Madoff-Linked Funds Sue Insurers Over Liability Costs

Date: Tuesday, August 11, 2009
Author: Bloomberg.com

Tremont Group Holdings Inc. and other feeder funds to Bernard Madoff’s defunct investment advisory business sued insurers including a CNA Financial Corp. unit for failing to cover Madoff-related litigation.

Tremont, a fund of funds based in Rye, New York, that had about $3.3 billion invested with Madoff, an affiliate of OppenheimerFunds Inc., is a unit of MassMutual Financial Group. Investors have filed more than 18 lawsuits against MassMutual seeking to recoup Madoff-related losses.

Liability insurers for MassMutual’s directors and officers, and its primary fidelity bond insurers, have ignored repeated requests to pay defense costs, lawyers for MassMutual and the funds said in a complaint filed today in Delaware Chancery Court. MassMutual seeks a court order declaring that Madoff’s theft, the biggest Ponzi scheme in U.S. history, resulted in multiple losses that are covered under its insurance policies.

In addition to CNA’s Continental Casualty Co., the complaint names some underwriters of the Lloyd’s of London insurance market and American Financial Group Inc.’s Great American Insurance Co.

Katrina Parker, a spokeswoman for Chicago-based CNA, and Lloyd’s of London spokesman Bart Nash had no immediate comment. American Financial Group officials couldn’t immediately be reached for comment.

Divide Liability

CNA, which sold MassMutual its primary D&O policy, is at odds with bond underwriters as to their respective obligations to divide liability, according to the complaint. The D&O insurers claim they are liable only for a percentage of the joint defense costs related to executives and directors. Corporate defendants are insured under the primary bond underwriters policy, according to the complaint.

“The primary bond underwriters have refused to agree to pay any portion of the joint defense costs,” lawyers for MassMutual said in the filing.

Aon Corp., the world’s largest broker, said in January that Madoff’s Ponzi scheme may cost insurers as much as $3.8 billion in claims to reimburse clients for losses and legal expenses. Costs could be as low as $760 million with the most likely expense being $1.8 billion, the Chicago-based firm said.

Madoff, 71, is serving a 150-year prison term after pleading guilty to defrauding investors by using money from new ones to pay off old ones in the $65 billion scheme. Investors have filed suits against funds that invested with Madoff and were wiped out including Gabriel Capital LP and Fairfield Greenwich Group.

Cincinnati-based American Financial fell 35 cents to $24.82 at 4:01 p.m. in New York Stock Exchange composite trading. CNA rose 4 cents to $20.91.

The case is Massachusetts Mutual Life Insurance Co. v. Certain Underwriters of Lloyd’s of London, CA4791, Delaware Chancery Court (Wilmington).

To contact the reporter on this story: Sophia Pearson in Wilmington, Delaware, at spearson3@bloomberg.net.