Accountants Owe Duty to Insurance Commissioner.

The state insurance commissioner is within the universe of those to whom an accounting firm owes a duty when making an audit of an insurance company to be submitted to the commissioner, the California Court of Appeal, Second District, held in Arthur Andersen LLP v. Superior Court (Quackenbush), 79 Cal.Rptr. 879 (1998).

Arthur Andersen audited Cal-American Insurance Co., an auto insurer, and gave it an "unqualified" or "clean" opinion--stating, that is, that the financial statements were prepared in accordance with generally accepted auditing principles. The audit report was filed with the California insurance commissioner, as required by a 1990 California statute. In fact, Cal-American was insolvent, and the audit statements materially represented its true financial condition. In view of the statements, the commissioner took no regulatory action, but as things worsened, he placed the insurance company in liquidation and sued Arthur Andersen, alleging professional negligence and misrepresentation.

The defendant contended, among other issue, that the commissioner was not within the ambit of those to whom it owed a duty, but the thai court denied its motion for summary judgment.

Affirming, the court of appeal constructed a duty based on the statute requiring the filing of the audit and controlling California law as established by a 1992 California Supreme Court case, Bily v. Arthur Young & Co., 834 P.2d 745. Prior to enactment of the statute, the court noted in an opinion by Justice Zebrowski, California law held that an auditor owed a duty of care to all reasonably foreseeable users of an audit report. Therefore, the court continued, when the legislature enacted the statute requiring...