The alleged Ponzi scheme run by Bernard Madoff will also take a nibble out of some liability insurers.

Investment advisors sued for parking customer money with Bernard Madoff will turn to their liability insurers for help, giving insurers their second big claims hit in a year. Already, they've been hit with claims related to losses on subprime investments.

Already, rates for Jan. 1 policy renewals such as directors and officers, and errors and omissions insurance rose 10% to 30%, mostly due to the subprime crisis, according to a Thursday research note by Fox-Pitt Kelton analyst Daniel Farrell. American International Group (AIG), Chubb Group (CB), Travelers Cos. (TRV) Ace Ltd. (ACE), and XL Capital (XL) all have large directors and officers lines of business.

When investment advisor Madoff was arrested last month and charged with criminal securities fraud, those allegedly defrauded included as many as 8,000 investors ranging from individuals to hedge funds and even to banks including Banco Santander SA (SAN.MC), HSBC Holdings PLC (HBC) and Royal Bank of Scotland Group (RBS).

Some investors have already filed suits against their advisors for steering them to Madoff, including one against investment advisor Ascot Partners LLC, which invested nearly all of its $1.8 billion in assets with Madoff. The suit also names its auditor, spreading the potential pain, and potentially the number of insurers that could see claims on policies.

Targets of lawsuits will turn to their liability insurers for help, said a policyholder attorney who has already begun hearing from investors.

Many of those defendants may not have sufficient coverage.

"My expectation for most of the big targets [of lawsuits] is that they don't have adequate limits of insurance to indemnify the people who would sue," said Marshall Gilinsky, a shareholder with lawfirm Anderson Kill & Olick. When professionals obtain liability coverage, "generally they don't look at assets under management of $1 billion and say, 'I need $1 billion of coverage.' The idea of being wiped out is not the basis on which people buy coverage."

Because of insurer-set policy limits that generally top out at about $15 million to $20 million per policy, total insurer exposure to Madoff will be considerably less than the $50 billion that Madoff allegedly said he stole, Gilinsky said, but industrywide exposure will be significant, perhaps in the billions.

Policies that could come into play include general and professional liability coverage, directors and officers or errors and omissions coverage, and even a few high-end homeowners insurance policies that carry "limited coverage for losses like those arising out of investments with Madoff's hedge funds," Gilinsky said.

Publicly traded companies typically carry several forms of liability coverage, and investment advisors frequently carry professional liability coverage.

The luckiest investors will be those who invested with a large investment advisor with "deep pockets" and only a small amount of money invested with Madoff, said Gilinsky. He said he doubted reports by some big investment houses that they had only very small loss from a few clients' investments with Madoff. Suggesting otherwise are news reports that investment advisors tended to invest heavily with Madoff because of his steady returns and the commissions he paid investment advisors.

When insurers end up paying out on claims from such policies, it will be the second hit many are taking on liability coverage in a year amid growing losses to lawsuits based on the subprime crisis.

Subprime-related lawsuit claims are already pushing up prices for liability coverage for financial companies, according to a Wednesday report by Raymond James analyst David O. Lewis. He notes estimates that the subprime crisis is expected to cost insurers between $3 billion and $10 billion in claims over the next few years.

In an interview, Lewis said so far, he did not believe the Madoff scandal would appreciably move the needle on casualty rates, particularly because most insurers limit their liability exposure to any one company to several million dollars.

Gilinsky said he expected exposure of companies such as AIG, Chubb, Travelers, ACE and XL to claims will roughly follow insurers' financial services companies market share. Spokespersons for AIG and Chubb would not comment on potential exposure. Spokespersons for Travelers, XL Capital and Ace did not immediately return phone calls asking for comment.

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141; lavonne.kuykendall@dowjones.com

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