Court Rules That Investment Losses Sustained as a Result of Madoff Ponzi Scheme Are Not Covered Under Homeowner’s Policy

January 6, 2011 | Appeals | Insurance Coverage

Legal Bulletin

The attached decision, issued on December 20, 2010 by Judge Lewis Kaplan, granted summary judgment to Fireman’s Fund and dismissed plaintiff’s Complaint. Rivkin Radler attorneys Michael Troisi, Michael Versichelli and Michael Welch represented Fireman’s Fund.

Plaintiff, Sharon Lissauer, sustained losses as a result of the Bernard Madoff Ponzi scheme. Over the course of many years, Ms. Lissauer invested in excess of $11 million dollars with Madoff and withdrew almost $8.5 million dollars. Therefore, she was a “net loser” and sustained a loss of approximately $2.5 million dollars. Ms. Lissauer sought coverage under her homeowner’s policy with Fireman’s Fund. Fireman’s Fund reached the conclusion that there was no coverage for this type of claim primarily because it did not involve “direct physical loss” to property.

Ms. Lissauer brought suit against Fireman’s Fund in the Southern District of New York. At the conclusion of discovery, Fireman’s Fund moved for summary judgment. The motion was based principally upon the argument that there was no coverage for this loss in the first instance, as this homeowner’s policy (as do most) contemplates a “direct physical loss” to property in order to trigger coverage. We argued that there was no physical element to this loss and, as such, no coverage under the policy.

Plaintiff, on the other hand, argued that she sustained a loss covered by the policy by virtue of the fact that Madoff stole her “account.” Plaintiff argued that an “account” is personal property, not subject to any limitations contained in the policy, and that she was entitled to the full measure of recovery up to her policy limits.

As you can see, Judge Kaplan accepted the arguments we advanced on behalf of Fireman’s Fund and found that no direct physical loss occurred here. Specifically, Judge Kaplan addressed the issue as follows:

Although there appears to be no controlling New York case law on the point, it is crystal clear for the reasons stated in Fireman’s memorandum that plaintiff’s investment losses, whatever else they may be, were not a “direct physical loss,” even if they involved “property described in…Personal Property.” They were consequences of plaintiff’s unfortunate but unmistakably voluntary transfers of money to Madoff and his theft of the funds.

We believe that Judge Kaplan’s ruling is the first in New York to specifically hold that investment losses sustained by investors as a result of Ponzi or similar type schemes involving the voluntary transfer of money do not constitute a “direct physical loss to property” and thus will not trigger coverage under traditional property insurance policies.


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