Rescission Decision Averts $43M in Damages in California Case

By Don Jergler | April 16, 2014

Attorneys representing Liberty Mutual Insurance Co. averting what could have been a $43 million payout in damages this week characterized the California court case a cautionary tale for insurers.

The case is Heide Kurtz v. Liberty Mutual Ins. Co., et al., and in it the plaintiff alleged wrongful denial of $20 million owed under fidelity bond policies issued by Liberty, Zurich American Insurance Co., Axis Insurance Co. and Twin City Fire Insurance Co.

The plaintiff also alleged a claim for bad faith against Liberty Mutual for what the plaintiff said was a wrongful delay in its coverage denial under the primary layer of coverage. More than $43 million in damages were sought.

lawsuitThe case involved Los Angeles-based Namco Financial Exchange Corp., which operated as an accommodator of tax deferred 1031 exchanges. Namco, which helped clients avoid paying taxes on real estate sales by holding their money until they used it to make new purchases, fell apart under an investigation and eventual prosecution of its owner.

The owner, Ezri Namvar, used the money to make payments to creditors from another company he controlled.

Years before Namvar’s prosecution, Namco purchased a commercial crime policy with a liability limit of $5 million from Liberty Mutual covering the Aug. 15, 2007 to Aug. 15, 2008, according to court documents.

One of the central issues in the litigation was an answer Namco provided in its insurance application in response to whether proceeds from 1031 transactions were held in bank accounts that were segregated from operating funds.

Lockton Insurance Brokers LLC served as Namco’s broker, but was not named in the suit.

A person in charge of day-to-day operations at Namco indicated the funds were segregated, so that condition of coverage was met, when in fact they were not, according to court documents.

Namco obtained additional insurance policies for losses in excess of $5 million, and each of the additional insurance policies followed the form of the Liberty Mutual policy, according to the documents.

Those document state: Zurich issued the first layer of excess policy with a $5 million limit of liability for covered loss in excess of $5 million; Axis issued the second layer of excess policy with a $5 million limit of liability for covered loss in excess of $10 million; and Twin City issued the third layer of excess policy with a $5 million limit of liability for covered loss in excess of $15 million.

Then on April 2, 2009, a Chapter 7 involuntary petition was filed against Namco in U.S.

Bankruptcy Court for the Central District of California and Heidi Kurtz was appointed as NFE’s Chapter 7 trustee months later.

Soon after being appointed Kurtz submitted insurance claims stating that Namco had misappropriated in excess of $35 million.

Liberty Mutual denied Namco’s claim in 2013, in part on the ground that Namco provided false information in its insurance application.

Central District of California Judge Dolly M. Gee sided with the insurer. Gee granted summary judgment in favor of the defendants all claims ruling that Namco made material misrepresentations in its policy applications to the insurers and that the defendants were entitled to rescind the policies.

Liberty attorney Kevin M. Mattessich, with Kaufman Dolowich & Voluck, LLP, argued the case with Dean B. Herman, Hee Young Lee and Brent A. Kramer.

Arguing for rescission, in which parties are put back to where they started and the agreement is abrogated, is considered an uphill battle, according to Mattessich.

“Rescission is hard issue to argue, and it’s not granted that often,” he said, adding that “insurance contracts typically have a higher standard of proof.”

With the amount of 1031 exchanges that go in, Mattessich said it was a cautionary tale to insurers to make sure the conditions of coverage are met, which they were in this case as the insurers made it a point to follow up with Namco when those in charge of operations failed to immediately provide answers to key questions on the policies being issued.

The attorney for Kurtz, Michael Bidart, with Shernoff Bidart Echeverria Bently, which specializes in representing policyholders, did not return a call for comment.

Kurtz couldn’t be immediately reached for comment.

Namvar was sentenced in October 2011 to seven years in federal prison on charges related to the theft of more than $20 million from investment clients, with a jury convicting him of wire fraud charges.

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