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A Deep Pocket, Unpicked

Hurricanes are formed when clusters of thunderstorms, fed by warm and moist air masses over tropical oceans, consolidate into swirling cyclones around a center of intensely low pressure.

Accountants are typically not involved in this process.

But that did not stop Florida’s Department of Financial Services from blaming the accountants - specifically the firm of Deloitte & Touche - for the financial collapse of a Tampa-based insurance company following a barrage of hurricanes that hit the state in 2004 and 2005.

It was a classic case of trying to pick the deepest available pocket.

Poe Financial Group, the umbrella company that held insurance companies Southern Family, Atlantic Preferred and Florida Preferred, is involved with ongoing litigation with the state of Florida over the collapse of the three insurers in 2005. When the first of the storms struck, Poe was the third largest insurer in Florida, but without out-of-state policy premiums and adequate reserves to prop it up, the insurer crumbled under the eight hurricanes that swept through the state in a 15-month period. The Department of Financial Services took over for all three insurance companies when their bankruptcies left behind nearly $1 billion in unpaid claims.

Defunct companies are, by definition, not a good place to go digging for buried treasure. But their accounting firms offer a greater recovery potential, and the bigger the accounting firm, the better. Deloitte is one of the biggest.

This is the likely explanation for why, in 2010, the Department of Financial Services also sued the accounting firm. The argument was that Deloitte had been negligent in auditing the three insurance companies, giving them a clean bill of health after the first wave of hurricanes in 2004. Regulators claimed they could have stepped in sooner had Deloitte’s auditors sounded the alarm.

Deloitte stood by its audit, and a six-member Florida jury acquitted the firm of any wrongdoing earlier this month. Jonathan Gandal, a spokesman for the company, said in a statement, “We are gratified that the jury confirmed this 2005 insolvency was caused by an unprecedented series of eight hurricanes in 15 months, not an accounting issue.” Had Deloitte been found liable, the firm could have faced up to $850 million in damages.

Sometimes accountants really are to blame for shoddy audits and misleading financial reports. More often, such lawsuits are an attempt to hold someone else responsible for losses that lenders or investors incurred after, in theory, knowingly undertaking business risks.

In this case, a state-regulated insurer failed, and caused losses for a state-administered (but industry-financed) guarantee fund, because the insurer’s risks turned out to be insufficiently diversified. Florida is a big state with an enormous coastline. Hurricane strikes happen fairly regularly, but the frequency and widespread distribution of the 2004-05 episode took everyone, including insurers, by surprise. From the Panhandle to the Keys to the Miami metro area, the spate of storms left almost no corner of the state untouched. Since Poe had no significant activity outside the state, it could not withstand the onslaught.

That’s called bad luck, not bad accounting. If regulators had insisted, Poe would have either had to underwrite risks elsewhere, or buy more reinsurance - essentially, insurers’ insurance - to mitigate its exposure. Instead, the state made an after-the-fact effort to hold Deloitte responsible for what was, at bottom, its own regulatory failure.

But it didn’t work. Even a jury of Floridians, who all pay the premiums that cover the state’s hurricane risks, saw that this was simply an effort to go after the deepest available pocket. They did their duty, and left that pocket unpicked.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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