On April 6, 1988, Luis Serrano purchased for $75,000 a 26´8´´–long Carrera speedboat named Hot Shot. First Federal Savings Bank provided $65,000 financing for this purchase. Serrano obtained a marine yacht policy for hull insurance on the boat for $75,000 from El Fenix, with First Federal being named as payee under the policy.
On May 2, 1988, Serrano sold the boat to Reinaldo Polito, and Serrano furnished First Federal with documents evidencing the sale. Polito assumed the obligation to pay off the balance due First Federal. On October 6, 1989, Serrano again applied to El Fenix for a new yacht policy, covering the period from October 6, 1989, through October 6, 1990, and the coverage extended to peril of confiscation by a governmental agency. Serrano did not have ownership or possession of the boat on October 6, 1989. First Federal, the named payee, had not perfected or recorded a mortgage on Hot Shot until July 5, 1990. On November 13, 1989, in the waters off Cooper Island in the British Virgin Islands (BVI), Hot Shot was found abandoned after a chase by governmental officials. A large shipment of cocaine was recovered, although no one was arrested. When Serrano and First Federal were informed that Hot Shot was subject to mandatory forfeiture under BVI law, they both filed claims under the October 6, 1989, insurance policy. What defenses would you raise on behalf of the insurer in this case? Decide. [El Fenix v Serrano Gutierrez, 786 F Supp 1065 (DPR)]