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American International Group Inc. need not make payments to some former Bernard Madoff clients who said their homeowner insurance policies entitled them to coverage for alleged losses, a judge ruled.

Two California residents, Robert and Harlene Horowitz, had alleged $8.5 million of losses in Madoff’s Ponzi scheme, reflecting the amount on their final account statement before the fraud was revealed in December 2008.

They said this entitled them to the maximum $30,000 payout under their AIG protection in their policy. They sought class-action status on behalf of potentially thousands of policyholders.

AIG contended it should pay nothing because the Horowitzes withdrew $226,000 more from Madoff’s firm than they put in.

U.S. District Judge Paul Crotty agreed, citing a ruling by U.S. Bankruptcy Judge Burton Lifland, who oversees the liquidation of Bernard L. Madoff Investment Securities LLC.

Lifland in March said it would be “absurd” to credit former clients for the bogus amounts shown on the account statements.

He agreed with Irving Picard, the court-appointed trustee for Madoff’s firm, that losses should be based on how much clients invested with Madoff and how much they withdrew.

Crotty said the sum on the final account statement “was not taken from the plaintiffs by fraud; rather, it never belonged to them, or even existed, in the first place due to fraud.”

Brad Friedman, a partner at Milberg LLP representing the Horowitzes, did not immediately return a call seeking comment.

Madoff, 72, is serving a 150-year sentence in a North Carolina federal prison after admitting in March 2009 to running what prosecutors called a $65 billion Ponzi scheme.

The case is Horowitz v. American International Group Inc. et al, U.S. District Court, Southern District of New York, No. 09-07312.

(Reporting by Jonathan Stempel in New York; Editing by Gary Hill)

Topics USA Legislation Fraud Claims Homeowners AIG