Bermuda-based insurance company ESG Re Ltd. is taking aim at its former auditor in a lawsuit seeking more than $20 million in damages from accounting giant Deloitte Touche.

The legal action, filed with the Superior Court of California, follows Deloitte stepping down as ESG's auditor last year. ESG Re said its action was intended as a means of seeking compensation for what it cited as damage caused to itself following Deloitte's withdrawal including the loss of existing and potential new business.

Although admittedly burdened with some legacy issues from the mid and late-1990's, ESG Re continued to deal with those issues at the same time as trying to grow its business but Deloitte's decision late last November carried what those close to the matter called "considerable consequences" for the reinsurer.

ESG Re claims that Deloitte's departure resulted in the company being late in filing key documents with the US Securities and Exchange Commission (SEC) - a devastating development that ultimately led to its delisting from Nasdaq stock market.

The company also saw its debt rating downgraded and its stock value fell after investor confidence was shaken by events.

Now ESG is seeking damages - the complaint is against Deloitte & Touche (Ireland), Deloitte & Touche (Bermuda), Deloitte & Touche (US) and Mary Fulton, a partner of Deloitte & Touche (Ireland) - citing professional negligence, wrongful and unjustified breach of contract, negligent misrepresentation and other misconduct by Deloitte Touche. ESG said Deloitte was being taken to court after its "unjustified termination of the auditing engagement contract with ESG Re in 2002".

The Royal Gazette understands that the D&T stepped down as auditors without warning, informing ESG Re of its decision in a late evening phone call on November 22. That move followed Deloitte having made a pitch for ESG's business on November 5, 2002 to the company's audit committee. For its part, at least some of Deloitte's concerns were made public in a report last December.

At that time, the audit firm indicated that it had at least seven disagreements with ESG relating to its financial accounts.

These were reportedly related to provisions for impairment in the value of a company investment, an increase in legal reserves, the proposed write-off of the company's deferred tax asset, the proposed write-off of a receivable, other discrepancies on receivables and payables and finally, disclosure of significant uncertainties relating to the company's financial position.

In the interim, however, ESG appointed a new auditor - BDO International - and it is understood that the company was subsequently given a "clean bill of health" in all areas of concern highlighted by Deloitte.

It is not known when the case will go to court but Paul Hubbard, a senior partner with Deloitte & Touche (Bermuda), yesterday dismissed the suit as "frivolous". Mr. Hubbard added that the Bermuda office had not been involved in the audit process of ESG at the time Deloitte withdrew its services last November. Calls by The Royal Gazette to the Deloitte US office for comment were not returned.

ESG Re writes life, accident and health reinsurance on a global basis. Founded in 1997 the company has offices in Europe, North America, Latin America and Asia and employs some 130 staff. The company is headquartered in both Bermuda and Dublin, Ireland. North American operations are based in Hartford, Connecticut.