Investment Losses From Madoff Ponzi Scheme Not Covered Under Homeowner’s Policy

January 31, 2011 | Insurance Coverage

After Sharon Lissauer allegedly invested more than $11 million with Bernard Madoff, and after she realized that she had lost millions of dollars when his Ponzi scheme collapsed, Ms. Lissauer brought a lawsuit in federal court in an effort to recover that money. The defendant Ms. Lissauer named in her lawsuit was Fireman’s Fund Insurance Companies; a Fireman’s Fund affiliate, American Insurance Company, had issued Ms. Lissauer a homeowner’s insurance policy and she contended that her losses were covered by that policy.

In a recent decision, the U.S. District Court for the Southern District of New York acknowledged that Ms. Lissauer’s loss “certainly was tragic.” The court, however, granted Fireman’s Fund’s motion for summary judgment, dismissing the complaint.

In its decision, the court explained that the homeowner’s policy was a conventional policy covering contents and tenant’s improvements at a Manhattan apartment, as well as scheduled valuable possessions. The policy declarations reflected two coverages (in addition to the valuable possessions): “Coverage For Damage To [The Insured’s] Property and “Coverage For Liability and Medical Payments To Others.”

The relevant provision of the policy, its personal property damage insuring clause, provided, in part, that the policy covered “direct physical loss to . . . Personal Property resulting from an occurrence.” The court said that assuming that Ms. Lissauer’s investments with Madoff constituted personal property within the meaning of the policy, her claim depended on whether she had alleged “direct physical loss” to that property.

The court was clear in its decision that Ms. Lissauer’s investment losses “were not a ‘direct physical loss,'” even if they involved personal property. Rather, the court ruled, the investment losses were consequences of Ms. Lissauer’s “unfortunate but unmistakably voluntary transfers of money to Madoff and his theft of the funds.” Ms. Lissauer’s proposed interpretation of the policy provision was not “within the bounds of reason,” the court concluded. She is appealing.

The case is Lissauer v. Fireman’s Fund Ins. Companies, 09 Civ. 10073 (LAK) (S.D.N.Y. Dec. 20, 2010). Rivkin Radler represents Fireman’s Fund in this case.

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