102 A.D.3d 223
N.Y. App. Div.2012Background
- JFI manages assets for 16 related entities and selected BLMIS as an outside investment advisor in 1998.
- JFI purchased fidelity bonds from National Union and excess layers, with a $10M single loss limit, $20M aggregate, and $3M deductible per single loss.
- Rider 9 made the bond part of the policy; the bond covers losses from dishonest acts by an employee or collusion.
- After Madoff’s fraud was exposed, some plaintiffs were net losers and some net winners; JFI submitted a single proof of loss of $107,619,369.33 based on last BLMIS statement showing fictitious gains.
- National Union denied coverage as the losses did not include fictitious profits; excess insurers joined in denial. The trial court initially limited coverage to actual cash invested, excluding phantom gains.
- Newly discovered evidence later led the court to renew and reaffirm that coverage is limited to loss of investment interest, not fictitious profits; the court also addressed aggregation and deductions for net losers and net winners.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does the bond cover fictitious Madoff gains? | JFI argues a broad 'loss' includes fictitious profits embedded in BLMIS statements. | Defendants contend 'loss' means actual cash investment losses, not phantom gains. | Loss does not include fictitious gains; coverage limited to actual investment losses. |
| Should claims be aggregated across insureds or treated separately? | JA argues individual losses should be treated separately under the bond’s terms. | Defendants argue a single aggregate loss applies due to 'Single Loss' and 'Joint Insured' provisions. | Treat claims as separate per insured entity; each net loser may recover up to its own $3M deductible, with further deductions as applicable. |
| What role do extrinsic evidentiary sources play in interpreting 'loss'? | Extrinsic evidence (e.g., 2003 bond limitation, premium calculation) could redefine 'loss'. | Policy ambiguity is required for extrinsic evidence; here 'loss' is unambiguous. | Extrinsic evidence not used to redefine 'loss'; the term is unambiguous and limited to actual losses. |
| Does the SIPC settlement affect recoveries under the bond? | Recovery via SIPC could reduce the insureds' net losses and affect coverage. | Bond language requires net recoveries to be applied to insured losses first; SIPC settlement does not create a broad setoff. | SIPC settlement and subsequent payments may offset individual losses; exact treatment to be determined at trial for net losers. |
| Should the deductible apply per net loser or to all net losers collectively? | A single deductible across all net losers would be improper given individual losses. | One deductible should apply per the bond’s structure for all net losers. | Apply the $3 million single loss deductible to each net loser’s recovery, not collectively. |
Key Cases Cited
- Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208 (2002) (burden of proof on insured to show coverage and ambiguity rules in policy interpretation)
- White v. Continental Cas. Co., 9 N.Y.3d 264 (2007) (clear policy language governs; extrinsic evidence only if ambiguity exists)
- State of New York v. Home Indem. Co., 66 N.Y.2d 669 (1985) (extrinsic evidence allowed to resolve policy ambiguity when language is vague)
- Horowitz v. American Intl. Group, Inc., 2012 U.S. App. LEXIS 17055 (2d Cir. 2012) (phantom assets not covered by fidelity bonds; 'loss' limited to actual losses)
- Cincinnati Ins. Co. v. Star Fin. Bank, 35 F.3d 1186 (7th Cir. 1994) (bookkeeping losses not covered; emphasis on actual monetary loss)
- In re New Times Sec. Servs., Inc., 371 F.3d 68 (2d Cir. 2004) (SIPA-related recovery limits; not all fictitious values recoverable)
- Simkin v. Blank, 19 N.Y.3d 46 (2012) (Madoff asset valuation disclosures; context for property settlement values)
- Haber v. St. Paul Guardian Ins. Co., 137 F.3d 691 (2d Cir. 1998) (reasonableness of inference about coverage when representations relate to existence of covered risk)