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The Actuary The magazine of the Institute & Faculty of Actuaries

From Court 76

High drama in September as Equitable Life settled its longstanding litigation against its former auditors and some former directors.

Equitable Life abandoned its £700m claim for damages against Ernst & Young yesterday in what the accountancy firm said was ‘the biggest climbdown in English legal history’.

The move means there is little chance of any major compensation for policyholders, one million of whom saw their retirement savings and investments cut dramatically after the world’s oldest mutual insurer came close to collapse in 2000. The insurer had claimed that Ernst & Young had been negligent when it audited the company’s accounts.

The one consolation for the insurer was that, under the terms of the settlement, each side is paying its own costs – estimated at £30m so far for Equitable Life and £20m for Ernst & Young, its former auditor. However, Equitable is refunding a £795,000 payment made earlier by E&Y in respect of the insurer’s legal costs. Equitable said it was with ‘great sadness and frustration’ that the board had decided to withdraw the claim completely but it would have been ‘foolhardy’ to continue in the wake of the legal advice they had received. Vanni Treves (Equitable chairman) said the insurer had been confident it could prove Ernst & Young’s audit was negligent. But it had been taken aback by the evidence given by the former Equitable directors in court. This left the board feeling there was too great a risk that the judge would rule that the former directors would not have done anything differently in terms of how they ran the company, whatever E&Y had done or said. The insurer not only had to prove there was audit failure, it also had to show this led to a loss being suffered.

Yesterday’s events deal a major blow to policyholders’ hopes of recovering large sums to help offset their losses when Equitable lost a legal battle over valuable minimum income guarantees enjoyed by some pension policyholders.

Mark Hapgood QC, representing E&Y, described the decision to abandon the claim as ‘the biggest climbdown in English legal history’. Ernst & Young alleged yesterday that behind the scenes, Equitable had made several proposals to settle the case in recent months, and had indicated it would accept about £10m–20m – an offer refused by E&Y.

However, the accountancy firm is not completely off the hook. It may still face an investigation by the Joint Disciplinary Scheme, the accountancy regulator. Policyholders’ only hopes for compensation now lie with the continuing action against the former directors and an inquiry by the parliamentary ombudsman, who is due to report within months. The case was adjourned until October 3. (The Guardian, 23 September 2005)

As we went to press, Equitable continued before Mr Justice Langley only with its case against 11 former directors, having settled with four others. Expert actuary Mike Arnold of Milliman – instructed by solicitors for Equitable – was in the witness box. The settlements of the cases against the auditors and directors meant that several other expert actuaries – including your news editor (instructed by solicitors for Ernst & Young) – were never heard.