Insurers are not obligated to provide coverage for Ponzi Scheme
July 10, 2017
This week, the United States Court of Appeals for the Eleventh Circuit ruled that the district court was correct in ruling that AIG and Hartford insurers are not obligated to provide insurance coverage to a bank and its executives because of a professional services exclusion in their liability coverage. The litigation resulted from a $1.2 billion Ponzi scheme. The case is Stettin v. Nat'l Union Fire Ins. Co., No. 15-14716, 2017 U.S. App. Lexis 11972 (11th Cir. July 5, 2017).
This suit resulted from a Ponzi scheme orchestrated by Scott Rothstein through his law firm Rothstein Rosenfeldt Adler P.A. The Rothstein firm maintained some bank accounts at Gibraltar Private Bank & Trust Co. Executives of Gibraltar were named as defendants in suits seeking to recover losses caused by Rothstein's scheme.
The plaintiffs requested that National Union, a unit of AIG, and Twin City, a unit of Hartford, extend coverage under the bank's “executive and organization liability” insurance policies in order to achieve a joint settlement of the claims. National Union had provided the primary policy, while Twin City provided an excess policy. The provisions of the excess policy mainly followed the primary policy's provisions.
The insurers denied coverage, and the executives began settlement discussions without involving the insurers. They reached a settlement that required Gibraltar and the executives to assign their policy rights in the law firm's bankruptcy trustees and other entities that had lost money in the scheme. After the settlement was reached, the executives again demanded coverage, and again were unsuccessful. They then filed suit in U.S. District Court in Miami claiming breach of contract and bad faith. National Union and Twin City moved to dismiss the action arguing that coverage for the scheme was barred by a “professional services exclusion” that was included in both policies.
The executives contend that the exclusion should be read severally and, therefore, only bars coverage as to the claims against those insured executives who directly provided professional services. Using this analysis, the district court erred because claims against executives who were merely responsible for managerial banking functions are not exempt from coverage.
The Court of Appeals disagreed with that argument and agreed with the District Court. The district court observed that the phrase unambiguously expresses a contractual intent to create joint obligations. The phrase “any insured” generally makes the obligations under an insurance provision “jointly rather than severally held” and “unambiguously expresses a contractual intent to create joint obligations and to prohibit recovery by an innocent co-insured”. Since the phrase “any insured” must be read in context, the Appellate Court decided that the district court correctly interpreted the exclusionary language. The professional services exclusion uses the phrase “any insured” twice, once discussing the claim made and the other time discussing the professional services rendered. The Appellate Court interpreted this as intent to create joint obligations.
Editor's Note: The policies exempted professional services from coverage and stated that the insurers would not be liable for losses made against “any insured” arising out of “any insured's” performance or failure to perform professional services for others. Although a Ponzi scheme may seem appealing, eventually the schemers will end up paying, not the insurance companies.