In Jacobson Family Investments, Inc. v. Nation Union Fire Insurance Co. of Pittsburgh, PA, 2015 N.Y. App. Div. LEXIS 5175 (1st Dep’t; June 18, 2015), the New York Appellate Division, First Department reversed the Supreme Court, New York County’s decision and found that National Union Fire Insurance Company of Pittsburgh, PA is not required to pay the claimant for losses arising out of Bernie Madoff’s infamous Ponzi Scheme.
National Union provides coverage to the insured pursuant to a Financial Institute Bond. The insuring agreement of the Bond covers losses arising out of the dishonest acts of scheduled Outside Investment Advisors: “solely for their duties as an Outside Investment Advisor, on behalf of the Insured…” Madoff was identified in the Schedule as an Outside Investment Advisor.
The bond contains an exclusion which bars coverage for, in relevant part: “loss directly or indirectly from any dishonest or fraudulent act or acts committed by any non-Employee who is a securities…broker, agent…”
The trial court found that the claim was within the insuring agreement because Madoff was a scheduled Outside Investment Advisor, rejecting National Union’s argument that Madoff was not acting solely within that capacity when the dishonest and/or fraudulent acts were committed. The trial court further found that, although Madoff was a registered securities broker, National Union had not met its burden of proof that the claim was barred by the aforementioned exclusion.
The First Department detailed Madoff’s activities that led to the claim: in addition to providing investment advice, Madoff operated a securities brokerage account; agreements between Madoff and the insured indicated that there was a broker/customer relationship; Madoff produced false brokerage account statements showing transactions, interest gains, dividends and withdrawals that never occurred; and Madoff’s compensation took the form of commissions as a broker. Based on these facts, the First Department overturned the trial court, emphasizing the insuring agreement’s use of the word “solely.” To require the carrier to provide coverage for a loss arising out of the dishonest or fraudulent acts of a person acting in a hybrid role of Outside Investment Advisor and securities broker would expand coverage beyond the intent of the bond. The First Department further found that the exclusion otherwise precluded coverage because the loss resulted from Madoff’s activities within his capacity as a securities broker.
The First Department further stated that the exclusion does not require that the non-employee actually act as a securities broker at the time of the loss, only that the non-employee is a securities broker. Confusingly, the court also stated that the exclusion does not operate as a “blanket preclusion of coverage for any act by Madoff simply because he happened to be both a registered securities broker and investment advisor.”
The takeaway here emanates from the court’s treatment of the word “solely” within the insuring agreement. In the court’s view, the use of this term indicated a clear intent to limit coverage to exclude situations where, as here, the non-employee occupied a hybrid role. Although this case involved a particular insurance bond, its holding should be referred to in matters where there is limiting language in the insuring agreement.