A federal court in Texas recently granted summary judgment in favor of an insurer because its insured did not “own” funds it lost within the meaning of a commercial crime policy after unknowingly investing in a Ponzi scheme. Cooper Industries Ltd. et al. v. National Union Fire Ins. Co. of Pittsburgh, PA., No. 2016 WL 3405295 (June 21, 2016).
The insured invested pension plan funds with a registered investment advisor, but unbeknownst to it, the advisor was part of a Ponzi scheme orchestrated by its principals who misappropriated funds and used the advisor’s funds as their personal bank accounts. Part of the funds “invested” was by way of a loan in exchange for a promissory note. The insured sought recovery under its crime policy. The insurer denied the claim and argued that there was no compensable loss because the policy only covers money that the insured “owned.” The policy provided that “[t]he property covered under this policy is limited to property … [t]hat you own or lease….” The insurer argued that the insured no longer “owned” the funds within the meaning of the policy because it had loaned money to an unregulated investment entity via promissory note, who in turn invested that money.
The court found that the insured structured its investments with the advisor such that it held, at the most, a limited partnership interest in the investment advisor’s entities. Under Delaware law, a partner has no interest in specific limited partnership property. Accordingly, the court reasoned that because the insured chose to lend funds in exchange for promissory notes and because a partnership interest did not confer “ownership” in any underlying property, it did not “own” its lost earnings within the meaning of the policy.