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California Court Grants Summary Judgment to Underwriters in $3.5 Million Bad Faith Case

March 24, 2021

On March 3, 2021, the Los Angeles County Superior Court granted Underwriters’ motion for summary judgment in a $3.5 million bad faith lawsuit. Underwriters were represented by WSHB’s insurance coverage team of Tracy Lewis and Ricky Zelonka. The case stemmed from an insurance coverage dispute arising out of a fire to residential real property in Hawaii in the summer of 2017. The Hawaii property was covered under a lender placed program issued to an international property management company. After Underwriters received the claim, the Company filed for bankruptcy and it was discovered that they engaged in a multi-year $1 billion Ponzi scheme. While Underwriters were adjusting the claim and considering the impact of the pending bankruptcy, the Company filed a bad faith lawsuit in California state court. Underwriters’ defense to the lawsuit was that the Policy was void ab initio due to the Company’s concealment of the true nature of its business and representing itself as a commercial lender when it procured the Policy.

After nearly a year of litigation and protracted discovery, Underwriters moved for summary judgment. In support of their motion, Underwriters pointed to the fact that the Company disguised itself as a commercial lender in order to obtain the Policy. Underwriters’ motion was supported by extensive Bankruptcy Court filings finding the Company’s entities were engaged in a massive, $1 billion dollar, multi-year fraudulent Ponzi scheme. Underwriters were also able to show that the Company had used the subject’s Hawaii property as part of the Ponzi scheme. In opposition, the Company argued that Underwriters could not rescind the policy because the Ponzi scheme was unrelated and immaterial to the risks underwritten and assumed by Underwriters. Essentially, the Company argued that misrepresentations made to innocent investors by the orchestrators of the Ponzi scheme did not amount to misrepresentations to the risks Underwriters agreed to insure under the policy. The Company made these arguments, despite the fact that Underwriters subscribed to a lending asset program designed for financial institutions and commercial lenders. The Judge agreed and found that the Company’s misrepresentations and concealment of the true nature of its business permitted Underwriters’ to rescind the Policy. Based on the Court’s ruling, the Company gets nothing, except for a few thousands of dollars of returned premiums.

This is a huge win for Underwriters in California in what was an extremely litigious case for more than a year and half.

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