Andersen to top insurance limits
January 16, 2002
(Reuters) — You can only insure against so much, and it looks like embattled accounting firm Andersen will go way over its limit.
Andersen probably doesn't have enough insurance to cover the expected blockbuster payouts from settling lawsuits over its handling of Enron Corp.'s audit, experts say.
Andersen has a maximum of $500 million in professional liability coverage in the commercial market, insurance sources say, plus funds held in several self-owned Bermuda insurance entities.
That may not be enough to cover possibly massive payouts Andersen may have to make in settling Enron-related suits. Enron investors—who lost almost $80 billion as the energy trader collapsed—have targeted Andersen, along with Enron executives, in a number of suits charging they misrepresented Enron's financial dealings.
``Typically, there's a limited amount of insurance available for accounting firms, and they are largely self-insured,'' said Mark Cheffers, who runs www.accountingmalpractice.com, which gives advice to accountants to prevent them from being sued. Andersen's exposures could be 10 to 100 times its outside insurance coverage, Cheffers said, estimating its third-party coverage at no more than $300 million.
Any large settlements could put the accounting firm under huge financial pressure, and impoverish its partners.
``Who will pay for this? The partners, probably,'' Rickard Jorgensen, president of Jorgensen & Company, a specialist professional liability agency in Maywood, New Jersey, told Reuters. ``They themselves will pay for early litigation costs and so on out of day-to-day cash flow.''
After that, Andersen will look to its limited insurance coverage.
Accountants, fearing lawsuits targeting ``deep pockets'', are generally reticent about their insurance arrangements. Andersen did not return calls on the subject.
Insurance sources say that Andersen has a large deductible, meaning it pays the first few million dollars of claims itself.
Andersen augments coverage from insurers with a series of ''captive'' insurance companies in Bermuda and the Cayman Islands, sources said, and possibly some further reinsurance or ''finite risk'' arrangements, which are basically offshore funds set up to smooth losses.
``These captives have been funded over years, and they probably have the resources to fund a lot of losses,'' said Jorgensen.
Even so, that may not cover Andersen's exposures.
Record pay-outs
Payouts on Enron-related lawsuits could set records, reflecting the largest ever U.S. bankruptcy. It previously paid large amounts for far smaller cases.
Andersen paid out $110 million to settle an accounting fraud lawsuit over its auditing of bankrupt appliance maker Sunbeam Corp. in May last year, without admitting fault or liability. It also paid out $75 million to settle a suit relating to Waste Management Inc. in 1998, part of a $220 million overall settlement.
This year Andersen also faces scrutiny, and possible payouts, for its work as auditor for Australian insurer HIH Insurance, which collapsed last year with a $2.5 billion shortfall in claims reserves, making it the largest bankruptcy in Australia.
Rival accountants have also fared badly. Ernst & Young paid out $335 million in late 1999 to settle shareholder suits related to accounting fraud at Cendant Corp.
Shareholders lost some $30 billion in that case, as measured by Cendant stock's fall from its record high to its bottom. PricewaterhouseCoopers last year paid out $55 million for a suit related to software firm MicroStrategy Inc.
Undercovered
The settlements have reduced the amount of insurance professional services firms can buy in the commercial market, as insurers shy away from huge losses. Traditionally, accountants would go to Lloyd's of London insurance market to set rates for their coverage. Brokers would then fill out the coverage in layers using insurers such as Chubb Corp. , Ace Ltd. and XL Capital.
Now reinsurers tend to exclude the ``big five'' accountants on reinsurance contracts, market sources say, leaving the firms to construct their own coverage with the help of brokers such as Aon Corp.
Aon helped accountants set up captive insurers in Bermuda some years ago, such as Professional Asset Indemnity Ltd., which accountants used to pool some of their risks. All the major accountants also have individual captives, sources say, although it impossible to know how much they cover.
If all those insurance sources are exhausted, exposure will revert to Andersen's partners, who usually are liable up to the value of their equity stake in the firm, under Andersen's limited liability partnership structure.
That still may not enough to cover a settlement, which could run into billions of dollars. It is not known how much money Andersen, a private firm with $9 billion in annual revenues, has on its balance sheet. |
