Judge Finds Peat Marwick May Be Unable to Pay in Suit

An Orange County judge has found that KPMG Peat Marwick has inadequate insurance to pay a potential judgment in a $100-million lawsuit.

The finding could impact hundreds of other cases against Peat Marwick--including a $3-billion suit against the accounting firm stemming from Orange County’s bankruptcy.

Plaintiffs’ lawyers say they are concerned that there won’t be enough funds to go around.

“What it means is that the more liability there is for them out there, the less money there is available for us,” said Michael Hennigan, lead attorney for Orange County in its negligence suit against Peat Marwick.

In finding that the firm failed to prove that it had insurance, Superior Court Judge John C. Woolley ruled that each of Peat’s California partners could be personally liable for any verdict won in a lawsuit on behalf of 20,000 teachers statewide.

The educators had sued Peat Marwick over failed real estate investment partnerships put together by Teachers Management & Investment Corp. in Newport Beach. The teachers accuse Peat of concealing TMI’s insolvency while raking in fees for auditing the partnerships. Peat denies the charge, saying it revealed all material information about the money-losing operations.

Since Woolley’s ruling last month, lawyers for Peat Marwick and for 250 current and former partners in California have been scrambling to overturn the decision. They even filed a motion to disqualify the judge.

The lawyers assert that the firm has insurance, according to transcripts of a hearing, even though they concede that “no formal policy document exists.”

Peat Marwick executives refused to comment on the insurance issue.

In the mid-1980s, when a wave of lawsuits chased insurers out of the industry, the major accounting firms formed their own carriers offshore--essentially making themselves self-insured. Even now, with insurance readily available, executives at some of the Big Six accounting firms say they stay with their own so-called captive funds in complicated layers of coverage.

Peat Marwick should have enough money of its own to pay a potential award in the TMI case, but without insurance, it may not have enough to cover billions of dollars in damages in other suits.