UPDATE: Two Sue AIG Seeking Recoveries For Madoff Losses

Two investors who claim they lost money to convicted Ponzi-scheme operator Bernard Madoff sued American International Group Inc. (AIG) on Wednesday, alleging the insurer is refusing to honor a fraud-protection provision in their homeowner's insurance policy.

The lawsuit, filed in U.S. District Court in Manhattan, alleges the insurer, through its units AIU Holdings and American International Insurance Co. of California, has refused to honor a claim by Robert and Harlene Horowitz, both of Los Angeles, under their homeowner's insurance policy with AIG Fraud SafeGuard coverage. They had invested money with Madoff's firm since about 1997.

The complaint claims AIG has refused to pay for amounts beyond any initial investments with Madoff and has denied claims related to "any alleged gains, growth or appreciation."

The Horowitz Family Trust, with Robert Horowitz, reportedly had $8.5 million in its account with Madoff as of Nov. 30, 2008, according to the lawsuit.

The lawsuit is seeking class-action status on behalf of all AIG policyholders who lost money in the Madoff scam and held AIG homeowner's policies with the fraud protection. The lawsuit was filed by law firm Milberg LLP.

Madoff, 71 years old, is serving a 150-year sentence in a federal prison in North Carolina after admitting in March to running a decades-long Ponzi scheme that bilked thousands of investors out of billions of dollars.

He ran the scam for years through the investment advisory arm of his business, Bernard L. Madoff Investment Securities LLC, by promising steady returns and by presenting an air of exclusivity by not taking all comers and recruiting investors via friends and associates.

Madoff claimed to have as much as $65 billion in his firm's accounts at the end of November, but prosecutors have said the accounts only held a small fraction of that.

An AIG spokeswoman declined comment Wednesday.

-By Chad Bray, Dow Jones Newswires; 212-227-2017; [e-mail]