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Before we begin, I want you to think back to the last life insurance application you filled out.  Did you really take the time to read the “yes or no”, check-the-box type questions?  Have you ever become confused by one of those questions and just checked one to be able to move on with the application?  Next time you do, you need to question if you’re committing insurance fraud, and what that could mean in the big picture.   

Recently, in PHL Variable Ins. Co. v. P. Bowie 2008 Irrevocable Trust, 2013 WL 1943820 (1st Cir. 2013), the United States Circuit Court for the First Circuit examined a case of momentous insurance application fraud -  far beyond (but still including) the accidentally-checked wrong box.  In the end, PHL was able to both cancel the insurance policy, and retain the nearly $200,000 in premiums paid by the insured.  While you first may think that such a result seems a bit extreme and unfair, keep reading.     

In PHL Variable, an insurance broker, Mr. Rainone, submitted a life insurance application on the life of Peter Bowie to PHL.  Bowie’s application stated that he was a self-employed real estate investor with a personal net worth of around $7.5 million, and that he received an annual income of approximately $250,000.  Based on this, Bowie sought a $5 million life insurance policy, which was to be payable to the P. Bowie 2008 Irrevocable Trust (the “Trust”).  As part of the insurance application process, PHL began its underwriting investigation, which included a third-party inspection by its vendor, Examination Management Services, Inc. (“EMSI”).  EMSI contacted Bowie, who stated that he earned roughly $250,000 annually and that his net worth was $7.35 million.  He also noted that a trust would be the beneficiary of the policy.  Based on this information, PHL offered Bowie a $5 million policy.

About five days after PHL offered the $5 million policy, Rainone submitted a revised application listing the Trust as sole beneficiary of the policy.  The second application repeated the financial information about Bowie as described above.  In addition, the application also answered “no” to each of the following abridged questions:

Will any of the premiums for the policy be borrowed by the proposed owner?

Will the owner pay premiums funded by an individual and/or entity other than the proposed insured?

Is the policy being purchased in connection with any program under which the proposed owner or proposed insured have been advised of the opportunity to transfer the policy to a third party within five years?

Does the proposed insured or proposed owner have any understanding or agreement providing for a party, other than the owner, to obtain any legal or equitable right, title or interests in the policy or entity owning the policy?

In addition to Rainone and Bowie reviewing the policy, Louis Baldi, an attorney and the trustee of the Trust also reviewed the policies and signed an attestation stating he reviewed the application and that the statements made by the proposed insured “are full, complete, and true to the best knowledge and belief of the undersigned and have been correctly recorded.”  Pursuant to this second application, PHL approved the $5 million policy on Bowie’s life and Baldi wrote a check from his client account to PHL for the policy premium -- $192,000.  Thereafter, PHL paid Rainone a commission of $172,365 for the Bowie policy.

Despite the representations on these applications, virtually all of the representations made were patently false.  Bowie was not a wealthy real estate investor, but rather a retired city employee, used car salesman, and blackjack dealer.  Additionally, he could not afford to pay the policy premium on his own.  Instead, his scheme originated with Rainone and his business partners, who negotiated with Imperial Premium Finance, LLC (“Imperial”) before the application process began.  Imperial’s business model consists of lending money to pay for life insurance policy premiums and, when borrowers default on those loans, take possession of the policies as collateral.

The plan was for Imperial to finance the premiums on Bowie’s policy and, in turn, take a security interest in the policy.  This deal is contrary to multiple representations made in the application asserting that Bowie, himself, would be paying the premiums and that no plan existed for a third party to obtain interest in the policy. 

Less than two weeks after Baldi and Bowie executed the Policy Acceptance Form, Baldi, on behalf of the Trust, entered a loan agreement with Imperial.  The loan provided that Imperial would lend $189,000 to the Trust, at a floating interest rate starting at more than 12% for the express purpose of paying premiums on the policy.  Additionally, Imperial charged a $19,400 origination fee and a $48,164.83 “lender protection insurance charge.”  Based on the terms of the loan, it was virtually impossible to be repaid.  Also, the life insurance policy served as collateral for the loan.  Rainone, in turn, signed an agreement with Imperial to pay the company a percentage of his commission from the Bowie policy in the amount of $67,025.  Rainone entered this agreement despite his signed report for PHL submitted with the Bowie application stating that “no person other than the undersigned shall profit by any commission on insurance issued on the application.”

Thereafter, Baldi never informed PHL that the representations in the application regarding the identity of the premium payor were no longer accurate.  He also never notified PHL of the assignment of an interest in the Policy to Imperial, although the policy included a requirement for such notice.

In early 2010, PHL attempted to contact the Trust, Bowie and Rainone regarding the information in the application.  Receiving no response, and based on its own further investigation, PHL discovered that the information had been falsified.

Upon discovery of the falsification, PHL filed suit to rescind (cancel) the contract due to the fraudulent representations, and also sought to retain the $192,000 premium as an “offset” against the damages it suffered in connection to the policy, including the costs of underwriting the issuance of the Policy, payments of the commissions and fees in connection with the issuance of the policy, administration and servicing of the policy, investigation of the misrepresentations and concealments, and commencement of the lawsuit.  PHL stated, however, that it was “ready, willing and able to refund or otherwise make payment of all or any portion of the premiums paid for the Policy as directed by the Court.”  Contemporaneously, and as a sign of good faith, PHL deposited with the Court, $192,000.

During the pendency of the litigation, the Trust sent a letter to PHL stating that it agreed to rescind the policy.  Thereafter, the Trust attempted to assert that this agreement mooted the complaint and demanded immediate return of the premiums paid.  The Court denied the Trust’s request for immediate return of the premiums, and rather declared the policy rescinded and noting that the sole issue for the court to determine is whether PHL is required to return the premiums or, if PHL may retain those premiums as special damages.

Ultimately, the district court awarded PHL the entire $192,000 premiums as special damages.  When the Trust contested this ruling, the Circuit Court of Appeals agreed with the district court, noting that the law would not “allow [the Trust] to commit an intentional and calculated fraud upon [PHL] and walk away unscathed while the innocent party bears the financial burden.”  Additionally, the Court noted that a party should not gain advantage from its own fraud.  To that end, PHL paid commissions to Rainone of $172,365 that it would not have paid but for the misrepresentations that led it to issue the policy.  Mere recession of the contract would not have compensated PHL for this expense.  Additionally, the Court believed that the remaining $19,635 was justified based on the costs of underwriting, administration, and servicing the policy as well as investigating the misrepresentations contained in the application.

The ruling handed down in PHL Variable is one that enforces the Court’s equitable tendencies, that one should not benefit from their frauds, or walk away simply by cancelling the policy and returning the premiums – particularly when that would leave the insurance company holding the bag for all commissions and other expenses paid.  Such a ruling is meant to dissuade others from attempting the same type of scheme by knowing that serious financial penalties are involved, and one is not able to walk away from its misrepresentations scot free.

Frank Cragle is a trial lawyer and a member of Hirschler Fleischer’s Insurance Recovery Team. He handles a variety of commercial business disputes, including insurance recovery and policyholder claims. Frank also devotes a substantial portion of his time to business tort litigation and intellectual property claims. For more information, contact Frank at 804.771.9515 or

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