AIG Sued by Homeowners Policyholders for Madoff-Related Losses

American International Group, Inc. is being sued by two homeowners policyholders who say their coverage includes fraud, yet AIG is refusing to pay for losses the couple experienced related to disgraced financier Bernard Madoff.

Source: Source: Business Insurance | Published on August 21, 2009

The lawsuit, filed in U.S. District Court for the Southern District of New York, alleges AIG inappropriately denied Madoff-related claims brought by Los Angeles residents Robert and Harlene Horowitz under an AIG Fraud SafeGuard homeowners policy. The coverage insures against the loss of money, securities or property as a direct result of “fraud, embezzlement or forgery,” according to the suit.

The suit, which seeks class action status, estimates there are “hundreds, if not thousands” of AIG Fraud SafeGuard policyholders who lost money in connection with Madoff during their coverage period.

Madoff was sentenced in June to 150 years in prison for securities fraud and other charges after operating what is thought to be the largest Ponzi scheme in history. Bernard L. Madoff Investment Securities L.L.C. used money from new investors to pay earlier investors, sending out fake financial reports indicating positive returns. The government plans to sell his remaining assets to repay bilked investors some of what they lost.

According to the suit against AIG, the last BMIS statement the Horowitzes received in November 2008 showed their account had $8.5 million, while in reality that balance was zero.

The couple submitted a claim to AIG, but AIG denied coverage on the basis of several policy exclusions, including losses caused by government seizure of property. AIG also said fraudulent growth of investments is not covered by the policy, according to the suit.

The plaintiffs say the exclusions are not applicable to the case, the policy language says nothing about excluding returns later shown to be fictitious, and there are some indications that BMIS began as a legitimate investment firm and evolved later into a Ponzi scheme.

The plaintiffs argue that even if they are not entitled to $8.5 million, they are entitled to their investment of more than $4 million plus interest, as well as the value of income tax payments made on the returns they thought they had earned.

“We believe these claims are without merit,” an AIG spokeswoman said in an e-mail. “While we do offer products that cover certain losses that are the result of fraud, they apply only to the extent that the policyholder experienced an actual net loss. In fact, our Private Client Group has paid hundreds of eligible policyholders who suffered Madoff-related losses pursuant to this coverage. However, in this case, we declined the plaintiffs’ claim because they received more money from Madoff through withdrawals from their account than they had deposited.”

Prosecutors said 1,341 accounts opened with Madoff's firm since December 1995 lost $13.2 billion, but that total losses, which date further back, have not been calculated.