Rescission an Effective Defense to Insurance Fraud
One of the most effective – and seldom used – tool to defeat insurance fraud, is the equitable remedy of rescission. Because insurers have little stomach to fight insurance fraud perpetrators they encourage more and more fraud.
The United States Court of Appeal for the Ninth Circuit, dealing with an alleged insurance fraud and an insurer’s request for a finding that its policy should be rescinded from its inception. In its opinion the Ninth Circuit recited the history of claims presented by then California lawyer Rex DeGeorge. The court began its recitation by noting that:
1. DeGeorge began losing yachts almost three decades ago. He had been the owner of the 43-foot yacht, Tutania. In 1970, he was interested in selling it. When a couple of purported Peruvian coffee merchants showed an interest in the yacht, DeGeorge arranged to take them for an overnight test-run. That night, the coffee merchants drugged him and his companion. DeGeorge and his companion, still feeling ill the next morning, escaped and sailed 35 miles back to shore in the yacht’s dinghy while the coffee merchants remained on board the vessel. Five days later, DeGeorge reported the theft to the police. The Tutania and the Peruvian coffee merchant bandits were never seen again. The Tutania had been insured by the Hartford Insurance Company. After DeGeorge threatened litigation for bad-faith denial of his claim, Hartford paid DeGeorge $43,000, the full policy value.
2. DeGeorge bought another vessel, this time a 57-foot racing yacht, the Epinicia. Six years after DeGeorge lost the Tutania, he was sailing the Epinicia off the coast of Italy with Paul Ebeling, a business acquaintance. The two men were sailing along on a starless, moonless night when about midnight they suddenly struck “a low-profile, dark object that was not visible.” Fortunately, DeGeorge had recently purchased a new dinghy. He and Ebeling, immediately realizing the danger, jumped into the dinghy and sailed back to the coast while the Epinicia sank in about twenty minutes. DeGeorge had insurance on the yacht and he filed a claim with the insurer, Lloyd’s. Lloyd’s originally declined to pay the claim, but after DeGeorge threatened litigation, they changed their position and paid him $194,000 for the loss of the yacht.
3. In 1983, DeGeorge was handling a law suit on behalf of a client. The suit involved a business deal potentially worth billions. According to DeGeorge, the parties opposing the suit had decided to pursue a rather unorthodox litigation strategy, i.e., they attempted to kill him. These parties had previously suggested they might in fact nail DeGeorge’s kneecaps to the floor. Although DeGeorge didn’t lose his kneecaps, an attempt was made that year to kill him while he and his wife were sailing off the California coast near Los Angeles. This time, DeGeorge lost a 47-foot yacht insured for $245,000. According to DeGeorge, a suspicious looking fishing boat circled the yacht. A little later, he and his wife were relaxing in the state room when explosions began to rock the boat. When the explosions stopped, DeGeorge and his wife jumped in a dinghy and escaped the vessel, which sank in shark infested waters in about half an hour. DeGeorge and his wife returned to Marina del Rey in the dinghy. They did not report the incident to any authorities, but four days later reported the loss to the vessel’s insurer, Fireman’s Fund. Fireman’s Fund eventually paid DeGeorge $245,000, the full amount of the policy.
4. A 1970 Rolex watch stolen from $1,150 unattended vehicle in Madrid
5. Personal items and jewelry $2,000 taken from an unattended taxi cab in Sydney, Australia
6. 1971 Baggage stolen from unattended more than vehicle in Barcelona, (several $20,000 identical claims against different combined insurers)
7. 1974 Missing Jensen-Healy automobile unknown
8. 1981 Baggage lost by airline $10,000
9. 1990 Baggage lost while traveling $9,000 in Europe
10. 1991 Baggage lost while traveling $10,000 in Europe
11. 1992 Paintings and personal property $700,000 stolen from home
12. 1993 other losses resulting from 1992 undisclosed theft settlement with second insurer
DeGeorge’s bad luck extended beyond the loss of mere personal property. He also filed twenty-nine insurance disability claims between 1976 and 1990. In a 1990 claim, DeGeorge sought $11,000 per month because of a “bipolar personality disorder.” The insurer, Monarch Insurance Company (Monarch), sought to rescind the insurance contract alleging DeGeorge had misrepresented and concealed material information in the application. However, after DeGeorge filed a counterclaim asserting breach of contract, bad faith, negligence, fraud, and negligent infliction of emotional distress, Monarch settled the claim for $550,000.
Regardless of his rather incredible background, the Ninth Circuit turned to the facts giving rise to the present case: the total loss of a fourth yacht.
In June 1992, DeGeorge contracted for the construction of a 76-foot motor yacht, the Principe di Pictor (Principe), from Azimut, SpA, an Italian firm, for the purchase price of $1.9 million. While the Principe was still under construction, DeGeorge assigned his end of the construction contract to Continental Pictures Corp. (Continental). Continental was a Panamanian corporation, apparently located in Switzerland. Although Continental allegedly bought DeGeorge’s contract for $3.6 million, Continental never paid anyone any money. In fact, after the contract was assigned to Continental, Azimut looked only to DeGeorge for progress payments. DeGeorge continued to make those payments to Azimut with $600,000 of his own money.
Continental then sold the Principe to Polaris Pictures Corp. for $3.62 million. Polaris had been formed by DeGeorge, had the same address as DeGeorge’s residence and, as the district court found, was “completely controlled by him at all relevant times.” Polaris had no assets other than some screenplays which the district court found to be of speculative value at best.
About two weeks before Continental sold the yacht to Polaris, DeGeorge arranged a stock swap with Tridon, a publicly traded company with no net worth. In this deal, Tridon acquired ownership of Polaris and DeGeorge acquired two million shares of Tridon stock. The stock swap agreement contained a clause which provided that all shares of Polaris stock would revert to DeGeorge if either Tridon or Polaris ever declared bankruptcy or an inability to pay their financial obligations. Because neither company had any significant assets, DeGeorge could, at any time, declare Polaris unable to pay its debts and regain his Polaris stock.
As a result of the stock swap, Tridon and not DeGeorge now owned Polaris.
The district court found this agreement was entered into for the purpose of distancing DeGeorge, on paper, from Polaris’s acquisition of the yacht. Polaris financed its purchase of the yacht through notes issued by Inbanco. Inbanco was formed and controlled by DeGeorge. It was incorporated on the same day that Polaris bought the yacht from Continental. Like Polaris, Inbanco shared a common address with DeGeorge. Inbanco’s only asset was apparently a $200,000 cash infusion from DeGeorge’s 28-year old nephew.
After Polaris bought the yacht from Continental, Polaris allegedly entered into an agreement with Jacob Wizman, supposedly a client of DeGeorge. Wizman agreed to buy a 98% interest in the Principe for $3.62 Million if the yacht could be delivered to him “as new” in January 1993. Because Wizman did not respond to a subpoena, the district court questioned whether he actually existed.
Polaris and Inbanco bought marine insurance on the Principe from Cigna through David Allen of Alliance Marine Risk Managers, Inc. (Alliance), a Cigna agent. The insurance application submitted by Polaris and Inbanco contained no reference to DeGeorge, Continental, Tridon, Wizman or any of the transactions and close ties among them. Cigna issued a policy of insurance naming Polaris as the insured, and naming Inbanco as the loss payee. The total value of the policy if all benefits were paid out was almost $6.5 million.
On its maiden voyage, with the insurance in place, the yacht Principe sank off the coast of Italy. DeGeorge and two companions, Paul Ebeling and Gabriel Falco, were on board at the time. Ebeling had also been on board one of DeGeorge’s other ill-fated yachts, the Epinicia, which also sank off the coast of Italy. Ebeling, who controlled Tridon during the Tridon/Polaris/DeGeorge stock swap, was now CEO of Polaris.
According to Ebeling and DeGeorge, the Principe was intentionally sunk by Sicilian drug runners posing as a trial crew for the Principe and seeking to escape from the Italian coast guard. As the story goes, the Principe was being captained by Andrea Libovich, a Yugoslavian sailor trained in the Russian navy. Ebeling and DeGeorge had met Libovich at a dockside café in Naples. They had previously discharged the captain provided by the ship’s builder, and decided to give Libovich a shot at the captain’s job with a test run on the yacht.
Libovich brought along two crewmen to help run the yacht. Although this was originally to be only a short test run, Libovich and his two crewmen each brought along two large, tightly stuffed, black duffle bags. Once the Principe was underway, the test run was extended overnight. During the night, the crew, brandishing guns, forced DeGeorge, Ebeling and Falco into one of the staterooms while Libovich or his crew drilled holes in the hull of the ship. Libovich told DeGeorge he was goingto sink the ship.
In spite of the water then supposedly pouring into the ship’s hull, Libovich spent the next four hours talking on the phone. Finally, at 6:00 a.m., Libovich and his crew, along with their six duffle bags, left the Principe and boarded a speed boat, which whisked them away on a course headed for the Libyan coast. DeGeorge, Ebeling, and Falco were left to perish on the now doomed Principe. Fortunately, the three were able to get into a small skiff and avoid being consumed by sharks infesting the local waters. The men remained in the area, watching as the Principe slowly descended into the sea.
The Italian coast guard happened by at about 12:30 p.m. By that time, only the radar unit of the Principe remained above the water. Although the Italians were able to raise the sinking yacht and tow it into port, the ill-fated Principe sank again while at the dock. When it was raised three days later, it was a total loss.
Polaris and Inbanco filed claims for the loss of the Principe. Cigna refused to pay the claims and instead sued for rescission of the insurance contract because neither Polaris nor Inbanco had disclosed material facts such as DeGeorge’s loss history or the close ties among all the parties involved in the ownership of the Principe. Polaris and Inbanco counterclaimed against Cigna, Allen and Alliance claiming, among other things, breach of contract and breach of the implied covenant of good faith and fair dealing.
The full decision can be found at CIGNA Property and Casualty Insurance Co. v. Polaris Pictures Corp., 159 F.3d 412, 98 Cal. Daily Op. Serv. 7920 (9th Cir. 10/22/1998) where the court affirmed the rescission of the policy, the trial judge referred DeGeorge to the U.S. Attorney and eventually resulted in the conviction of DeGeorge for wire fraud. He is presently serving a sentence in a federal penitentiary. The criminal case can be read at United States v. DeGeorge, 380 F.3d 1203 ( 08/30/2004).
One can only hope that other insurers will take heed of the actions of Cigna and decide, unlike the insurers of DeGeorge’s earlier claims, that it is improper to pay off a fraud and that making him appear and testify in a case to prove the insured committed fraud and should recover nothing.
© 2016 – Barry Zalma
Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog
Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide
The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972
Mr. Zalma’s new e-books are available at http://www.zalma.com/zalmabooks.htm
Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma, on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma
The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.