Liquidators sue National Warranty's auditors, actuaries

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BY DICK PIERSOL / Lincoln Journal Star

Originally published 6-27-2004

National Warranty Insurance Group's auditors and actuaries helped cause the insolvency, KPMG Caymans says.

National Warranty Insurance Group's auditors, Deloitte Touche, and their consulting actuaries, Milliman USA, neglected to perform their duties and helped cause the company's insolvency, according to a lawsuit filed by National Warranty's liquidators.

A Cayman Islands court declared National Warranty, which operated from Lincoln offices, insolvent last year. The latest report from the liquidators, KPMG Caymans, said the insolvency left almost half a million people who held motor vehicle service contracts without coverage for claims insured by National Warranty.

Some auto dealers that sold the contracts have covered claims anyway, but there's been no public accounting of how people with contracts in force have been treated.

This is the first lawsuit by the liquidators spreading the blame for National Warranty's failure beyond the company's acknowledged conflict with business associates at the DeltaGroup, a Texas organization that marketed the vehicle service contracts to Internet vendors and motor vehicle dealers that sold them to drivers.

Among defendants in the lawsuit are affiliates in the Caymans and the United States of Deloitte Touche Tohmatsu, the prominent international accounting and consulting organization. The Cayman affiliate signed off on National Warranty's last publicly filed financial audit, from 2001. Court papers said Deloitte's Omaha office worked on National Warranty's 2002 audit, which was never finished, according to court documents, because National Warranty's officers wouldn't sign letters that assured its financial statements were accurate.

As a risk retention group, a specialized type of company authorized by federal law to insure its members' liability, National Warranty was allowed to choose its domicile for regulation, and that was the Cayman Islands.

The other defendant in the lawsuit, Milliman USA, is a prominent actuarial firm that signed National Warranty's last filed statement of actuarial opinion, for 2001, which assured that National Warranty's reserves for claims met the requirements of the Caymans law.

Representatives of Milliman and Deloitte would not comment on the lawsuit's allegations.

Filed in U.S. Bankruptcy Court in Nebraska, the lawsuit says Deloitte affiliates performed the annual audits from 1990 to 2003.

It says Deloitte auditors breached their duties by, among other things, "failing to obtain reasonable assurance about whether NWIG's financial statements were free of material misstatement, whether caused by error or fraud; â€- failing to obtain an understanding of internal control sufficient to plan the audit and to determine the nature, timing and extent of audit procedures to be performed; failing to examine on a test basis evidence supporting the amounts and disclosures in the financial statements; and failing to assess the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation."

Krista Kester, a Lincoln lawyer representing the liquidators, could not be reached to comment on the implications of fraud, nor to describe evidence the liquidators have to back up their allegations.

Milliman USA worked for National Warranty from 1999 on, according to the lawsuit, and was supposed to independently estimate expectations of reserves necessary to cover the claims that would come in for years after the sales of vehicle service contracts.

The lawsuit says Milliman breached its duty since at least 1999 when, in each actuarial review it performed, Milliman expressed the opinion that the amounts carried in National Warranty's balance sheet made a reasonable provision for claims into the future and when it failed to warn that the provisions for loss were inadequate.

How that happened is not explained in the lawsuit.

But in a deposition taken earlier, Barry Lake, president of National Warranty in its last months and still employed there, said National Warranty director and former president Dennis Costin told him the DeltaGroup claims hadn't been reported to Milliman, because Milliman had not asked for them. DeltaGroup accounted for about 40 percent of National Warranty's business, according to court documents.

The liquidators said they expect to prove actual financial losses to the company and creditors at trial.

Their lawyers blamed Deloitte and Milliman for "an increase in liabilities over assets that precipitated or exacerbated the insolvency of NWIG and its eventual liquidation." They want a jury trial in Omaha.

The actual losses to customers and creditors hasn't been estimated lately, but early estimates were in the scores of millions of dollars.

Reach Dick Piersol at 473-7241 or dpiersol@journalstar.com.