Posting for

Wednesday, September 23, 1998

by: Bert Rush

brush@firstam.com

FRAUDS/NEGLIGENT MISREPRESENTATION/DATE OF POLICY

This is the "other story" to the Diamond Benefits Life saga.

In early 1988 two promoters, G. Wayne Reeder of California and Charles S. Christopher of Texas, conspired to pay off debt and finance improvements on two Reeder projects by looting the assets of two insurance companies, Diamond Benefits Life of Arizona and American Universal Insurance Co. (a property and casualty insurer) of Rhode Island.

The two Reeder projects were the Indian Palms Resort & Country Club near Palm Springs (a/k/a Indian Springs Country Club) and Heritage Ranch, a residential development near San Luis Obispo, CA.

Reeder and Christopher applied to the Rhode Island Department of Business Regulation for a license to own and operate American Universal. The Department required that they show that they could contribute sufficient assets to American Universal to guarantee its solvency and ability to pay policyholder claims.

As part of this process, Reeder and Christopher represented that the Indian Palms and Heritage Ranch properties were virtually debt-free, and that mortgages against them would be given in favor of Diamond Benefits Life and American Universal to secure potential policy obligations of these insurers.

The Department allowed the sale of American Universal to Reeder and Christopher to close on May 27, 1988, with the understanding that proof of the debt-free condition of Indian Palms and Heritage Ranch would be forthcoming before August 1, 1988.

As soon as Reeder and Christopher got inside American Universal they recorded deeds of trust in favor Diamond Benefits Life and American Universal against Indian Palms and Heritage Ranch, then they began misappropriating American Universal assets (i.e., funds on reserve for future claims) to pay off liens and encumbrances against these same properties.

In June or July 1988 First American offices in Riverside and San Luis Obispo counties were asked to issue loan policies in favor of Diamond Benefits Life and American Universal in connection with the already recorded deeds of trust--but there were some odd special requests.

Mainly, we were asked to issue policies with policy dates of May 27, 1988, without taking exceptions for (and without otherwise disclosing) substantial liens and encumbrances affecting the properties as of that date. In fact, some of these encumbrances had already been paid off (with funds looted from American Universal), while the rest (delinquent property taxes running into the millions) remained to be paid before our policies would be issued.

Not seeing a problem, our examiners agreed to this special request--and policies were issued at the end of July 1988--which were policy-dated May 27, 1988 but which did not reflect substantial encumbrances and liens which had existed as of the policy date but were paid off before the policies were issued.

Reeder and Christopher used these policies to convince Rhode Island authorities that they had complied with requirements for obtaining their license to operate American Universal--by demonstrating that the Reeder projects were debt-free except for the deeds of trust in favor of Diamond Benefits Life and American Universal.

In time Reeder and Christopher went broke, and Diamond Benefits Life and American Universal were declared insolvent and taken over by state insurance regulators. When their misappropriations and misrepresentations were discovered Reeder and Christopher faced federal criminal charges in Rhode Island--and both were found guilty.

The point: The FBI thoroughly investigated our title and escrow files, and interviewed the First American employees involved. None of the employees had any idea of how our policies were being misused and misrepresented to Rhode Island authorities. Likewise, none had a friendly relationship with Reeder or Christopher, and none received any gifts from them.

Still, this was a worrisome case. We were fortunate that the employees involved were professional and able to explain their actions to the satisfaction of the FBI and prosecutors. Had any employee done anything to arouse suspicion, the Company could have been dragged into a very serious criminal case--and one that got a lot of publicity on the east coast.

Whenever we are asked to prepare a policy in an unusual manner (or a preliminary report or commitment, for that matter), we need to stop and make sure we understand the reason and purposes behind the request before proceeding. It's certainly the type of request that should be brought to the attention of in-house counsel and/or a senior underwriter.

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