The litigation fallout from the Bernard Madoff investment scandal recently entered the realm of insurance when two individuals brought a class action suit against American International Group Inc. (“AIG”) in US District Court in the Southern District of NY, alleging the wrongful denial of coverage for losses suffered as a result of Madoff’s scheme.  The Plaintiffs, Robert and Harlene Horowitz, are Los Angeles residents who held investments with Bernard Madoff Investment Securities L.L.C. (“BMIS”).  The complaint alleges that they had a balance of over $8.5 million with BMIS in the fall of 2008.  After learning that their investment was lost in Madoff’s elaborate Ponzi scheme, the Horowitzes submitted a claim to AIG under their Fraud Safeguard homeowners policy.  AIG denied coverage under the policy on the basis of a number of exclusions.  The Horowitzes now bring a class action lawsuit against AIG on behalf of individuals who held an AIG homeowner’s policy with coverage for Fraud Safeguard Events and lost money in Madoff’s scheme during the policy period.  The complaint alleges breach of contract, breach of the implied covenant of good faith and fair dealing and unjust enrichment as their causes of action against AIG. 

According to the complaint, the AIG Fraud Safeguard policy held by the Horowitzes, covers loss of money, securities or property resulting from “fraud, embezzlement or forgery.”  The complaint states that the policy defines fraud as “[a]ny . . . intentional perversion of truth by someone other than you or a family member perpetrated in order to induce you or a family member to part with something of value.”  Plaintiffs allege that Madoff’s investment scheme amounts to a fraud under the policy.  They point to Madoff’s arrest, charge, and ultimate guilty plea of securities fraud and statements made by Madoff himself that his business was “one big lie” and “a giant Ponzi scheme.”  Plaintffs further state that as a result of this fraud they, and potentially thousands of other AIG policyholders, lost money from their BMIS investment accounts.  Plaintiffs submitted their claims to AIG seeking payments for these losses and were denied coverage on the basis of several policy exclusions.  Specifically AIG asserted that the balance of the Horowitzs’ investment account contained only “gains, growth, or appreciation” of their capital contributions, not covered by the policy, and that that the policy does not cover loss to the extent that it was caused government seizure of property.  

Plaintiffs now assert that AIG improperly denied them coverage under their homeowners policy.  The complaint states that the policy contains no provision limiting loss based upon the method of valuation, that their loss did not result from any government action, and that the policy entitles them to receive the entire amount of their loss.  They further assert that “the focal point of the coverage dispute is and should be” on Plaintiffs’ and other class members, legitimate expectation based on “written confirmations and account statements” of their BMIS investments, that represent the full amount of their covered loss.  Alternatively, however, Plaintiffs argue that should they not be entitled to the full amount of their loss, they should be able to recover their capital contribution along with an implied interest rate.  Plaintiffs also allege that BMIS began as a legitimate business, and that any growth of their investment prior to the initiation of the Ponzi scheme should also be recoverable under the policy. 

Plaintiffs assert that this action is proper for class action certification and that there are hundreds, or possibly thousands, of potential class members.