Tenth Circuit Holds Lawsuit Against Accounting Firm Alleging Negligence in Three Successive Audits to be Based on Interrelated Acts or Omissions
In a win for Wiley’s client, the United States Court of Appeals for the Tenth Circuit, applying Oklahoma law, has issued a published opinion holding that a lawsuit alleging negligence against an accounting firm in connection with three successive audits was based on interrelated acts or omissions. Am. Sw. Mortg. Corp. v. Cont’l Cas. Co., 2023 WL 6798929 (10th Cir. Oct. 16, 2023). The lawsuit thus constituted a single claim, subject to the applicable policy’s per-claim limit of liability, rather than the aggregate limit of liability.
The insurer issued a professional liability policy to an accounting firm that conducted three successive audits of its audit client’s financial records. Each of the audits failed to detect that the audit client was engaged in a fraudulent scheme that rendered lines of credit issued to the audit client by two different lenders to be unsecured. The lenders brought suit against the accounting firm, alleging that the firm had been negligent in failing to detect the fraudulent scheme. The policy had a limit of liability of $1 million per claim and $3 million in the aggregate. It also provided that claims based on “interrelated acts or omissions” would be treated as a single claim, with “interrelated acts or omissions” defined as “all acts or omissions in the rendering of professional services that are logically or causally connected by any common fact, circumstance, situation, transaction, event, advice or decision.”
A dispute arose as to the applicable limit of liability, and coverage litigation ensued. The United States District Court for the Western District of Oklahoma held that the claims by the two lenders as to each individual audit were based on “interrelated acts or omissions” but that the claims as to the separate audits were not. The Tenth Circuit affirmed in part and reversed in part.
The Tenth Circuit held that all of the claims were based on “interrelated acts or omissions,” and so the single per-claim limit of liability of $1 million applied. In reaching this result, the Tenth Circuit noted that it had previously held that the phrase “logically connected” means “connected by an inevitable or predictable interrelation or sequence of events” and observed that, “for two things to be logically connected, one must attend or flow from the other in an inevitable or predictable way.” The Tenth Circuit then explained that, in addition to considering the meaning of “logically connected” it also had to determine “what logically connects each act.” The court determined that “[w]hat logically connects the ‘interrelated acts’ is any common fact, circumstance, situation, transaction, event, advice or decision.” Applying that standard, the Tenth Circuit held that the audits were logically connected because “[e]ach audit report ‘flow[ed] from the other’ as a result of one common circumstance: the Auditor’s negligence.” The Tenth Circuit reasoned that “the common facts and circumstances underlying the recurring negligence here make it ‘predictable’ that the Auditor may make the same mistake—just as he did.”