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A Markel Corp. unit does not have to continue defending a company in connection with its former CEO’s embezzlement, a federal appeals court ruled in overturning a lower court decision.
Paul Donisthorpe, former CEO of Albuquerque, New Mexico-based Desert State Life Management, which acted as a trustee for disabled individuals, ran an embezzlement scheme in which he intentionally misappropriated and comingled more than $4.9 million of the entity’s client funds for his own use, according to Friday’s ruling by the 10th U.S. Circuit Court of Appeals in Denver in Evanston Insurance Co. v. Desert State Life Management et al.
Regulators declared Desert State financially unsound in March 2017, and in August 2017 Christopher Moya was appointed its receiver, according to the ruling.
Mr. Donisthorpe pleaded guilty to wire fraud and money laundering in November 2017. He was sentenced to 12 years in prison and ordered to pay $6.8 million in restitution and a $4.8 million judgment.
Three former clients sued Desert State, Mr. Donisthorpe, his ex-wife, a director and others, demanding restitution, and their cases were consolidated into a class action.
Mr. Moya asked Desert State’s professional liability insurer, Markel unit Evanston Insurance, to defend and indemnify Desert State.
Evanston responded by sending a reservation of rights letter to Mr. Moya, then later refunded the premiums paid under the policy and made an offer to rescind the coverage, which Desert State did not accept.
In July 2018, Evanston sued Desert State and others in U.S. District Court in Albuquerque seeking to rescind the policy and be granted a declaration the class-action defendants were not entitled to coverage under the policy and that Evanston had no duty to defend against claims arising from Mr. Donisthorpe’s criminal conduct.
The district court ruled the policy insured Mr. Moya and the director for the claims filed against them.
It was overturned by a unanimous three-judge appeals court panel, which ruled that the lower court had erred in not applying a policy exclusion that barred coverage for any claim arising out of misappropriation or commingling of funds.
Two of the judges upheld the lower court in ruling that Evanston was not entitled to the policy’s recission because it had not requested it immediately, with one of the judges disagreeing on this issue.
The case was remanded for further proceedings.
Attorneys did not respond to requests for comment.