Steven Wevodau - Property & Casualty Insurance

The impact on the errors and omissions insurance sector from the Bernard Madoff Ponzi scheme scandal will be astronomical and worldwide, according to an E&O specialist.

Jonathan Legge, a managing director with Mercator Risk Services, said the reverberations will likely register as investment advisors and banks that invested clients’ money through Mr. Madoff are hit with actions by investors.

Mr. Legge said insurers initially may have been looking at their exposure to Mr. Madoff specifically, but now they are finding that many big investment advisors, funds and banks had significant money from clients invested through Mr. Madoff. Some had as much as 40 percent of their clients’ money invested through Mr. Madoff, said Mr. Legge.

As a result, clients could make allegations concerning “lack of due diligence” for those who were steering money to Mr. Madoff, he said.

For insurers, Greg Flood, president of IronPro, which is the management and professional liability division of Ironshore, said it is difficult to tell what the full impact will be from the Madoff scandal. He noted that investigations into the matter will not be resolved for a while, but he said with a Ponzi scheme of this size, and the amount of time over which it occurred, it will add up to “a lot of liability somewhere.”

Claims against hedge funds have already been seen, according to Joseph P. Monteleone, insurance coverage lawyer at the New York office of Tressler Soderstrom Maloney & Priess, LLP. He said the Madoff news is only a month old, and there have already been at least a half-dozen lawsuits. With the size of losses attributable to individuals, Mr. Monteleone said he expects a lot of claims to be filed going forward.

Mr. Flood said financial institution E&O has already faced $3.5 billion in claims resulting from the subprime crisis, and directors and officers liability insurance claims over subprime mortgage investments are somewhere in the $5 billion range.

With the Madoff scandal on top of that, Mr. Flood said it could take until 2011 to work through all of the litigation from activities dating back to 2007.

Mr. Legge said he does not know exactly how insurers are positioned to handle this new headache. By itself, he said, the Madoff scandal would likely not be a major problem for insurers, but combined with the subprime and credit issues, insurers could feel some significant pain.

Insurers will see more losses rolling in, Mr. Monteleone said, but he added he does not believe the Madoff scandal will be “the straw that breaks the camel’s back.” He said rates will increase for classes of business, such as hedge funds, and coverage for these classes may be harder to obtain.

Regarding defense strategies for insurers, Mr. Monteleone said plaintiff and defense attorneys will likely settle most cases, but the size of such settlements is unknown as of now. These types of cases, he said, rarely go to trial, and defense attorneys who may contend their clients were defrauded by Mr. Madoff will likely try to get the case thrown out through a motion to dismiss.