New York Appellate Court Rules That Brokerage Exclusion Bars Coverage for Madoff-Related Losses
10.29.15
This is only gets display when printing
(Article from Insurance Law Alert, October 2015)
For more information, please visit the Insurance Law Alert Resource Center.
Our October 2013 Alert reported on a New York trial court decision holding that a policy exclusion barring coverage for losses caused by the dishonest acts of brokers did not apply to Madoff-related losses because Madoff and Madoff Securities were not acting as brokers but “were actually imposters who merely pretended to be or do something as part of their fraudulent scheme.” United States Fire Ins. Co. v. Nine Thirty FEF Investments, LLC, 44 Misc.3d 1213(A), 997 N.Y.S.2d 670 (N.Y. Sup. Ct. Oct. 1, 2013). This month, a New York appellate court reversed the ruling. United States Fire Ins. Co. v. Nine Thirty FEF Investments, LLC, 2015 WL 5794368 (N.Y. App. Div. 1st Dep’t Oct. 6, 2015).
Two investment companies sought coverage for Madoff-related losses under financial bonds issued by U.S. Fire Insurance Company. U.S. Fire denied coverage on several bases, including “Exclusion (x),” which precluded coverage for “loss resulting directly or indirectly from any dishonest or fraudulent act or acts committed by any non-Employee who is a securities . . .broker, agent or other representative of the same general character.” The trial court had ruled that Exclusion (x) did not apply because Madoff had not been “acting” as a securities broker in connection with the losses but rather had engaged in only illusory brokerage activities. Rejecting this reasoning, the appellate court emphasized that the exclusion uses the phrase “who is a securities broker” and does not require the non-employee to have been “acting” as a securities broker. The appellate court held that the exclusion applied because it was undisputed that Madoff was a registered broker during the relevant time frame. The court further noted that application of Exclusion (x) did not contradict or otherwise nullify another policy provision that covered losses arising from the dishonest acts of outside investments advisors. As the court explained, that provision could still provide coverage for losses resulting from the dishonest acts of outside investors who are not brokers.