NU Online News Service, Aug. 24, 12:33 p.m. EDT

Despite some large payouts to wealthy homeowners stung by the Madoff Ponzi scheme, it is unlikely that property underwriters will set about revising coverage language for fraud, an expert said.

Robert P. Hartwig, president of the Insurance Information Institute, commented on the issue of claims compensation for victims of the Madoff scheme after a well-publicized class action lawsuit.

That legal action came after American International Group rejected a policy claim by a Los Angeles couple, Robert and Harlene Horowitz, who had an $8.5 million account with Bernard L. Madoff Investment Securities (BMIS).

AIG refused the claim on the grounds that over the time they dealt with Mr. Madoff the couple had actually made a profit on their investment and so there was no covered loss.

According to the suit filed in New York's U.S. District Court in Manhattan, the company said that any "gains, growth, or appreciation" of capital "are not covered" by the policy.

Drafted by the Milberg law firm, the suit argues that there is no provision stating that fraud losses will be limited by the type of valuation determined by the insurer or any language "that could be read to impose the coverage limitations conjured by" AIG.

The AIG's homeowners insurance policy at issue contains coverage for Fraud Safeguard Events and protects against "loss of money, securities, or other property up to the applicable Limits of Insurance shown in the schedule resulting directly from fraud, embezzlement, or forgery" perpetrated against policyholders.

An AIG spokesman, Mark Herr, said the company's Private Client Group has "paid hundreds of eligible policyholders who suffered Madoff-related losses pursuant to this coverage. However, in this case, we declined the plaintiffs' claim because they received more money from Madoff through withdrawals from their account than they had deposited."

Mr. Hartwig said he had not heard any indications of companies moving to change or narrow policy language. He said an event with the size of the Madoff scheme was unusual "and hopefully will not be repeated in the future."

He said it was not surprising given the current economic climate to see a class action of the type that was filed.

An attorney who defends insurers and asked that his name not be used said he understood that a number of insurers, not just AIG, had paid Madoff claims.

At the end of the day he did not expect that the claim filed by the Horowitz's would be successful. He said his firm has seen Madoff claims that were "even weaker" from people who had invested in BMIS through an intermediary.

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