The California Court of Appeal has reversed a lower court's judgment in a significant case regarding insurance policy rescission. The ruling affects Passport 420, LLC, which had sought coverage from Starr Indemnity & Liability Company for an aircraft that was seized by the government. The decision is crucial as it clarifies the obligations of insurance applicants to disclose material facts during the application process.
In this case, Passport 420, LLC, was seeking insurance coverage for a jet purchased with funds that were later revealed to be embezzled. The court's ruling emphasizes the importance of full disclosure in insurance contracts and the consequences of failing to do so. The case number is B343113, and it was filed on October 1, 2026.
Background
Passport 420, LLC, is a limited liability company that was formed in 2016 by attorney Michael Avenatti and successful engineer William Parrish. Avenatti suggested they purchase a jet together, and he drafted an operating agreement for the company. The agreement named Avenatti as the manager, giving him significant control over the company’s affairs.
In January 2017, Passport took delivery of the aircraft and obtained an insurance policy from Starr Indemnity. The policy included a “War Risk” endorsement, which covered losses caused by government seizure. However, Avenatti had embezzled nearly two million dollars from a client, using those funds to pay for his share of the aircraft. This fact was not disclosed to Starr during the application process.
In April 2019, the U.S. government seized the aircraft as part of a criminal investigation into Avenatti, who was subsequently indicted for fraud. After the seizure, Passport filed a claim with Starr for the insured value of the aircraft, but Starr denied the claim, citing the concealment of material facts during the underwriting process.
The Ruling
The California Court of Appeal ruled in favor of Starr Indemnity, reversing the lower court's decision that had favored Passport. The court found that Passport concealed the material fact that Avenatti used embezzled funds to purchase the aircraft. The court stated, "As a matter of law, no reasonable insurer would insure property against government seizure if it knew the property was acquired with embezzled funds." This ruling allows Starr to rescind the insurance policy.
The court also noted that Avenatti's knowledge of his crimes could be imputed to Passport, as he was acting as the manager of the company when he committed the embezzlement. The judges involved in this decision were Justices Yegan, Cody, and Baltodano.
Impact
This ruling has significant implications for both insurance companies and applicants. It reinforces the principle that insurance applicants must disclose all material facts, regardless of whether the insurer specifically inquired about them. The court clarified that the materiality of a concealed fact does not depend on the insurer's inquiry or investigation practices.
The decision may lead to stricter underwriting practices in the insurance industry, as insurers may now be more vigilant about the sources of funds used in transactions. This case also serves as a warning to applicants that failure to disclose critical information can result in the rescission of their policies, leaving them without coverage when they need it most.
What's Next
Starr Indemnity is now able to rescind the insurance policy, effectively nullifying any claims Passport may have had under that policy. Passport's cross-appeal regarding the award of prejudgment interest has been dismissed as moot. It is unclear if Passport will seek further legal action or appeal this decision.