U.S. Fifth Circuit - The FindLaw 5th Circuit Court of Appeals Opinion Summaries Blog

Insurance Doesn't Cover Ponzi Scheme Losses

If somebody steals your car, your insurance should cover it. Right?

But what if you loan somebody your car, and they crash it commiting a robbery? Will your insurance pay then?

That's the gist of a deal gone wrong in an insurance case, Cooper Industries, Ltd. v. National Union Fire Insurance Company. The Fifth Circuit said the insurer didn't have to pay for a company that lost money it loaned to fraudsters in a Ponzi scheme.

Crime Policy

Cooper Industries, an electrical equipment supplier, loaned $140 million from its employees' pension fund to entities operated by Paul Greenwood and Stephen Walsh. The pair took the money and were later charged with securities fraud and misappropriation in a $1.3 billion Ponzi scheme.

The company made a claim under its crime policy with National Union Fire Insurance Company, a unit of American International Group. The insurer denied the claim, and the policy holder sued in federal court.

On a motion for summary judgment, the trial judge said the insurer was not obliged to pay because the policy holder did not own the funds once it loaned the money. The company appealed.

The U.S. Fifth Circuit Court of Appeals affirmed. The judges said the insurer did not have to pay for the fraudsters' crime.

No Title

The appeals court said there was no dispute of material fact about coverage because the policy specifically defined "own." Once Cooper Industries turned over the funds, it no longer owned them.

"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," the panel said.

According to reports, the Ponzi scheme also ensnared 3M. A federal court denied that company's insurance claim, but 3M recovered its losses through a receivership.

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