The Bernard Madoff scandal will raise the cost of insurance for directors or financial advisers facing lawsuits - Cost of Insurance for Directors Facing Lawsuits

The Bernard Madoff scandal will raise the cost of insurance for directors or financial advisers facing lawsuits, underwriters have warned.

By Yvette Essen, Insurance Correspondent
Last Updated: 5:12PM GMT 07 Jan 2009

Premiums have already surged by up to 50pc and are expected to rise further as fears mount that the alleged $50bn (£33bn) investment fraud surrounding the New York hedge fund will result in court actions against financial advisers and directors for poor advice and negligence.

Reinsurance group Aspen Re said financial institutions were already seeing big rises in premiums for Directors and Officers (D&O) cover and Errors & Omissions (E&O) cover in the wake of the credit crisis. It said: "Rates are increasing in the range of 10pc to 50pc depending on type of risk."

However, Guy Carpenter, the world's second largest reinsurance broker, said these rises are just the tip of the iceberg, with the Madoff scandal likely to add further pressure to premiums. Mr Madoff attracted investment from wealthy individuals and financial institutions around the globe.

Chris Klein, global head of business intelligence at Guy Carpenter, said: "Demand for D&O for financial institutions such as banks, stockbrokers, investment funds, pension funds, insurance and reinsurance companies has increased substantially.

"The situation is worsening. Madoff is causing some anxiety for insurers and reinsurers. We expect aftershocks, we expect to see law suits."

Zurich Insurance, which provides cover to roughly a third of FTSE 100 companies, is also predicting more litigation and higher premiums as a result. Douglas Robare, Zurich's head of D&O, said: "Reinsurers are very concerned about what is happening. We will see a lot more litigation."

Predictions that the events at Madoff will result in higher premiums come as the reinsurance industry has just renewed the bulk of its policies in time for January 1.

Separately, Mr Klein said credit insurance, which covers suppliers in the event of their customers going bust, was seeing rises of between 30pc to 40pc, particularly for businesses involved in the construction and retail sectors. He added that reinsurance premiums covering property and boats from hurricane damage in the US were up by an average of about 8pc.