Insurance Disclosure for California Businesses - McLellan Law Group
Business Litigation | Published November 6, 2026 | McLellan Law Group, LLP
Insurance Disclosure Obligations for California Businesses: What Passport 420 Means for You
A California court reversed a $20 million judgment because one member of an LLC concealed the source of funds used to buy the insured asset. Here is what business owners need to know about disclosure duties when applying for insurance.
Bottom Line: In Passport 420, LLC v. Starr Indemnity & Liability Co. (Oct. 1, 2026, B343113), the California Court of Appeal held that an insurance applicant has an affirmative duty to disclose material facts to an insurer, even when the insurer does not ask about them. The court reversed a judgment that included nearly $4 million in policy benefits, over $1 million in attorney fees, and $15 million in punitive damages. For California business owners, the message is clear: what you know but do not say on an insurance application can destroy your coverage.
What Happened in This Case
Two individuals formed an LLC to purchase a jet. One contributed about 53% of the purchase price; the other, an attorney, contributed the rest. It is undisputed that roughly $2 million of the attorney's contribution came from embezzled client funds. The other member knew nothing about the embezzlement.
The LLC obtained insurance through Starr Indemnity. The application asked about the aircraft, its pilots, and maintenance, but never asked about the source of the purchase funds. Starr did no investigation beyond a Google search of the members' names.
When federal authorities seized the jet and indicted the attorney, Starr denied the insurance claim and rescinded the policy, citing concealment of the embezzlement.
What the Court Decided
Despite a jury verdict in favor of the LLC, the Court of Appeal reversed. The key holdings:
- Disclosure is an affirmative duty. An applicant must disclose material facts to an insurer even when the insurer never asks about them. The fact that Starr's application did not include a question about the source of funds did not relieve the LLC of its duty to disclose.
- Materiality can be decided as a matter of law. A fact is material if it would have caused a reasonably careful insurer to make further inquiries. The court held that the embezzlement was material as a matter of law because it went directly to the risk being insured: the possibility that the government would seize the jet.
- A manager's knowledge is the company's knowledge. Under the LLC's operating agreement, the attorney was appointed manager with full authority. His knowledge of his own embezzlement was imputed to the LLC as an entity, even though the other member knew nothing about it.
Key point: The insurer's failure to ask did not protect the insured. The court found the duty to disclose exists independently of the application questions, and the insurer's lax underwriting did not excuse the applicant's concealment.
Why This Matters for California Business Owners
This decision has practical consequences for any business that carries insurance, which means essentially every business. Here are the key takeaways:
1. Do not assume the application covers everything
Many business owners treat insurance applications as a checklist: answer the questions asked, and move on. Passport 420 makes clear that this is not enough. If you know something that would matter to an insurer, you must disclose it, whether or not there is a question about it on the form.
2. "Material" means anything that would prompt further inquiry
You do not have to determine whether a fact would change the insurer's final decision. The standard is lower: would the fact cause a reasonably careful insurer to investigate further? If so, it is material, and it must be disclosed.
3. A manager's knowledge binds the company
If your business is structured as an LLC and the operating agreement gives one member full management authority, that manager's knowledge is the company's knowledge for insurance purposes. This is true even if the other members are entirely innocent and had no way of knowing what the manager knew.
This has direct implications for how businesses structure their management and governance. The more authority a single individual has, the more that individual's knowledge can be attributed to the company.
4. The insurer's failure to investigate does not help you
The LLC argued that Starr should have done more investigation during underwriting. The court rejected this. The duty to disclose falls on the applicant, and a lax investigation by the insurer does not excuse concealment.
Practical Steps for Business Owners
- Review applications thoroughly before signing. Do not just answer the questions. Ask yourself: is there anything else the insurer would want to know? The source of funds for the insured asset, pending legal issues, known risks, and unusual business arrangements are all potential disclosure items.
- Audit what your managers know. Before binding coverage, review what each person with management authority knows that could bear on the insured risk. If a manager has information that could matter, it needs to be disclosed.
- Put disclosures in writing. If you disclose something beyond what the application asks, document it. A separate letter or email to the broker or underwriter creates a record that you disclosed the information.
- Review your operating agreement. If one member has full management authority, understand that their knowledge can be imputed to the company. Consider whether governance changes would reduce this risk.
- Consult with counsel before binding coverage on high-value assets. For significant insurance policies, having an attorney review the application and the surrounding facts can help identify disclosure issues before they become rescission arguments.
Frequently Asked Questions
Does this apply to all types of insurance?
The duty to disclose material facts applies broadly to insurance applications in California. While Passport 420 involved an aircraft policy, the legal principles regarding concealment and materiality apply to commercial general liability, property, professional liability, and other policy types.
What if I did not know about the material fact?
Concealment requires actual knowledge. If you genuinely did not know about the fact, you cannot be found to have concealed it. However, in an LLC or corporation, the question is what the entity knew through its managers and officers, not just what one individual member knew.
Can the insurer rescind the policy years later?
Yes, if the insurer can show that material facts were concealed at the time of application. In this case, the policy was rescinded after the government seizure, which occurred years after the policy was first issued. Rescission reaches back to the inception of the policy.
What if another member signed the renewal without knowing?
The court's analysis focused on the knowledge at the time the policy was originally obtained and the operating agreement in effect at that time. The opinion did not separately analyze the later renewal signed by the innocent member, which may be a question for future cases.
Can I sue the manager who caused the problem?
Potentially, yes. If a manager's concealment or misconduct caused the company to lose insurance coverage, the company may have claims against that individual for breach of fiduciary duty or other causes of action. An attorney can evaluate the specific circumstances.
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About the Authors
Claire Melehani, Esq.
Founding Partner
Founding partner at McLellan Law Group with experience representing businesses in complex commercial and competition-related disputes throughout Silicon Valley.
Steven McLellan, Esq.
Founding Partner
Founding partner at McLellan Law Group, whose practice focuses on business litigation and civil disputes throughout Silicon Valley and Santa Clara County.
Legal Disclaimer: This article is for general informational purposes only and does not constitute legal advice or create an attorney-client relationship. Consult a licensed California attorney for advice specific to your situation. McLellan Law Group, LLP · 20665 4th Street, Ste. 202, Saratoga, CA 95070 · (408) 963-7533
