Insurer: We’re not liable for claims

Firm wants to keep from paying claims in Desert State embezzlement case

A second insurance company has gone to federal court in New Mexico to keep from having to pay millions of dollars in claims brought on behalf of victims whose trust funds and savings were embezzled by the CEO of the now-defunct Desert State Life Management of Albuquerque.

The Cincinnati Insurance Co., based in Fairfield, Ohio, is seeking a declaratory judgment that the company isn’t liable for coverage of the losses because the insurance policy it sold to Desert State doesn’t cover the “wrongful acts” admitted by former Desert State CEO Paul Donisthorpe in a criminal plea agreement last November.

Donisthorpe, who is not in federal custody, is awaiting sentencing after pleading guilty to federal criminal charges of wire fraud and money laundering. He faces eight to 12 years in prison and has agreed to pay more than $4.8 million in restitution.

The New Mexico Financial Institutions Division uncovered the decadelong embezzlement scheme after examining Desert State Life Management’s financial records in early 2017. An estimated 77 clients, described as vulnerable people with disabilities, had investment, savings or trust accounts with Desert State Life Management, which also served as a court-appointed conservator for some.

Federal prosecutors say Donisthorpe siphoned money from client accounts to buy vehicles, an Angel Fire vacation home, pay his home mortgage and credit cards, and finance a Texas cattle operation.

A proposed class action lawsuit filed on behalf of victims is still pending in federal court, as is a lawsuit filed by Evanston Insurance Co., which provided “professional liability” insurance for the firm.

Evanston contends it shouldn’t have to pay claims because Donisthorpe made “material misrepresentations” in buying the insurance.