Seven insurance key takeaways from Trump's NY fraud case

Judge finds Trump Organization staff misled insurers, closely guarded documents

Seven insurance key takeaways from Trump's NY fraud case

Insurance News

By Jen Frost

Donald Trump and top brass executives at the Trump Organization will be gearing up for an appeal battle following a New York civil suit fraud ruling that puts the former President on the hook for $355 million in fines plus interest.

At issue, Judge Arthur Engoron found that Donald Trump and high-ranking Trump family members in the Trump Organization had committed financial statement fraud and conspired to defraud insurers.

Here are seven key insurance takeaways from Engoron’s decision as it stands.

Trump and family members conspired on insurance fraud

Donald Trump, Donald Trump, Jr and Eric Trump were found  to have engaged in conspiracy to commit insurance fraud.

Engoron set out that the finding was due to their roles in falsifying business records and valuations that were used by both insurers and lenders.

Trump Organization former senior employees Allen Weisselberg and Jeffrey McConney were found to have committed “overt acts” of insurance fraud. The pair should be permanently prevented from serving in a financial control function for any New York corporation or entity, Engoron said.

Weisselberg has, in separate proceedings, pleaded guilty to 15 criminal counts of tax fraud, including falsifying business records while at the Trump Organization.

Private company underwriting pitfalls

Due to the Trump Organization’s private status, underwriters had no choice but to rely on the truthfulness of its senior employee representatives in coming to coverage decisions, Engoron found.

“Because the Trump Organization is a private company, not a publicly traded company, there is very little that underwriters can do to learn about the financial condition of the company other than to rely on the financial statements that the client provides to them,” the judge said in his 92-page decision.

Surety insurer Zurich was found to have relied on “false representations” by Weisselberg and McConney and “intentionally false and misleading representations” set out in Statements of Financial Condition (SFCs).

“If they’re not giving us true information or accurate information, that greatly impacts our underwriting decisions,” Claudia Markarian, Zurich underwriter, testified.

Company financials were locked away

Underwriters from both Zurich and HCC Global were prevented from making copies of financial documents. Instead, they were only able to view these at Trump Tower with Weisselberg or McConney present.

Though both insurance companies agreed to these terms, this was said to be a “rare” client requirement.

Documents they were shown were said to be limited.

HCC underwriter Michael Holl, who arranged the organization’s increased D&O policy, said in a contemporaneous email that he saw “very few financials” but had seen the balance sheet for year-end 2015 and had been told the following year’s would be better.

D&O – litigation risk under the surface

Trump Organization directors and officers (D&O) underwriter HCC Global was said to have not been informed of impending legal action when it arranged a big limit policy. Instead, the underwriter relied on incorrect assurances from the Trump Organization that no claims were expected and no communication had been received, Engoron found.

In 2017, the Trump Organization sought to add a D&O policy with a $50 million limit on Donald Trump’s presidential inauguration. This was a significant hike from the current policy’s $5 million limit.

HCC went on to approve additional D&O coverage to the Trump Organization after an underwriter reported having been told the company was not facing any “material litigation” at a Jan. 10, 2017 meeting.

This representation was “false”, Engoron ruled, as at the time there was an ongoing Office of the Attorney General of the State of New York (OAG) investigation into the Trump Foundation and Trump family members.

A claim was later made to the Trump Organization’s insurers, including HCC, in 2019 for enforcement action that stemmed from the said OAG investigation into the Trump Foundation. Underlining the underwriting impact this claim had, HCC went on to offer a renewal policy at a five times higher cost than the expiring premium after becoming aware of it, according to the decision.

The cash on hand and “misleading” SFC impact

Underwriters were reliant on incorrect information regarding cash on hand as per the SFCs they were provided with, Engoron found.

Like lenders, both Zurich and HCC relied on information that set out that Donald Trump had $192 million cash on hand boosted by his partnership interest with real estate business Vornado.

This was “intentionally and materially misrepresented”, Engoron said. The judge pointed to Donald Trump’s interest in Vornado having been misstated, with the assets neither liquid nor under Donald Trump’s control.

HCC’s Holl testified that the $192 million in cash figure was a meaningful underwriting consideration in that it was “a measure of liquidity for the company.”

Executives at the Trump Organization were also found to have inflated property valuations, including that of Mar-a-Lago and an Aberdeen, Scotland golf club.

Were Mar-a-Lago to be worth the $1 billion to $1.5 billion Trump testified he believes it is worth today, it would be worth 400% more than the most expensive private residence listed in the country, Engoron set out.

The 2014 to 2018 SFCs valued Aberdeen as though 2,500 private residences that do not exist had already been built, the judge noted.

Zurich was found to have relied on misleading statements from Weisselberg that valuations within the SFCs had been based on professional, outside appraisals.

Under questioning in court, Weisselberg contended that appraisals did not need to be disclosed to insurance representatives because they had been commissioned by lenders. This was “simply not what he represented to Zurich,” Engoron said.

Scorn poured on Aon and Zurich relationship impact

Whether Zurich would have underwritten the Trump Organization without paying great heed to its financials was a matter raised during the trial. One expert had argued that it would have done so anyway to protect a commercial relationship with broker Aon.

Insurance expert for the defense, David Miller had testified that Zurich would have been set on underwriting for the Trump Organization due to a wish to “keep the relationship between Aon and Zurich in place”.

Engoron noted that, during cross-examination, Miller went on to concede that he had not considered notes made by Zurich underwriter Markarian in 2018 and 2019 meetings and had no reason to not accept her testimony as true. This appeared to pour scorn on the likelihood of Zurich being prepared to underwrite the business at all costs to please Aon.

The “everybody does it” excuse

Trump defendants’ protestations that loans had been repaid in a timely manner failed to curry favor with Engoron, who further set his sights on what he labeled the “everybody does it” excuse.

“Here, despite the false financial statements, it is undisputed that defendants have made all required payments on time; the next group of lenders to receive bogus statements might not be so lucky,” Engoron said. “New York means business in combating business fraud.”

Given insurer reliance on SFCs and valuations prepared with lenders in mind in the Trump case, assertions that “everybody does it” may give underwriters pause for thought.

Got a view on the New York Trump Organization legal case? Leave a comment below.

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