Insurers So Far Not Resisting Madoff-Linked D&O Claims

NU Online News Service, March 27, 2:25 p.m. EST

NEW YORK–Insurers are not currently contesting directors and officers' legal defense claims related to the Bernard Madoff pyramid scheme, but carriers are examining proceedings to see if they can stop payments, legal experts said.

The observations by a panel of attorneys representing plaintiffs came during the sixth annual D&O Conference here sponsored by the law firm of Anderson Kill & Olick, P.C.

Anderson Kill attorney William G. Passannante moderated the discussion that included Marshall Gilinsky and Alex D. Hardiman, also attorneys with Anderson Kill; Joshua A. Levine, an attorney with Simpson Thacher; and James J. Sabella, a director with Grant & Eisenhofer, P.A.

Mr. Sabella noted that while it will be difficult, if not impossible, for anyone to sue Madoff's corporation because it is in bankruptcy, there are many other parties that can be sued for recovery including auditors, fund managers, advisors and accountants.

He predicted that regardless of where the actions are filed, they will all end up in Federal Court in New York where many will find that their only claim will be to what they invested and not the phantom earnings Mr. Madoff said the investments made.

Despite Mr. Madoff's fraud conviction, Mr. Gilinsky said insurers are still paying D&O claims for defense costs to those connected with the case. However, he cautioned that while insurers are paying, they are taking careful notes of proceedings, waiting to see if they can invoke any exclusions for criminal acts.

Mr. Levine noted that since the Madoff $50 billion-plus Ponzi case was revealed and Mr. Madoff pleaded guilty to the scheme that bilked investors, a variety of federal and state agency investigations have been underway.

On a related topic Mr. Passannante noted that issues within the insurance industry today could affect insurer's willingness to pay D&O claims in the future.

With the collapse of the economy and the continued soft market, insurers are feeling pressure on their revenues, he explained. One area where insurers may be tempted to control costs is by tightening up on their claims process, something he said is "likely to get ugly" in the future.

Adding to claims pressure is the increased amount of fraud that is being uncovered in the financial industry, amounting to millions of dollars in losses for each case and creating "a huge negative pressure on the insurance business," he said.

However, Mr. Hardiman noted that, at least in the Madoff case, insurers appear to be taking a "softer position on claims," adding that "it might have to do with their desire to keep policyholders."

Turning to litigation related to the collapse of the subprime mortgage market, Mr. Hardiman said 50 percent of securities suits are currently related to that financial meltdown. Of those suits, 60-to-70 percent name a director or officer, translating into a large focus on D&O policies for recovery.

He noted too that some of these cases could involve fiduciary insurance coverages and that it is important for policyholders to understand which policy is affected and to notify insurers promptly. Failure to do so may mean a denial of the claim.

"Get insurers as much information as possible at all stages of the game," said Mr. Hardiman, adding that it is a "sad moment" when both the attorney and client learn an insurer has a legitimate cause for not paying a claim.