The impact on the errors and omissions insurance sector from theBernard Madoff Ponzi scheme scandal will be astronomical andworldwide, according to an E&O specialist.

Jonathan Legge, a managing director with Mercator Risk Services,said the reverberations will likely register as investment advisorsand banks that invested clients' money through Mr. Madoff are hitwith actions by investors.

Mr. Legge said insurers initially may have been looking at theirexposure to Mr. Madoff specifically, but now they are finding thatmany big investment advisors, funds and banks had significant moneyfrom clients invested through Mr. Madoff. Some had as much as 40percent of their clients' money invested through Mr. Madoff, saidMr. Legge.

As a result, clients could make allegations concerning "lack ofdue diligence" for those who were steering money to Mr. Madoff, hesaid.

For insurers, Greg Flood, president of IronPro, which is themanagement and professional liability division of Ironshore, saidit is difficult to tell what the full impact will be from theMadoff scandal. He noted that investigations into the matter willnot be resolved for a while, but he said with a Ponzi scheme ofthis size, and the amount of time over which it occurred, it willadd up to "a lot of liability somewhere."

Claims against hedge funds have already been seen, according toJoseph P. Monteleone, insurance coverage lawyer at the New Yorkoffice of Tressler Soderstrom Maloney & Priess, LLP. He saidthe Madoff news is only a month old, and there have already been atleast a half-dozen lawsuits. With the size of losses attributableto individuals, Mr. Monteleone said he expects a lot of claims tobe filed going forward.

Mr. Flood said financial institution E&O has already faced$3.5 billion in claims resulting from the subprime crisis, anddirectors and officers liability insurance claims over subprimemortgage investments are somewhere in the $5 billion range.

With the Madoff scandal on top of that, Mr. Flood said it couldtake until 2011 to work through all of the litigation fromactivities dating back to 2007.

Mr. Legge said he does not know exactly how insurers arepositioned to handle this new headache. By itself, he said, theMadoff scandal would likely not be a major problem for insurers,but combined with the subprime and credit issues, insurers couldfeel some significant pain.

Insurers will see more losses rolling in, Mr. Monteleone said,but he added he does not believe the Madoff scandal will be "thestraw that breaks the camel's back." He said rates will increasefor classes of business, such as hedge funds, and coverage forthese classes may be harder to obtain.

Regarding defense strategies for insurers, Mr. Monteleone saidplaintiff and defense attorneys will likely settle most cases, butthe size of such settlements is unknown as of now. These types ofcases, he said, rarely go to trial, and defense attorneys who maycontend their clients were defrauded by Mr. Madoff will likely tryto get the case thrown out through a motion to dismiss.