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.”).


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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



                                                  4
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

                                                   6
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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