Business Law Journal

In Passport 420, LLC v. Starr Indemnity & Liability Co. (Cal.App.2d, Oct. 1, 2026, No. B343113) 2026 WL 2948480 (“Passport”), a California Court of Appeal recently considered a situation involving an insurance carrier’s rescission of an aircraft insurance policy due to the policyholder’s failure to disclose that a portion of the funds used to purchase the aircraft had been embezzled. In Passport, the Court analyzed California’s statutory framework concerning the process of negotiating insurance contracts and held that when an applicant for insurance fails to disclose known facts which are material to the insurance contract, an insurer may rescind the contract when it ultimately discovers the truth - even if the insurer never inquired about those facts prior to issuing the contract.

The facts involved in the underlying civil action date back to 2016, when William Parrish—a successful engineer, businessman, and licensed pilot—hired Michael Avenatti as his attorney. At Avenatti’s suggestion, the two decided to purchase a private jet together and prepared an operating agreement creating Passport 420, LLC (the “Company”), which was comprised of two members – Avenatti’s law firm, Avenatti & Associates APC (“A&A”), and a separate limited liability company controlled by Parrish, Spring Creek Research LLC (“Spring Creek”). The Company’s operating agreement contained certain provisions which, in pertinent part, provided that the Company’s Manager had “full and complete authority, power and discretion to manage and control the affairs of the Company, to make all decisions regarding such matters, and to perform any and all other acts and activities customary or incident to the Company’s purpose.” The operating agreement further provided that the Company would be bound by any and all actions of the Manager “taken in accordance with” the operating agreement. Avenatti was appointed as the Company’s first Manager, and no formal elections for that position were held at any point thereafter.

The operating agreement was executed in July 2016, and the Company took delivery of the purchased aircraft in January 2017. The Company subsequently hired Christopher Ohman to pilot and manage the maintenance of the aircraft. Ohman also completed the Company’s application for an aircraft insurance contract from Starr Indemnity & Liability Company (“Starr”). The application requested myriad information including, among other things, aircraft identification and maintenance arrangements, pilot qualifications, and any liens or loans secured by the aircraft. The application did not request information regarding the source(s) of the funds used to purchase the aircraft nor the financial conditions of the Company and/or its members, and Starr made no inquiry concerning any such information during the underwriting process.

Starr ultimately issued the aircraft insurance contract to the Company, which carried a one-year term period and had an effective date of January 26, 2017. Most notably, the contract contained a “War Risk” endorsement stating that Starr would pay for the “physical loss” of the aircraft caused by, “…seizure… by, or under the order of any government, public or local authority, whether civil, military or de facto[.]”

By early 2018, the relationship between Parrish and Avenatti had significantly deteriorated; Avenatti had stopped paying the Company’s bills and Ohman had resigned as the Company’s pilot. Parrish eventually took over managerial duties and started paying the Company’s bills, but Avenatti refused to acknowledge Parrish’s assumption of his managerial duties and/or formally appoint Parrish as the Company’s Manager in writing. Around February 2019, Parrish applied to renew the Company’s aircraft insurance policy with Starr for another one-year term. The application was signed by Parrish on the Company’s behalf and had inserted Parrish’s information in place of Avenatti.

Avenatti was indicted for wire and bank fraud on April 10, 2019, and the United States Treasury Department seized the Company’s jet the same day. As it turns out, the $2 million A&A contributed to purchase the Company’s jet had been embezzled by Avenatti from one of his other clients. Approximately two weeks later, Parrish submitted an insurance claim to Starr seeking to recover the $4 million insured value of the jet less the $10,000 deductible (for a total of $3,990,000), which Parrish requested be paid to him individually rather than to the Company. Starr eventually sent the Company a reservation of rights (“ROR”) letter advising that it was declining to pay the claim until it had completed its investigation, and the Company commenced its civil suit against Starr approximately two weeks later, alleging causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing.

Two months after Avenatti’s criminal case concluded with his conviction, Starr denied the Company’s claim and purported to rescind the aircraft insurance policy. Relying on the evidence of Avenatti’s crimes, Starr’s stated reasoning for denying the claim was (among other purported policy exclusions and conditions) that the Company had concealed material facts—i.e., that the aircraft was purchased using stolen funds—from Starr during the underwriting process. At the close of the Company’s case, Starr moved for judgment on the grounds that the Company’s concealment of Avenatti’s embezzlement entitled it to rescind the policy. The trial court denied the motion, and the jury subsequently found in favor of the Company, awarding it: (i) $3,990,000 for Starr’s breach of the insurance policy; (ii) $1,048,331.51 in prejudgment interest; (iii) $1,417,068.27 in attorney’s fees; (iv) $125,971.01 in costs and (v) $15 million in punitive damages.

On appeal, the Court in Passport held that the trial court erred when it denied Starr’s motion for judgment based on its equitable rescission claim. Noting the dispute to be a “classic case of concealment,” the Court relied upon the applicable provisions of the Insurance Code concerning an insurance applicant’s disclosure obligations to support its finding that Passport failed to disclose the material fact that a portion of the funds used to purchase the aircraft had been embezzled by Avenatti, thereby increasing the risk the aircraft would be seized by the government and entitling Starr to rescind the policy once it discovered that material fact. Because the rescission issue was dispositive, the Court did not reach Starr’s remaining contentions, including its policy-exclusion defenses, the challenge to the bad-faith finding, or its attacks on the attorney’s fees and punitive damages awards.

In reaching its finding, the Court pointed to the testimony given by Starr’s underwriter and his supervisor during the underlying civil trial that the use of embezzled funds in the Company’s aircraft purchase was a material fact, and that Starr would not have issued the policy had it known the truth. It did not matter that Starr failed to inquire as to the source of the Company’s aircraft purchase funds and/or any other aspect of the Company’s finances during the underwriting process; rather, the Court read §§ 332, 334 and 336 of the Insurance Code together to provide the materiality of a concealed fact does not depend on the insurer’s inquiry or the reasonableness of any investigation it conducts. Instead, the Court held that an insurance applicant’s affirmative duty to disclose all known material facts to an insurer under § 332 relieves the insurer of any duty to inquire about a particular material fact unless (i) that fact is distinctly implied from other revealed facts or (ii) the insurer has actual knowledge that certain facts disclosed in an application were untrue. As succinctly stated by the Court, “the question is not whether Starr asked about the source of [the Company’s] funds. The question is whether its underwriting decision would have been different had [the Company] disclosed the true facts.” Answering this question in the affirmative, the Court held, as a matter of law, that “no reasonable insurer would insure property against government seizure if it knew the property was acquired with embezzled funds.”

Finally, the Court held that, under California’s general agency laws, Avenatti’s knowledge of the concealed material fact (i.e., that he contributed embezzled funds used to purchase the aircraft) must be imputed to the Company as its Manager at the time. The Court also found that the “malevolent agent exception” to the general imputation rule—under which neither a “malevolent” or “rogue” agent’s actions (that are hostile to the principal) nor the agent’s knowledge of his misdeeds are imputed to his principal—did not apply. Unlike the circumstances involved in other cases where the “malevolent agent exception” applied due to a “rogue” agent’s hostile actions, the Court in Passport found Avenatti’s actions benefitted the Company (at least initially) because the embezzled funds allowed the Company to complete its jet purchase. Although the Court (in a footnote) clarified that it viewed Parrish and the Company as “victims” of Avenatti, it refused the apply the “malevolent agent exception” because: (i) Avenatti embezzled his client’s money after he became the Company’s manager; (ii) Avenatti was acting as the Company’s agent when he contributed the embezzled funds to purchase the Company’s aircraft; (iii) the purchase was made by the Company using embezzled funds for the Company’s unknowing benefit, not by Avenatti as an individual for his own purposes; and (iv) Avenatti was acting as the Company’s manager and in its interest when the Company obtained the Starr insurance policy.

Because nothing in the record suggested that Starr was not dealing with the Company in good faith when it issued the aircraft insurance policy, the Court found that Avenatti’s concealment of his crimes must be imputed to the Company. Accordingly, Starr was entitled to rescind that policy when it discovered the truth of that concealed material fact.

In sum, the Court’s decision in Passport highlights the imbalance of the respective obligations and duties owed by insurance applicants and insurers during the insurance application negotiation process, and underscores the importance for individuals and/or companies to conduct thorough due diligence when entering into business with others. 

For a thorough review of the potential risks and obligations owed by you and/or your company under a contract, please contact the authors or your usual counsel at Atkinson, Andelson, Loya, Ruud & Romo for assistance.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.

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