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AIG unit not obligated to cover Ponzi scheme losses


An American International Group Inc. unit is not obligated to provide coverage to a company that became victim of a Ponzi scheme under its crime policy because the policyholder no longer owned the funds it had loaned the criminals, says a federal appeals court in affirming a lower court ruling.

It is at least the second such ruling by a federal appeals court involving the Ponzi scheme’s operators.

Cooper Industries Ltd., an electrical equipment supplier that has since been acquired by Dublin-based Eaton Corp., became the victim of a Ponzi scheme operated by Paul Greenwood and Stephen Walsh when it loaned some of its employees’ pension plan funds to entities they operated, according to Monday’s ruling by the 5th U.S. Circuit Court of Appeals in New Orleans in Cooper Industries Ltd.; Cooper US Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pa.

The amount of money involved is in dispute, according to the ruling.

National Union, a unit of AIG, had issued commercial crime insurance policies to Cooper that covered the company’s pension plans.

National Union denied coverage and Cooper filed suit in U.S. District Court in Houston, which granted the insurer’s motion for summary judgment.

The District Court “held that Cooper could not recover under its policy with National Union because the claimed loss occurred only after Cooper loaned its funds to the fraudsters, at which point Cooper did not own either the earnings, or the principal as required under the policy,” said the ruling.

On appeal, a three-judge appeals court panel agreed with the lower court. Cooper “maintains that there is a genuine dispute of material fact over whether it equitably owned the lost profits and principal,” said the ruling. But, “The policy clearly does not use ‘own’ in such a broad sense,” said the ruling.

“Under the policy and the facts of this case, Cooper is not entitled to recover its principal investment because it did not suffer a ’loss’ of that principal until after title had passed” to the criminals, said the ruling, in affirming the lower court’s ruling.

In a similar ruling involving Mr. Greenwood and Mr. Walsh earlier this year, a federal appeals court affirmed a lower court ruling and held National Union and other insurers are not obligated to indemnify 3M Corp. for lost earnings caused by the two men’s Ponzi scheme.