10-4408-cv
Horowitz v. AIG, Inc.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
Rulings by summary order do not have precedential effect. Citation to a summary order filed on or after
January 1, 2007, is permitted and is governed by Federal Rule of Appellate Procedure 32.1 and this court=s
Local Rule 32.1.1. When citing a summary order in a document filed with this court, a party must cite either
the Federal Appendix or an electronic database (with the notation Asummary order@). A party citing a
summary order must serve a copy of it on any party not represented by counsel.
At a stated term of the United States Court of Appeals for the Second Circuit, held at the
Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York, on
the 15th day of August, two thousand twelve.
PRESENT:
PIERRE N. LEVAL,
CHESTER J. STRAUB,
PETER W. HALL,
Circuit Judges.
_____________________________________________
ROBERT AND HARLENE HOROWITZ, on behalf of themselves
and all others similarly situated,
Plaintiffs-Appellants,
v. No. 10-4408-cv
AMERICAN INTERNATIONAL GROUP, INC., AMERICAN
INTERNATIONAL INSURANCE COMPANY OF CALIFORNIA, INC.,
AIU HOLDINGS, INC. (now known as CHARTIS, INC.),
CHARTIS, INC., AIG PRIVATE CLIENT GROUP, AIU HOLDINGS LLC
(also known as CHARTIS INTERNATIONAL LLC), AIG PROPERTY
CASUALTY GROUP, INC. (now known as CHARTIS, INC.),
Defendants-Appellees,
JOHN DOES 1-49,
Defendants.
______________________________________________
FOR PLAINTIFFS-APPELLANTS: BRAD N. FRIEDMAN, JOSHUA KELLER, and JENNIFER
LEIGH YOUNG, Milberg, LLP, New York, New York.
FOR DEFENDANTS-APPELLEES: MICHAEL B. CARLINSKY, and JANE M. BYRNE, Quinn
Emanuel Urquhart & Sullivan, LLP, New York,
New York.
Appeal from a judgment of the United States District Court for the Southern District of
New York (Crotty, J.). UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the judgment of the district court is AFFIRMED.
Robert and Harlene Horowitz, customers of Bernard L. Madoff Investment Securities,
LLC (“BLMIS”) appeal from the district court’s dismissal of their breach of contract claim against
AIG, Inc.1 From about December 1997 to December 2008, the Horowitzes invested a total of
$4,327,230.55 with BLMIS; withdrew $4,553,000 from the account; and believed at the end of
that period that the balance in their account was more than $8.5 million. In 2008, the Horowitzes
purchased a homeowner’s insurance policy from AIG which included a Fraud Safeguard
endorsement that provided for up to $30,000 in coverage for losses resulting from fraud,
embezzlement, or forgery during the period of coverage. After learning that BLMIS was a Ponzi
scheme and that the securities reflected on statements provided by BLMIS were fictitious, the
Horowitzes filed a claim with AIG to invoke coverage under the Fraud Safeguard endorsement.
AIG denied the claim because, inter alia, the Horowitzes had not suffered a loss under the policy’s
terms. The Horowitzes initiated this action challenging AIG’s interpretation of what constitutes a
covered direct loss under the policy, and how that covered direct loss is calculated. We assume
1
The plaintiffs have sued AIG, Inc., American International Insurance Company of California, Inc., AIU Holdings,
Inc. (now known as Chartis, Inc.), Chartis, Inc., AIG Private Client Group, AIU Holdings LLC (a/k/a Chartis
International LLC), AIG Property Casualty Group, Inc. (now known as Chartis, Inc.). For ease of reference all
defendants are referred to collectively as “AIG.”
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the parties’ familiarity with the facts and issues presented on appeal, elaborating only as necessary
to explain our decision to affirm the district court.
Discussion
We review de novo the dismissal of a complaint on Rule 12(b)(6) grounds and the court’s
interpretation of the contract. Litwin v. Blackstone Group, L.P., 634 F.3d 706, 708 (2d Cir. 2011);
see also Phillips v. Audio Active Ltd., 494 F.3d 378, 384 (2d. Cir 2007). The rules of contract
construction are well settled under New York law; the starting point is the contract’s language.2
“The cardinal principle for the construction and interpretation of insurance contracts . . . is that the
intentions of the parties should control . . . [and] the meaning of particular language found in
insurance policies should be examined in light of the business purposes sought to be achieved by
the parties and the plain meaning of the words chosen by them to effect those purposes.”
Newmont Mines Ltd. v. Hanover Ins. Co., 784 F.2d 127, 135 (2d Cir. 1986) (internal quotations
and citation omitted). Where the provisions of the policy “are clear and unambiguous, they must
be given their plain and ordinary meaning, and courts should refrain from rewriting the
agreement.” U.S. Fidelity & Guar. Co. v. Annunziata, 492 N.E.2d 1206, 1207 (N.Y. 1986)
(internal quotations omitted). The language of the contract should be given meaning in the
context of the instrument as a whole, including any endorsements or riders, see Richner
2
In their moving papers below the parties cited to and relied on both California and New York law. The
district court concluded that the laws of both states are substantially similar and considered the merits of the
complaint and motion to dismiss under both states’ laws. Perceiving little difference between the laws of
the two states as well, we cite, where necessary, to New York law. See I.B.M. Corp. v. Liberty Mut. Ins.
Co., 363 F.3d 137, 143 (2d Cir. 2004) (“Choice of law does not matter . . . unless the laws of the competing
jurisdictions are actually in conflict. . . . In the absence of substantive difference, however, a New York
court will dispense with choice of law analysis; and if New York is among the relevant choices, New York
courts are free to apply it.”).
3
Commc’ns, Inc. v. Tower Ins. Co. of N.Y., 898 N.Y.S.2d 615, 617 (N.Y. App. Div. 2d Dep’t 2010),
and the circumstances under which the contract was executed, see Nemmer Furniture Co. v. Select
Furniture Co., 208 N.Y.S. 2d 51, 55 (N.Y. Sup. Ct. 1960).
The Horowitzes take issue with the district court’s suggestion that the Madoff Ponzi
scheme is not a peril covered by the Fraud Safeguard policy. We agree with the Horowitzes that,
in the context of a Fraud Safeguard policy such as the one at issue in this case, the district court’s
conclusion that a Ponzi scheme is not a predictable peril is unpersuasive. Indeed, a Ponzi scheme
is likely just the sort of fraud anticipated by the policy drafters. That said, in our view the dispute
in this case turns not on whether the peril, i.e., the Madoff fraud, is a covered event, but on the
Horowitzes’ remaining arguments concerning which losses flowing from that fraud are directly
attributable to the covered conduct and thus recoverable under the policy.
Construing the policy in their favor, the Horowitzes contend that the term “loss” can fairly
be read to include: (1) the full account balance as reflected in their final BLMIS statement; (2)
earnings reasonably expected on their capital investment based on a growth assumption or implied
interest rate; (3) net loss in constant dollars; (4) non-recoverable tax payments; and/or (5)
legitimate growth on investments during the pre-Ponzi period. Arguing that each of these is a
reasonable interpretation of a covered loss under the policy’s terms and an appropriate measure of
loss under the circumstances, the Horowitzes maintain that the district court deviated from
accepted principles of contract construction and failed to consider the term “loss” in the context of
the policy as a whole and from the reasonable expectations of the insured. For the reasons that
follow, we agree with the district court that the policy is not ambiguous and that the covered loss is
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limited only to the “something of value” that the Horowitzes were induced to part with as a result
of the fraud.
Here, the policy provides coverage for the “loss of money, securities, or other property . . .
resulting directly from fraud . . . perpetrated against [the insured] . . . during the Policy Period.”
Fraud is defined in the policy as the “intentional perversion of truth by someone . . . in order to
induce [the insured] to part with something of value.” Under the Exclusions provision of the
policy there is no coverage for any indirect loss “result[ing] [from] any fraud guard event including
but not limited to . . . [the] inability to realize income that you would have realized had there been
no loss or damage to money, securities, or other property.” In clear and plain terms, the Fraud
Safeguard policy covers the loss of money, securities, or other property resulting directly from the
intentional perversion of the truth by someone who has thereby induced the insured to part with
something of value, and the policy expressly does not cover the insureds’ indirect losses of such
things as ability to realize income from the money, securities, or other property had the money,
securities, or other property remained in the hands of the insureds.
We disagree with the Horowitzes that a fair reading of the policy would treat the final
BLMIS account balance as the measure of their covered loss. The policy, on its face, covered the
direct loss of money, securities, or property as a result of fraud. A “direct loss” is “[a] loss that
results immediately and proximately from an event.” Black’s Law Dictionary (9th ed. 2009).
The Madoff fraud consisted of Madoff coaxing investors to part with funds and transfer those
funds to him for investing. The only “thing of value” the Horowitzes were induced to part with by
Madoff’s lies was the monies they transferred to BLMIS― which, fortunately for them, they have
fully recovered.
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The Horowitzes next maintain that AIG improperly calculated the value of their capital
investment in failing to account for “reasonably expected earnings” based on a growth assumption
or an implied interest rate. The policy expressly excludes coverage for indirect losses―a term
that includes the inability to realize income from the money, securities, or other property that
would have been realized but for the fraud. The policy makes plain that indirect losses, even
those that are a foreseeable outgrowth of the initial direct loss such as the failure to realize income
that may have materialized but for the initial loss, are not covered. See Black’s Law Dictionary
(9th ed. 2009) (indirect loss, i.e., consequential loss is defined as a “loss arising from the results of
damage rather than from the damage itself”). Furthermore, indirect losses under the policy are
not limited, as the Horowitzes argue, to only the “inability to realize income” or the “payment of
damages.” The policy excludes coverage for any loss not directly resulting from the fraud.
The Horowitzes also contend that the “thing of value” lost is actually a security. In other
words, the Horowitzes argue that their arrangement with Madoff was a securities contract valued
at $8.5 million which they have now lost in connection with a fraud event. Again, the “thing of
value” the Horowitzes were fraudulently induced to part with was their capital investment, and
there is no suggestion in the record that they transferred securities to Madoff in order to satisfy
their investment obligation.
Lastly, the Horowitzes argue that there is some indication that BLMIS started out as a
legitimate investment vehicle and only gradually evolved into a Ponzi scheme. Thus the
Horowitzes seek a declaration that “Defendants are unable to identify the date the [Madoff] Ponzi
scheme started, [and they] cannot [therefore] employ the loss methodology at issue because
earnings and/or withdrawals before the Ponzi scheme started were all legitimate.” The district
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court observed that the Horowitzes have not alleged that they invested and earned sufficient
returns during any so-called pre-Ponzi period as to constitute a loss over and above their net gain
of $225,000, which they have already received back directly from BLMIS. Even if we were to
accept that such earnings could constitute a covered direct loss under the policy, we agree with the
district court that the claim is inadequately pled.
Conclusion
We have fully considered all of the Horowitzes’ remaining claims and arguments, and we
conclude that they are without merit. The judgment of the district court is AFFIRMED.
FOR THE COURT:
Catherine O=Hagan Wolfe, Clerk
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