Insurer on Hook for $10 Million in Investments With Madoff

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Unites States Fire Ins. Co. v. Nine Thirty FEF Investments, LLC
Supreme Court of the State of New York: Commercial Part 48, October 1, 2013
The Supreme Court of the State of New York: Commercial Part 48 held that U.S. Fire Ins. Co was on the hook for approximately $10 million of investments deposited with Bernard Madoff. The court held that the losses caused by the Ponzi scheme were not barred from coverage by the dishonest securities brokering exclusion.

The defendants are private limited liability companies formed for investment purposes for their owners, which are charitable organizations and families. The defendants entered into a business relationship with Bernard Madoff and invested millions of their clients’ money with Madoff which was lost in a multi-billion dollar Ponzi scheme in violation of the federal securities laws.

The insurer argued that an exclusion for losses caused by dishonest acts of securities brokers barred coverage. The court ruled that the exclusion applied to non-employees of the vehicles who were acting in a brokerage capacity. It held that Madoff brokers were not acting in such capacity, but were rather doing nothing more than running a con game. Madoff was not acting as a broker, but was perpetrating a fraud as an investment advisor.  Therefore, the court found that the U.S. Fire owed coverage.