The United States Court of Appeals for the Third Circuit recently upheld a $182.9 million judgment against PricewaterhouseCoopers, LLP (“PWC”) for allegedly contributing to the failure of Ambassador Insurance Company (“Ambassador”) through negligent auditing. Thabault v. Chait, No. 06-2209 (3d Cir., Sept. 9, 2008).

Ambassador was a surplus lines insurance company, incorporated in Vermont, with its principal place of business in North Bergen, New Jersey. According to the decision, Ambassador retained PWC to audit its annual SEC statements that were filed between 1979 and 1982. Annual statements filed with the Vermont Insurance Department incorporated PWC’s loss reserves calculations from the audited annual SEC statements.

At trial in the United States District Court for the District of New Jersey, the Insurance Commissioner of the State of Vermont (the “Commissioner”), who has served as receiver of Ambassador for over 20 years, alleged that, but for PWC’s negligence in failing to disclose the insolvency of Ambassador following its audits, Ambassador would not have continued to write insurance policies, which resulted in its failure. After a nine week trial, the jury awarded $119.9 million in damages to the state of Vermont. After the District Court awarded prejudgment interest, the total judgment reached $182.9 million.

PWC appealed the jury verdict and argued on appeal that the District Court erred in (1) not entering judgment for PWC as a matter of law for lack of compensable injury to Ambassador on the basis that deepening insolvency cannot be used as a measure of damages for a negligence claim and (2) not granting summary judgment to PWC as a matter of law for lack of proximate causation.

Although the court agreed that there were references made throughout the case to “deepening insolvency,” it concluded that the damages presented to the jury were based on traditional New Jersey tort damages. The court held that an increase in liabilities constitutes harm to the company, as well as to the affected policyholders, and the law provides a remedy when a plaintiff proves a negligence cause of action.

On the issue of proximate cause, the court held that the District Court did not err in refusing to enter summary judgment in favor of PWC as a matter of law, because PWC failed to provide evidence that intervening events were sufficiently extraordinary that imposition of liability against PWC would be unreasonable.

For a full copy of the opinion, please click here.