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AIG, Hartford shielded from policyholder’s Ponzi scheme lawsuits

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Units of American international Group Inc. and Hartford Financial Services Group Inc. units are not obligated to provide insurance coverage to a bank and its executives — who were drawn into litigation that ensued from a $1.2 billion Ponzi scheme— because of a professional services exclusion in their liability coverage, says a federal appeals court in affirming a lower court ruling.

Scott Rothstein, who orchestrated the Ponzi scheme through his law firm, Rothstein Rosenfeldt Adler P.A., was sentenced to 2½ years in prison in 2015, according to news reports.

Coral Gables, Florida-based Gibraltar Private Bank & Trust Co., in which the Rothstein law firm maintained accounts, and some of its executives were named as defendants in numerous suits seeking to recover losses caused by Mr. Rothstein’s scheme, according to Wednesday’s ruling by the 11th U.S. Circuit Court of Appeals in Atlanta in Herbert Stettin, trustee, et al. v. National Union Fire Insurance Co. of Pittsburgh, Pa., Twin City Fire Insurance Co., Aon Risk Services Inc. of Massachusetts et al.

They requested that National Union, a unit of AIG, and Hartford unit Twin City extend coverage under the bank’s “executive and organization liability” insurance policies toward a joint settlement of the claims.

National Union had provided the primary policy, while the Twin City policy provided an excess policy that followed the primary policy’s relevant provisions, according to the ruling.

When the insurers denied coverage, the executives began settlement discussions without the insurers. The parties eventually reached a settlement under which Gibraltar and the executives assigned their policy rights to the law firm’s bankruptcy trustees and other entities that lost money in the Ponzi scheme, according to the ruling.

After the settlement, the trustees again unsuccessfully demanded coverage. They then filed suit in U.S. District Court in Miami, asserting breach of contract and bad faith claims.

The District Court granted National Union and Twin City’s motion to dismiss the action based on the policies’ professional services exclusion.

A unanimous three-judge appellate court panel affirmed the lower court’s ruling. The policies exempted professional services from coverage, stating the insurers would not be liable for losses made against “any insured” arising out of “any insured’s” performance for failure to perform professional services for others, said the appellate court ruling.

Understanding that the phrase ‘any insured’ must be read in context … we believe that the District Court correctly interpreted the exclusionary language,” said the panel’s ruling, in affirming the lower court’s ruling.