporting the risk to the board of the insurer and the Financial Regulator, PwC allegedly breached auditing standards and insurance regulations.

It is alleged that if PwC had acted differently, the hole in QIL’s reserves might have been plugged a lot quicker as the board and the regulator would have been obliged to address the insurer’s serious financial woes. QIL might have been placed in administration at an earlier date, maybe as far back as 2005, and it would have ceased writing new business at that stage. QIL might also have avoided paying €201 million to banks and bondholders in 2011 to secure its release from the subsidiary guarantees. It might also have adjusted its pricing model.

In other words, McAteer and McCann maintain the slide into insolvency could have been stopped, or at least ameliorated, if the insurer had been made aware of the risks it was facing.

Addressing all the remedial steps Quinn Insurance might have taken in the counterfactual narrative presented by the administrators, Paraic Joyce, audit partner at PwC, pointed out in a 2016 affidavit that these could have had unforeseen results. “Even if all of these steps were taken, they would not necessarily have had the consequences for the Plaintiff’s business that it asserts,” he said.

Warning signs

Then there were the manifold frailties within QIL’s systems. The administrators claim PwC ought to have noticed the insurer’s weak internal controls and beefed up its auditing tests accordingly. 

For starters, QIL did not have an in-house actuarial department. It outsourced calculations on its solvency requirements, known as technical provisions, to experts Milliman which attached a disclaimer to the figures it provided that all source data was assumed to be complete and accurate.

During the audit process, PwC had at one point criticised Milliman’s estimates on the technical provisions. This should have set alarm bells off and resulted in a review of the source data and methodology applied, according to claims made by the Grant Thornton administrators.

There were other unheeded warning signs, it is claimed;  QIL’s rapid growth, its inexperience in the mainland UK market and its unsophisticated pricing policies.

On the operations side, there were alleged structural weaknesses. Staff members were inadequately trained and managers were incentivised to close files quickly, even when that proved premature and resulted in inappropriately high settlements. Personnel chopped and changed as did the processes used to handle claims. There was allegedly a culture of frequently ignoring professional legal advice even on quantum when it came to settling claims. 

It is claimed PwC ought to have planned its audits in light of the prevailing view in the market that QIL was under-providing for its claims. It is alleged the insurer was known to lowball its prices to win market share across Europe, often in areas like professional indemnity insurance, where it lacked expertise. It came on strong but when compared to other insurance players, the ratio of reserves to claims paid by QIL in the UK appeared much lower than average. Its reserves were below market benchmarks.

PwC is promising to put up a robust defence, contesting the claims on all fronts.

The list goes on. A key area where PwC is alleged to have breached its duty related to the supposed existential threat posed by the cross-guarantees on the Barclays’ deal. As auditors of QIL’s subsidiaries, PwC allegedly ought to have been aware of the implications of the intercompany guarantees on the insurer’s reserves. The facts of the guarantees were noted in the accounts each year along with the unchallenged views of the company directors that they would not result in a loss. It is said that such views should not have been accepted at face value, without the benefit of independent checks, especially in light of the growing indebtedness of the wider Quinn Group. 

PwC is promising to put up a robust defence, contesting the claims on all fronts. Every accusation thrown at the professional services firm is denied including in the broadest sense any suggestion it is to blame for the demise of Quinn Insurance. 

On the technical side, It will move to strike out all claims predating 2006 arguing they are statute-barred as they fall foul of the six-year time limit to bring a civil action. 

In its role as auditors, PwC says it contractually relied on Quinn Insurance to provide comprehensive financial records and information that gave a true reflection of the business, in accordance with its obligations under company law. It claims if this did not happen then any loss or damages experienced by QIL are a result of its own conduct. While PwC acknowledges there is a reasonable expectation auditing procedures are capable of detecting a material misstatement in the accounts, the systems are not designed to identify each and every weakness in the company’s internal controls. 

It claims while experts differ about the robustness of QIL’s technical provisions during the relevant period, this does not of itself mean there was an error or breach of duty on behalf of the auditor. While PwC admits it knew about the cross-guarantees supplied by QIL’s subsidiaries on the Barclays loans, it does not accept that the fact of their existence was of such significance to warrant a report to the board of directors or the Financial Regulator.

PwC contends there was no expectation that the guarantees would be called in during that period and that the financial health of the insurer was considerably better before 2008 than the picture being painted by QIL’s administrators.

The showdown must go on

While the battle over Quinn Insurance bears the stamp of the last boom and bust era, it seems likely the country will be deep in the grips of another recession by the time the case gets an airing. The pleadings are complete but discovery between the two sides- often a lengthy and bruising legal process – has yet to be finalised.

The most recent activity in the case has revolved around security for costs. 

In 2018, Justice Robert Haughton in the Commercial Court (since promoted to the Court of Appeal) refused PwC the protective costs order which is typically granted to a defendant when faced with an impecunious adversary. 

Such orders can stifle litigation if the plaintiff is too broke to ready-up the money ahead of the trial. 

In this case, the judge found there were special circumstances that merited deviating from the granting of security to PwC. For one, Quinn Insurance claimed the accountancy firm was to blame for its calamitous finances. On a preliminary reading of the case, Haughton agreed. He accepted the evidence that had QIL been alerted by its auditors to the significant financial problems, including the existence of the guarantees and the alleged understating of the technical provisions, it could have taken remedial action. 

The judge also took the view that there was an exceptionally important public interest dimension to the case, in terms of the burden on the Exchequer, and in determining how QIL “could collapse notwithstanding the regulatory system, the role of the Financial Regulator, and the need for public confidence in the proper regulation of the insurance industry in the future”. In other words, the case would go to the heart of how the financial system operated in Ireland.  It could not be characterised as “a run-of-the-mill professional negligence suit”.

But on appeal, Haughton’s ruling was completely overturned.

In a judgment this week, the Court of Appeal’s Justice Marie Baker found the lower court had failed to strike the right balance in the case.  Given that the costs of defending the action is likely to be €30 million, she said: “To expect PwC to bear the risk of having to meet costs of that magnitude seems to be intrinsically unfair. In this regard, it is worth observing that while Quinn has the benefit of limited liability, PwC does not. The individual partners are liable for these enormous costs.”

It may have rocked the state, but in the words of Justice Baker, “the interests pursued in this litigation are wholly commercial”.

Nor did she find any evidence that a security for costs order would stifle QIL’s claim. Publicly supported it may be, but security or no security, the case will go on. It is expected that around €15 million will have to be lodged upfront.

In respect of the public interest, PwC argued that the Financial Regulator is not a party to the proceedings and, regardless of how the litigation resolves, it cannot lead to a condemnation of the watchdog, or indeed offer any analysis of any failures in the regulatory system itself.

Baker agreed. “This is private litigation, albeit between a State-funded company in administration against its auditors, for negligence. The result can only be a finding of negligence or breach of contract against the auditors and a consequential award of damages should this be established”.

While the Insurance Compensation Fund would reap huge financial benefits from a Quinn victory, this was not enough to tip the case into a category of exceptional public importance. 

It may have rocked the state, but in the words of Justice Baker, “the interests pursued in this litigation are wholly commercial”.