Peat Marwick’s Insurance Is Ruled Deficient

SANTA ANA — An Orange County judge has found that KPMG Peat Marwick LLP doesn’t have adequate insurance to pay a potential judgment in a $100 million lawsuit.

The finding could affect hundreds of other cases nationwide 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 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 J. 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.”

Executives refused to comment about the insurance issue, but industry analysts said they can’t believe that Peat Marwick isn’t adequately covered.

Rick Telberg, editor of Accounting Today, called the apparent lack of adequate insurance “absolutely shocking” and “hard to believe.”

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 6 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 might not have enough to cover billions of dollars in damages in other suits.

Amounts sought in fraud and malpractice lawsuits often bear little resemblance to how much plaintiffs win, if anything. But a major award, or series of verdicts, could be devastating, industry experts say.

Seven years ago, Laventhol & Horwath, then the nation’s seventh-largest accounting firm, went bankrupt under a load of debts and lawsuits. The partners ended up paying $10,000 to $400,000 each to settle the firm’s debts.

Peat is expected to be merged into Ernst & Young LLP this month, and no one believes Peat’s situation in the TMI case will affect the deal.

Meantime, plaintiffs’ lawyers in the TMI case are turning up the heat by asking for a court order that would force each of Peat’s California partners to provide a personal financial statement because punitive damages, if awarded, could push a verdict to $800 million.

“Now that the court has exposed an Achilles heel, Peat can no longer hide the very real exposure [to damages] it faces,” said Ronald Rus of Irvine, lead lawyer for the teachers. “We’re set for trial next month, so Peat’s exposure and that of its partners are real.”