Insurance Policies — Cleaning Up Madoff's Mess
March 18, 2009
Bernie Madoff just pled guilty to eleven criminal counts in what is potentially the world's largest Ponzi scheme. While Madoff's guilty plea ended his criminal trial, the related litigation has just begun. New cases against companies and individuals embroiled in the Madoff mess are being filed almost daily, with some speculating that Madoff's victims could even be sued by a bankruptcy trustee seeking to recoup sham "profits" paid to those victims. For companies defending against Madoff-related claims, as well as for companies bringing such claims, insurance coverage should be a significant consideration.

From the defendant's perspective, insurance can help pay the potentially significant costs incurred to defend against the claims and any resulting settlements or verdicts. From the plaintiff's perspective, insurance can be a source of compensation from defendants that may be defunct or otherwise unable to pay. Thus, a plaintiff who considers it futile to sue a broker, company, or individual, may have a renewed incentive to bring suit if the targeted defendant is covered by insurance.

If you and/or your company become embroiled in Madoff-related litigation, you should be aware of the following sources of potential insurance coverage:

Types of Policies that May Provide Coverage

The policies most likely applicable to Madoff-related suits are Directors' and Officers' (D&O), Errors and Omissions (E&O), and Fidelity Liability Policies.
  • D&O Insurance provides coverage for claims made against officers and directors arising from acts committed in the directors' and officers' official capacities, and it reimburses a company for amounts paid to indemnify officers and directors. The policies also may provide coverage for securities-related claims made directly against the company.
  • E&O or Professional Liability Insurance provides coverage for errors and omissions made in the course of providing a professional service. Such policies should provide coverage for breach of fiduciary duty, misrepresentation, and similar claims against financial advisors, investors, and auditors.
  • Fidelity Insurance insures against employee fraud or dishonesty, and could apply to claims against companies alleging that your employee was complicit in Madoff's scheme.
In addition to these types of policies, if the suit involves claims against an individual, be sure to investigate whether the individual has coverage under a personal excess liability policy, which may be an additional coverage source.

For Defendants, Notify Your Insurer

Failure to provide an insurer with timely notice can be an absolute defense to coverage. Notification requirements vary by policy, so be certain to review your policies' specific requirements now, before coverage is no longer available.
  • D&O and E&O policies are often "claims made" policies, and require that notice be given prior to the end of the policy period or, in some circumstances, within a specific time thereafter.
  • Fidelity insurance also has strict notice deadlines, sometimes as short as sixty (60) days after the claim is asserted against the policyholder.
  • Some policies, for example D&O policies, provide coverage on a first-come, first-served basis. Therefore, coverage for multiple claims against multiple insureds could rapidly exhaust the entire policy. In order to ensure your defense costs are covered, you should notify your insurer as soon as possible regarding a potential claim.
Defense Coverage Is Not Limited to Litigation Costs

Policyholders sometimes believe that defense coverage only applies to attorneys' fees and costs incurred in the defense of an existing lawsuit. However, in certain circumstances, coverage may also be available for fees and costs associated with responding to a subpoena or a government investigation.

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Coverage for Madoff-related claims may be available under D&O, E&O, and Fidelity policies, but be aware that policy forms vary, sometimes significantly, from insurer to insurer. Thus, determining the availability of coverage for particular claims requires a policy-specific inquiry. To assist in this analysis, you should consult with an insurance coverage attorney experienced in representing policyholders.