Financial Ponzi Schemes: Insurance May Be Your Last Chance to Recoup Losses

The Insurance Coverage Counseling & Litigation Group is sending this alert to clients and interested parties because of the potential for insurance coverage issues arising out of investor losses in connection with the recent collapse of alleged Ponzi schemes run by Bernard L. Madoff, Stanford Financial and others whose schemes recently have come to light. Businesses that had direct or indirect dealings with investment scammers should evaluate what protection is afforded by their liability insurance program since.

Most McGuireWoods clients have an arsenal of insurance protection that potentially provides them with a fertile source of recovery for losses arising out of these alleged Ponzi-related losses. Clients should focus on their Directors’ and Officers’, Errors and Omissions and Fiduciary Liability insurance policies. Businesses that were involved with any Ponzi scheme should consult with insurance coverage counsel now to avoid problems in pursuing insurance claims.

Following are some examples of the types of claims arising out of these two situations that may be covered by insurance:

• Claims against accounting firms that performed audits on funds that invested their clients’ funds with Madoff or Stanford.
• Claims made against directors and/or officers of businesses that invested with either entity.
• Claims brought against investment funds, outside brokerages, and investment advisors that placed their clients’ funds with Madoff or Stanford.
• Corporate bankruptcy brought about by Madoff’s or Stanford’s failure is likely to raise D&O coverage concerns.
• ERISA claims against pension plan fiduciaries, including directors and officers arising from the investment, management and oversight of employee benefit and retirement plans.

As with any insurance claim it is critically important to evaluate and submit insurance claims promptly. Our clients should be aware of the following recommendations in order to maximize the potential for their insurance recovery:

• Locate all potentially applicable insurance policies and review coverages with an insurance coverage lawyer.
• Verify the reporting dates in “claims made” insurance policies. Failure to give timely notice of a loss within the reporting period specified in a claims made insurance policy may bar coverage. You should be aware that for insurance programs that renew around the beginning of the year, reporting deadlines may be rapidly approaching.
• Attorneys and risk managers should be aware that the term “claim” is not limited to lawsuits. Insurers may argue that receipt by a client of a written demand or even a request to toll or waive a statute of limitations period triggered the “notice” obligations under an insurance policy. In addition, insurance policies may not only cover defense costs but may provide coverage for responding to governmental subpoenas or investigations.
• What initially appears to be a small claim not worth reporting to an insurance company may later blossom into a much more significant situation. Policyholders should not put off notifying an insurance carrier simply because they think a claim presents minimal exposure or can be defended within the deductible or self-insured retention level.
• D&O policies may contain Prior Acts and Prior Notice Exclusions that can severely hamper, if not completely extinguish, any right to recovery.
• A client contemplating bankruptcy should evaluate its D&O coverage position. A client already in bankruptcy will need to understand the bankruptcy issues that surround D&O coverage.

The firm’s Insurance Coverage Counseling & Litigation Group works closely with our clients’ in-house counsel and risk managers to handle D&O, E&O (including professional liability) and Fiduciary insurance claims. Our practice group has helped many businesses and financial institutions collect from their insurers for losses arising from these types of claims.