AIG Off the Hook for Claims by Madoff Clients Under Home Policies

By Jessica Dye | August 16, 2012

American International Group Inc. does not have to cover insurance claims from two former Bernard Madoff clients who sought compensation for their losses under their homeowner’s policy, a federal appeals court ruled on Wednesday.

The 2nd U.S. Circuit Court of Appeals rejected an appeal from Robert and Harlene Horowitz, who had sought up to $30,000 in coverage under a fraud safeguard provision in their homeowner’s policy with AIG. The two California residents had sought to make their lawsuit a class action on behalf of other AIG policyholders.

The Horowitzes said they lost $8.5 million from their Madoff account when the money manager’s Ponzi scheme was uncovered in 2008, reflecting the amount on their final account statement. But AIG denied they suffered any direct loss under the terms of their insurance policy.

The Horowitzes had deposited $4.3 million in their Madoff account over nearly 10 years and withdrawn about $4.5 million over the same period, leaving them with $226,000 more than they invested, according to Wednesday’s ruling. The $8.5 million claim was the indirect loss of potential returns on their initial investment, a scenario that was explicitly excluded from coverage under their policy, AIG argued.

In September 2010, U.S. District Judge Paul Crotty in Manhattan agreed with AIG and dismissed the lawsuit. The plaintiffs appealed to the 2nd Circuit, which backed Crotty’s ruling.

“The policy expressly excludes coverage for indirect losses – a term that includes the inability to realize income from the money, securities or other property that would have been realized but for the fraud,” the appeals court wrote.

AIG could not immediately be reached for comment. A lawyer for the plaintiffs was also not immediately available.

Madoff is serving a 150-year prison sentence after admitting to running what prosecutors called a $65 billion Ponzi scheme.

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