A New York state intermediate appellate court, applying Connecticut law, has held that a liability insurance policy’s loss-of-money, personal-profit, sale-of-securities, and insolvency exclusions preclude coverage for claims by investors against an insured bank for amounts lost in connection with Bernard Madoff’s Ponzi scheme. Associated Cmty. Bancorp, Inc. v. St. Paul Mercury Ins. Co., 2014 WL 2841137 (N.Y. App. Div. June 28, 2014).
The policy’s loss-of-money exclusion barred coverage for claims for “the actual loss of money, securities, property or other items of value in the custody of the [the insured].” The policy’s personal-profit exclusion barred coverage for loss “based upon, arising out of, or attributable to [the] Insured gaining in fact any personal profit, remuneration or financial advantage to which such Insured was not legally entitled.” The policy’s sale-of-securities exclusion barred coverage for any claim “based upon, arising out of, or attributable to: (a) the [insured’s] underwriting, syndication, or promotion of equity or debt securities; (b) the [insured’s] investment banking activities, including the sale and distribution of a new offering of securities; [or] … (e) any disclosure requirements in connection [therewith].” The policy’s insolvency exclusion barred coverage for loss “based upon, arising out of, or attributable to the insolvency … of … any investment bank, or any broker or dealer in securities or commodities.”
The court held that, because the underlying claimants alleged that their money in accounts with Bernard Madoff was “stolen, unlawfully retained, or misappropriated,” the underlying claim alleged an “actual loss of money,” precluding coverage under the loss-of-money exclusion. The court also held that, because the underlying claimants alleged that the insured “used incoming funds to pay its own fees and to sustain its custodial business and continue to generate its fees,” the underlying claim alleged that the insured gained a “profit” or “financial advantage” to which it was not entitled and, hence, the personal-profit exclusion independently barred coverage. Moreover, according to the court, because the underlying claimants alleged that “by depositing [their] funds in omnibus accounts and allocating shares in those accounts to [the investors], [the insured] engaged in the sale or promotion of unregistered securities and failed to provide the required disclosures,” the sale-of-securities exclusion also precluded coverage. Finally, the court held that, even though the insured was independent of Bernard Madoff’s insolvent entity, the insolvency exclusion also barred coverage. Interpreting the term “arising out of” broadly to mean “connected with,” “had … origins in,” “grew out of,” “flowed from,” or “incident to,” the court concluded that the underlying claims arose out of Madoff’s Ponzi scheme and the insolvency of his firm.