Insurance Broker Expert Witness’s Testimony is Partially Admitted in Ponzi Scheme Litigation

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Court: United States District Court for the Southern District of California
Jurisdiction: Federal
Case Name: Fid. Nat’l Fin., Inc. v. Nat’l Union Fire Ins. Co.
Citation: 2014 U.S. Dist. LEXIS 47041

Facts

This case involved the aftermath of a Ponzi scheme collapse, created and executed by the defendant. The case laid out a host of insurance coverage issues relating to damages and lawsuits arising out of the failed Ponzi scheme. The primary focus was the Financial Institution Bond (FIB) issued by the defendant’s insurance company with a policy limit of $15 million per single loss. The purpose of a FIB is to protect an employer from dishonest conduct by an employee, including forgery.  Here, two employees allegedly forged the victims’ signatures on various documents to purchase a number of condominiums.

The Insurance Broker Expert Witness

The insurance broker expert witness was an insurance broker who wrote a dissertation on financial institution securities. He also co-authored a textbook on fidelity bonds which was published by the Insurance Institute of America in 1992. The defendant retained the expert to provide his expert opinion on a variety of issues, including the best practices of bond fidelity and the interpretation of the disputed terms of the insurance policy. This testimony was contested on several points by the plaintiff.

The plaintiff argued that the insurance broker expert had relied on proof omitted by the magistrate judge. They noted that Rule 702 allowed the expert to base their judgment on “the facts of the case,” however, he could not rely on facts that the court ruled inadmissible. The plaintiff also alleged that the expert’s reliance on inadmissible documentary evidence had contaminated his expert opinion on the defendant’s claims investigation.

The plaintiff also argued that the insurance broker expert witness’s opinion on the requirement of “formal” proof of loss was contrary to California law because “proof of claim” has been defined in the California Insurance Regulations as “[a]ny evidence or documentation . . . that provides any evidence of the claim and that reasonably supports the magnitude or the amount of the claimed loss.” The plaintiff further argued that the insurance broker expert had incorrectly relied on FIBs from a different annual period than the one under which the plaintiff was claiming the forgery had taken place. The plaintiff claimed that this part of the expert’s testimony was inadmissible because of a change in language between the different periods.

The plaintiff also questioned the expert’s opinions that an “experienced escrow attorney” should have known that “bank fraud was deceptive”. The plaintiff alleged the expert was not qualified to offer these opinions.

Discussion

The court found merit in the plaintiff’s argument on the inadmissibility of the insurance broker expert’s testimony that relied on excluded documents. The court also noted that the expert’s opinion on the necessity of formal proof of loss contradicted the applicable law. The court explained this opinion was inadmissible since it would mislead the jury. The court, however, allowed parts of the expert’s testimony on bonds from two different annual periods. They found this would only affect the weight of his testimony, not inadmissibility, and could be challenged during cross examination. 

Additionally, the court was of the opinion that the expert was not qualified to opine whether the escrow transaction was fraudulent. The court observed that the expert was not qualified to interpret such clauses and had not properly analyzed the legal language of the provision.

Held

The insurance broker expert’s testimony was admitted in part for opinions on bond fidelity and rejected for opinions based on excluded materials and for unqualified legal conclusions.