Madoff Claimants Could Turn To Insurers For Coverage
09 Janeiro 2009 - 3:15PM
Dow Jones News
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
Click here to go to Dow Jones NewsPlus, a web front
page of today's most important business and market news, analysis
and commentary. You can use this link on the day this article is
published and the following day.