Madoff D&O and E&O claims set to hurt insurers

Losses related to the alleged Bernard Madoff fraud will cause “pain” for a handful of exposed insurers, experts have warned.

Specialists are divided about the exposure for claims on directors’ and officers’ (D&O) and errors and omissions (E&O) policies, with estimates ranging from $760m (£525m) to $3.8bn.

Advisen, a consultant, said it had identified about 55 claims linked to the disgraced US financier and the number was “growing day by day”.

“About 10 companies write about 80% of the financial institution D&O and E&O coverage for US and foreign firms.

“It’s fairly confined within that group, but someone like AIG will have very large books of business and there will be some pain for a handful of companies,” said Dave Bradford, executive vice-president of Advisen.

Aon predicts exposure to insurers could hit $3.8bn. “The range of direct insured losses will be most likely somewhere between $760m and $3.8bn, with a best estimate of $1.8bn,” said Stephen Mildenhall, head of Aon Benfield’s actuarial and enterprise risk management practice.

Advisen predicts losses will reach $1bn. Its estimate is lower because it believes investment firms may not have adequate coverage.

“It is surprising how many were not insured or had low policy limits. There was a lot of money that was placed directly with Madoff too, and relationships directly with Madoff will have no basis for recovery,” said Bradford.

“I also think some fairly strong defences will be put forward. Bad investments and advice is not a basis for liability and clients would need to prove that they [banks and investment firms] were grossly negligent.”

Lloyd’s maintains that it has not yet been affected by Madoff claims. “We have no direct exposure to Madoff,” said a spokesman.