PADI Accused of Insurance Fraud

A major class action lawsuit was filed against PADI on October 28, alleging that PADI is violating insurance laws by operating as a de facto, but unregistered, insurance agency by selling insurance to its dive shops, but retaining the responsibility to pay claims up to $300,000. To paraphrase the claim:

Through advertising materials and direct representations, dive shops were led to believe that they were purchasing both commercial general liability and property damage insurance through Lexington Insurance Co., a licensed and bonded insurance company. This belief was perpetuated by the insurance broker, Vicencia & Buckley. In reality, PADI, which assists dive shops with obtaining insurance has, in fact, “perpetrated massive insurance fraud” on the dive shop owners. Although PADI, assisted by V&B, leads dive shop owners to believe that they are insured by Lexington, in fact, PADI has purchased master policies through Lexington. Each is in favor of PADI with a $300,000 per occurrence deductible, meaning that PADI is directly responsible to each dive shop for the first $300,000 of damages or injury per occurrence, at least regarding business interruption. This means that PADI is acting as a primary insurer and collecting premiums from all dive shops, despite PADI not being a licensed or bonded insurer in any state and not carrying mandated insurance reserves.

Basically, the practical effect of the suit’s contention is that PADI has inadequate reserves and if several big claims were to be made, PADI would have inadequate funds to pay the claims and the dive shops would be left holding the bag. Insurance companies, by law, are required to have reserves to handle claims and can’t pocket all the premiums. PADI is under no such regulation.

The Plaintiff in the suit is Kauai Scuba Center, which burned down January 10, 2010. PADI paid the business interruption claim four months after the store went out of business, but as Rick Lesser, attorney filing the suit, told Undercurrent, “they are not an insurance company and cannot retain risk. They hid it all.”

The owner of the Kauai Scuba Center, Damion McGinley, is a PADI instructor. Upon filing the lawsuit, PADI yanked his instructor’s certificate. Once attorney Steve McGuire in Lesser’s office raised hell, PADI said it was all a mistake and McGinley’s certification was quickly reinstated.

PADI, in a statement, claims that “The lawsuit has no merit and is premised . . . factual inaccuracies. . . . PADI has requested that it be voluntarily dismissed and intends to move for sanctions against the plaintiff and its attorneys if it is not voluntarily dismissed. Former PADI counsel, Rick Lesser, is one of the attorneys that brought this lawsuit. PADI believes that its decision to sever its relationship with Mr. Lesser may be a motivating factor behind this lawsuit.”

Lesser fired back by releasing a number of documents to support his suit. He told Undercurrent that he hadn’t worked for PADI for many years. “I tried to place a program for them in 2003 in London, but they were just using it to get a better price from Lexington, I think. I did wrap up case in early 2004 against a PADI store only, but that was the last -- PADI itself was few and far between.”

In reading the complaint, PADI’s response and the backup documents, we think this could be a significant fight with serious ramifications for PADI if the suit prevails.