Eide Bailly LLP v. Humphreys

Background

Senior Health Insurance Company of Pennsylvania (SHIP) is a long-term care insurer that entered a court-supervised financial rehabilitation process. Michael Humphreys, in his capacity as the court-appointed statutory rehabilitator of SHIP, brought a counterclaim for professional negligence (accounting malpractice) against Eide Bailly LLP (EB), an accounting firm that had audited SHIP. The rehabilitator alleged that EB issued an unqualified (clean) audit opinion in 2016 when it should have issued a modified or qualified opinion, and that this failure delayed regulatory intervention by the Pennsylvania Insurance Department (PID), causing SHIP to suffer greater financial losses than it otherwise would have.

Eide Bailly moved for summary judgment on the remaining malpractice counterclaim and also filed three motions under Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), seeking to exclude or limit testimony from three of the rehabilitator's expert witnesses. The rehabilitator likewise filed three Daubert motions targeting EB's experts. United States Magistrate Judge Shannon G. Elkins issued a Report and Recommendation (R&R) on January 31, 2026, recommending that all six Daubert motions be denied and that EB's summary judgment motion be granted — but only on causation grounds, with damages evidence found sufficient to create a triable issue. Both parties objected. Judge Davis conducted a de novo (independent, from scratch) review under 28 U.S.C. § 636(b)(1).

Legal Standards

Summary judgment is appropriate when there is no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). A dispute is genuine if a reasonable jury could return a verdict for either party; a fact is material if it affects the outcome.

Daubert Rulings

Lisa Kuklinski (rehabilitator's damages expert) Kuklinski is a practicing actuary, Fellow of the Society of Actuaries, member of the American Academy of Actuaries, and Managing Director at FTI, with over 30 years of actuarial experience. EB argued she lacked the experience or methodology to opine on how quickly an insurer like SHIP might have entered and progressed through rehabilitation under a different audit outcome, and that her opinions were speculative and based on another expert's conclusions. The court found her credentials and experience sufficient, rejected the argument that her testimony covered only simple arithmetic, and held that the remaining objections went to weight rather than admissibility. EB's motion to exclude Kuklinski was denied.

Carl Harris (rehabilitator's actuarial expert) Harris is a consulting actuary with experience since 1979, Fellow of the Society of Actuaries, member of the American Academy of Actuaries, and a Fellow of the Conference of Consulting Actuaries. He conducted an independent reserve analysis and opined that an average 60.8% rate increase was actuarially justified as of December 31, 2016, and assumed 100% of policyholders would accept new rates. EB argued this was irrelevant and prejudicial because it went beyond the scope of the actual negligence alleged, and that real-world rehabilitation results contradicted his assumptions. The court found Harris's testimony relevant to both the accuracy of prior actuarial work and the reasonableness of EB's response to concerns raised by another actuarial firm. Disagreements with his factual assumptions went to weight, not admissibility. EB's motion to exclude Harris was denied.

James Wrynn (rehabilitator's regulatory expert) Wrynn is a licensed attorney and Senior Managing Director at FTI with extensive experience in insurance regulation, including service as Executive Director of the New York State Insurance Fund, Superintendent of the New York State Department of Insurance, and First Deputy Superintendent of the New York State Department of Financial Services. EB conceded he was generally qualified but argued his opinions beyond the narrow question of rehabilitation timing were vague, ambiguous, and potentially misleading. The court agreed with the R&R that Wrynn's broad regulatory experience — including ensuring the solvency of insurance carriers and understanding the importance of statutory audits — qualified him to testify on the topics in his report. EB's motion to limit Wrynn's testimony was denied.

Rehabilitator's three Daubert motions The rehabilitator sought to exclude testimony from three of EB's experts (Tucker, Gustafson, and Cohen). All three motions were denied, with no detailed analysis of those experts set out in the order.

Summary Judgment: Causation

For purposes of the summary judgment motion, EB conceded the elements of duty and breach. The disputed issues were causation and damages.

The R&R concluded — and Judge Davis agreed — that the rehabilitator failed to create a genuine issue of material fact on but-for causation. Under Minnesota law, a plaintiff in a professional malpractice case must introduce concrete evidence of what it would have done but for the defendant's negligence and what those actions would have reasonably produced. Christians v. Grant Thornton, LLP, 733 N.W.2d 803, 813 (Minn. Ct. App. 2007).

The rehabilitator's evidence fell short because: - Expert Patrick Cantilo testified that he could only speculate as to how PID might have responded to a different audit result. - Expert Wrynn testified that a modified audit report alone would not necessarily have led to rehabilitation or liquidation, and that PID had discretion to investigate rather than immediately take control. - Expert Kuklinski acknowledged PID could have exercised discretion to take action other than immediately placing SHIP into rehabilitation. - The 100% policyholder rate-increase acceptance rate used in damages models was described by the experts themselves as an assumption made to simplify calculations, not a factual prediction.

The rehabilitator argued the case was analogous to Jerry's Enterprises, Inc. v. Larkin, Hoffman, Daly & Lindgren, Ltd., 711 N.W.2d 811 (Minn. 2006), in which a business owner testified specifically what he would have done had his attorney warned him about a contract provision. The court distinguished Jerry's on the ground that in that case, the plaintiff articulated a specific course of action he would have taken. Here, in contrast, the rehabilitator's experts could only identify a menu of actions PID could have taken — without establishing what PID would actually have done. Because PID was not required to place SHIP into rehabilitation in 2016, and no evidence established that it would have exercised its discretion to do so, causation remained speculative. The Rehabilitator's objection on this point was overruled.

Summary Judgment: Damages (Modification of R&R)

The R&R had found, despite acknowledging significant speculation in the damages evidence, that the rehabilitator's experts used recognized actuarial methodologies sufficient to give a jury a basis for calculating damages. EB objected, arguing this conclusion was irreconcilable with the R&R's own finding that the damages evidence was speculative.

Judge Davis sustained EB's objection and modified the R&R on this point. The court found that the damages evidence was too speculative to permit a jury to make a reasonable and principled estimate. The core problem was that SHIP's damages calculation rested on a chain of uncertain events — whether and how quickly SHIP would have entered rehabilitation, how quickly rehabilitation would have progressed, whether rate increases would have been approved, and whether policyholders would have paid those higher premiums — and the experts were not unified on whether or when any of these events would have occurred. While the law does not require mathematical precision in proving damages, it does require proof to a reasonable (if not absolute) certainty. The court concluded the evidence here did not satisfy even that standard.

In Pari Delicto Defense

The equitable defense of in pari delicto bars recovery when the plaintiff participated in the same wrongdoing it complains of. The parties disputed whether and how this doctrine applied to a statutory rehabilitator appointed under Pennsylvania law litigating under Minnesota law. The R&R did not resolve this issue because the summary judgment ruling made it unnecessary, and the court likewise declined to reach it.

Disposition

The court ordered that judgment be entered accordingly.