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There is More Than One Way to Skin A Fraudster  

DELAYED RESCISSION FAILS BUT EXCLUSION APPLIES  

Evanston Insurance Company appealed from a bench trial on an  insurance-coverage dispute. After determining that Evanston failed to  timely rescind the policy after learning that the insured lied on the  application to avoid discovery of his embezzlement scheme, and that a  policy exclusion did not apply, the district court required Evanston to  continue defending Desert State Life Management against a class action  arising from its former CEO\'s embezzlement scheme.  

In Evanston Insurance Company v. Desert State Life Management;  Christopher Moya, et al, No. 21-2145, United States Court of Appeals,  Tenth Circuit (December 30, 2022) the Tenth Circuit issued what it  believed to be a Solomon-like decision that did justice to Evanston and  Desert State.  BACKGROUND  Desert State Life Management was a New Mexico trust corporation that  acted as a trustee for disabled individuals. From 2008 to March 2017,  Donisthorpe served as its CEO. In October 2016, Donisthorpe applied for  an Evanston professional-liability insurance policy on Desert State\'s  behalf. 

Donisthorpe\'s response to the following application question was  a lie:  \\u201cIs the applicant [Desert State] or any principal, partner,  owner, officer, director, employee, manager or managing member of the  Applicant or any person(s) or organization(s) proposed for this  insurance aware of any fact, circumstance, situation, incident or  allegation of negligence or wrongdoing, which might afford grounds for  any claim such as would fall under th[e] proposed insurance?"  WARRANTY  Donisthorpe, by the application warranted that he understood and  accepted the notice and that the information contained in the  application was true and that it "shall be the basis of the policy and  deemed incorporated therein." 

Based on Donisthorpe\'s application  responses, Evanston issued Desert State a professional-liability  insurance policy.  Despite the notices, coverages, and exclusions, Donisthorpe completed  Evanston\'s application while running an embezzlement scheme that exposed  Desert State to liability. Donisthorpe intentionally misappropriated  and commingled over $4.9 million of Desert State\'s client funds for his  own use. Donisthorpe hid his scheme by presenting fraudulent reports to  Desert State\'s board of directors and to New Mexico regulators.  In November 2017, Donisthorpe pleaded guilty to a two-count federal  felony information charging him with wire fraud and money laundering. He  was sentenced to 144 months in prison and was ordered to pay $6.8  million in restitution and a $4.8 million money judgment. Donisthorpe\'s  criminal case triggered demands for restitution among former Desert  State client