(Article from Insurance Law Alert, April 2018)
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A Connecticut federal district court ruled that Pacific Indemnity had no duty to defend or indemnify its insured under a homeowner’s policy for losses incurred in connection with Bernard Madoff’s Ponzi scheme. The court found that Madoff’s fraudulent conduct did not constitute a “wrongful entry” into the homeowner’s investment accounts under the policy. Kostin v. Pacific Indemnity Co., 2018 WL 1747047 (D. Conn. Apr. 10, 2018).
Susan Kostin’s family company had an investment account with Madoff. Before Madoff’s fraud was discovered, Kostin withdrew $3.75 million from her account. After discovery of the Madoff scheme, the bankruptcy trustee brought an adversary proceeding against Kostin, seeking recovery of the withdrawn funds. Kostin sought coverage under her homeowner’s and excess policies. When Pacific Indemnity denied coverage, Kostin retained counsel at her own expense and ultimately settled with the trustee. In the present suit, Kostin sought reimbursement of defense and settlement costs from Pacific Indemnity.
The court dismissed Kostin’s suit, finding that the policies did not cover the Madoff-related losses. In particular, the court rejected Kostin’s argument that her losses were caused by Madoff’s “wrongful entries” into her family’s investment account. The court explained that even assuming that “wrongful entry” could be interpreted to include a variety of unauthorized intrusions into personal property or electronic accounts, it could not be construed to include fraudulent ledger book entries. Further, the court noted that Madoff’s access and “entry” to Kostin’s account was authorized, notwithstanding the fact that he engaged in fraudulent accounting within that account.