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M. Diane Koken, the Pennsylvania state insurance commissioner, has filed suit against Deloitte & Touche in her capacity as liquidator of Reliance Insurance Co., accusing the actuarial firm of causing financial harm to Reliance and contributing to its insolvency. The complaint, filed Tuesday in Commonwealth Court, accuses Deloitte and Jan A. Lommele, an actuary for Deloitte, of professional negligence and malpractice, misrepresentation, breach of contract, and aiding and abetting breaches of fiduciary duty. In the complaint, Koken alleges that during Reliance’s final years, its impending collapse was hidden from its policyholders, creditors, regulators and the public by financial statements audited by Deloitte and Lommele. “Deloitte and Lommele knew or should have known that Reliance and the Pennsylvania Insurance Department would rely on their findings and opinions and intended that their findings and opinions be so relied upon,” the complaint says. The complaint includes two claims for alleged malpractice against Deloitte; one that the firm’s actions as Reliance’s independent auditor amounted to malpractice, and the other, that the firm committed malpractice as the insurer’s actuary. A third and fourth count allege breach of contract for actual and auditing services between Deloitte and Reliance. “Based on those failures by Deloitte, the company was made to look about a billion dollars better than it actually was,” said Koken’s attorney, Dan Wheeler of Philadelphia-based Blank Rome Comisky & McCauley, who is being assisted by firm colleague Jerome Richter. Deloitte and Lommele propped up Reliance’s reported financial position, the complaint claims, and permitted Reliance to pay out cash to its unregulated parent companies when Deloitte knew or should have known that Reliance was in serious financial trouble. The defendants also ignored risk factors, Koken claims, and in exchange for millions of dollars in fees, prolonged Reliance’s ability to continue operating. The defendants, Koken allege, intentionally, recklessly or negligently calculated a range of losses for policyholders that was more than $500 million too low. “Had Deloitte and Lommele caused Reliance to accurately report its financial condition in its financial statements, and had Deloitte and Lommele properly and timely communicated their knowledge to the PID, Reliance would have been forced to take steps to prevent further losses and would have been forced to cease upstreaming cash to its unregulated parent companies,” the complaint reads. “Hundreds of millions of dollars in losses to Reliance, and ultimately to its thousands of policyholders and creditors, would have been avoided, or at least mitigated.” According to the complaint, from 1998 to 2000 Reliance directors and major shareholders caused the company to pay its parent companies more than $500 million. But, the complaint says, they failed to have Reliance collect $200 million owed to it by Reliance Group Holdings Inc., the main parent company. “At the same time, Reliance’s business was deteriorating and Reliance’s loss experience was worsening, yet Reliance continued to increase premium volume,” the complaint says. At the end of 1999, Reliance was on the brink of insolvency, but Deloitte and Lommele concealed the true financial status of Reliance by overstating the insurer’s surplus by nearly $1 billion, the complaint says. “Their failure to identify or cause Reliance to correct the material misstatements in its financial statements and related materials, and failure to question the viability of Reliance as a going concern, allowed Reliance to keep operating, allowed it to assume additional obligations, allowed its officers and directors to drain its cash, and foreclosed any possibility that Reliance could be saved,” the complaint says. The complaint alleges that Deloitte and Lommele employed methodology not accepted in the actuarial profession in calculating Reliance’s reasonable range of loss. The defendants are alleged to have deviated from professional standards by not basing their estimates on reasonable assumptions and approved actuarial methods. Deloitte also failed to adequately assess internal controls and expose errors in the 1999 audit of Reliance’s financial statements, the complaint says. Reliance, and its creditors, operated without regulatory intervention for longer than it otherwise would have, the complaint says, resulting in Reliance’s insolvency. The actions of Deloitte led to an overestimation of Reliance’s surplus by $1 billion at the end of 1999, leading to an inaccurate public perception of Reliance’s financial condition, the complaint says. “Deloitte and Lommele’s failure to disclose Reliance’s depleted surplus also helped Reliance to preserve its favorable rating for A.M. Best, the most recognized rater of insurance companies as to the ability to pay claims,” the complaint says. If Reliance’s actual financial condition had been revealed at the end of 1999, its rating would have been downgraded, leading to lost ability to write new coverage, according to the complaint, and that would have averted additional losses from policies issued after that time. Paul Marinaccio, spokesman for Deloitte, said the firm had not yet seen the complaint and therefore could not specifically comment on it. “Deloitte and Touche performed its services for Reliance in accordance with all applicable professional standards and will defend itself accordingly,” he said.

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