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Estimates of E&O/D&O Losses Climb

March 25, 2009

New York, NY - Estimates of Madoff and sub-prime meltdown related Errors & Omissions and Directors & Officers Insurance (E&O/D&O) claims facing insurers of financial institutions continue to climb. An article in the March 16th issue of National Underwriter cites a study by reinsurance broker Aon Benfield that estimates direct insurance losses from the Madoff ponzi scheme at $1.8 billion, with a possible range of $760 million to $3.8 billion, depending upon the actual limits purchased by the defendant firms. Targets of the lawsuits include hedge funds and asset management firms, foreign banks and insurers, boards of non-profits that lost money, and the Madoff entities themselves. Speaking of the chances of recovery against hedge funds, Sherrie Savett, of Berger & Montague, P.C. in Philadelphia explained, "the theory is there was a lack of due diligence by those funds, and that they're responsible for that reason."

In a story appearing in the March 23rd edition of Risk Management, Greg Flood, president of IronPro, the management and professional liability insurance arm of IronShore, sees litigation ahead. "It's going to take some time to determine the actual investor losses, considering how complicated this fraud was and the amount of time [over which] it was perpetuated," he said. "I don't think individual investors who invested directly with Madoff don't have much in the way of expectations for recovery. The investors who invested with funds that then invested with Madoffs hedge fund, I would suspect, will sue the fund manager for negligence. The due diligence processes these investment managers put Madoff through will, in part, frame the argument of liability." Flood also said, "While it's still too early to call, it's conceivable that a low 10-figure sum of financial institutions' E&O/D&O insurance may be exposed." Flood claims that the industry's E&O/D&O market is currently facing claims of $8 billion to $9 billion due to the subprime credit crisis. Commenting on the effect this will have on insurance pricing, Flood said, "It'll drive rates up, coverage may narrow and limits available may compress."

The article also quotes Marshall Gilinsky, a policyholder attorney with Anderson Kill & Olick, who believes many losses will be recouped. "The Madoff-related liabilities and losses of the key figures in this saga are generally so large that they will far outstrip policy limits," he said. "At the same time, E&O/D&O and other forms of third party insurance should in many cases cover some if not all of policyholders' defense costs and possibly much or perhaps even all of the policyholder's liabilities meaning that some investors stand to recover much of what otherwise is thought to have been lost."

Hedge Fund Insurance, a division of Frenkel & Co., Inc., sells Errors & Omissions and Directors & Officers Insurance policies that provide coverage for defense costs and any judgment or settlement arising out of a claim alleging covered wrongful acts - as well as fraud protection for hedge funds and hedge fund investors. Call Mike Feinstein at (212) 488-0270 for more information on E&O/D&O and fraud protection.

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