At Aon Benfield, Mr. Mildenhall noted that the maximum potential insurance limits exposed to the Madoff scandal are estimated at more than $6 billion, but he said the range of direct insured losses will be a far smaller number–most likely somewhere between $760 million and $3.8 billion, with a best estimate of $1.8 billion.

“The numbers all are derived from two dimensions of uncertainty,” Mr. Mildenhall said. He highlighted the first element as “uncertainty around the particular limits and attachment points that insured parties would have purchased,” and questions surrounding the degree of liability of different policyholders as the second.

To develop its insurance loss estimates, Aon Benfield analyzed possible exposure to four categories of potential defendants which could be protected by D&O and E&O insurance:

o Asset management firms that ran so-called “feeder funds”–funds that directed investor capital to Mr. Madoff or his firm, Bernard Madoff Investment Securities.

o Foreign banks and insurers that placed investors' assets and their own assets under Mr. Madoff's management.

o Charitable organizations and public institutions, whose boards may be sued by disgruntled donors for performing insufficient due diligence on investments with Mr. Madoff.

o Bernard Madoff Investment Securities.

The Aon Benfield report notes that payouts by insurers of Bernard Madoff Investment Securities could be limited by policy language excluding fraudulent acts.

For the other three categories, the report summarizes estimates of limits and attachments purchased, limits exposed, and direct insurance losses.

A summary setting forth typical low, medium and high levels of limits purchased reveals wide ranges for financial firms in particular. For foreign banks and insurers, for example, purchased limits range from a low of $10 million to a high limit of $750 million, Mr. Mildenhall pointed out, noting that a medium limit for such firms comes in at around $100 million.

“There's a lot of uncertainty around what the limit would be, where the attachment would be, and whether there would be endorsements that mean certain layers wouldn't respond for certain coverages,” he said. “That's driving a big range around the [estimate of] potential limits exposed.” He referred to a range of maximum losses payable under insurance policies calculated in the next step of the analysis.

The range of limits exposed extends from a low of $1.3 billion (assuming only low-limit policies were purchased) to $6.4 billion (for high-limit policies).

Going on to explain the calculation of those figures, Mr. Mildenhall said Aon Benfield gathered information on investment losses associated for roughly 140 Madoff victims identified in articles in the Wall Street Journal, Bloomberg News and other press sources. The reasoning was that for each announced victim there could be a potential lawsuit against one of the three types of entities analyzed–asset management firms, foreign banks and insurers or charities.

The news sources cited actual dollar losses for about 100 of the victims, he said, adding that Aon Benfield proceeded with its analysis by assigning a potential defendant category to each named victim.

“If the judgment that came down against [the defendant insured] was equal to the amount of economic loss [the victim] put forth, then how would the coverage respond in that case,” he asked, summarizing the question being answered by this part of the analysis.

Depending on the type of insured, the broker selected the potential limit that could be in play from the table of low, medium or high range limits by category of defendant. The high-end $6.4 billion figure assumes all defendants purchased high limits policies, he explained.

“For a lot of the big European banks, the potential economic loss would be in excess of the policy limits that they're likely to have purchased. That would be a limits loss. In other cases, it would be a smaller loss and it wouldn't exhaust coverage,” Mr. Mildenhall said.

According to the report, foreign banks and insurers account for $4.9 billion of the $6.4 billion high estimate of potential limits exposed, with asset management firms accounting for $1.2 billion and charities only $222 million.

“We had some examples where we knew what people were buying, and some examples where we knew at least a piece of the coverage,” filling in the rest. “So it's an informed judgment,” he said. “It's not like we've got a bordereaux listing exact potential defendants and their [insurance policy] limits.”

Moving from the estimate of potential limits exposed to the final calculation of direct insured losses, Mr. Mildenhall noted that the exposed limits are only paid if every policyholder is found 100 percent liable for their full exposure. “There's some chance here that suits are going to get dismissed,” he said, explaining that more likely scenarios assume varying degrees of liability for different policyholders.

In the report, Aon Benfield applied a 60 percent factor to the exposed limit totals for asset management firms and for foreign banks and insurers–developing insurance loss estimates ranging from $169 million to $738 million for the asset managers and $590 million to $3 billion for the foreign banks and insurers.

The best estimates within the ranges are $371 million for the asset firms and $1.5 billion for the banks and insurers, with charities contributing only $6 million to the overall best estimate of $1.8 billion.

For the analysis of charities, Aon Benfield assumed the insurance losses would only be 5 percent of exposed limits, in contrast to 60 percent for the other categories of insured firms that are potential lawsuit defendants.

Brian Alvers, a senior vice president, explained that Aon Benfield reviewed industry data on other events to analyze dismissal rates and also talked to other industry experts. Explaining the 95 percent dismissal rate assumption for charities, a foreseeable D&O suit might come from a large donor, but the donor might be on the board of the charity. “They wouldn't be able to sue themselves. So those things would probably go away,” he said.

Comparing the overall direct insurance loss best estimate of $1.8 billion to investment losses of $35 billion or more, Mr. Mildenhall noted that the result–about 5 percent of investment losses–is similar to the one that played out in the wake of the Enron debacle.

When Enron settlement figures are examined against estimated policy limits, the resulting estimate of insurance losses for Enron is $3.7 billion, he said. This is 5-6 percent of the $60-$70 billion total economic losses.

Mr. Mildenhall pointed out that the Aon Benfield estimate for Madoff litigation is an estimate of direct insurance losses, and therefore does not include any provision for the next ring of defendants now being sued–third-parties like audit firms.

While the broker said many auditors tend to self-insure, potentially keeping a lid on private insurer payouts, experts agree that auditors face significant exposure.

Gerard Silk, a partner with Bernstein Litowitz Berger & Grossmann LLP, representing investors in funds that had holdings with Madoff, described opinions he has seen that are signed by auditors of funds.

“They make representations regarding the nature of investments, saying that those investments are in fact 'true and accurate,' and that the investments were held by the fund as of year end,” he said. “Those are statements that could give rise to liability on behalf of firms that made them.”

While Mr. Silk and Brad Friedman of Milberg LLP both identified audit firms as potential deep pockets in Madoff litigation, on a Web conference sponsored by NERA Economic Consulting earlier this month, the two plaintiffs' attorneys said they foresee many potential hurdles for victims seeking to recover investment losses.

For example, Mr. Silk described legal hurdles facing limited partner investors in funds of funds, whose investments were put into Madoff funds. Those LPs who file suits against general partners of the funds of funds “will have to demonstrate that general partners acted with a standard of conduct that is either grossly negligent or something beyond,” such as recklessly or fraudulently.

In addition, he said, in most partnership agreements, there is language governing litigation against the GP, there are provisions for indemnification of the GP, and provisions that allow the GP to use fund assets to defend itself from litigation.

“That presents an interesting twist because with limited assets remaining, LPs could be suing the GP and, in fact, their own assets could be going to defend the cases,” Mr. Silk noted.

Beyond that, he said, for cases being filed as class actions, there are added hurdles. For example, class actions alleging breach of fiduciary duty and other common law claims against GPs could be subject to preemption under the Securities Litigation Uniform Standards Act of 1998–a law requiring certain securities class actions to be brought in federal court.

To make a federal claim, he continued, plaintiffs cannot plead that GPs or others were grossly negligent. “You would have to demonstrate that they acted with scienter–a state of mind of recklessness or greater than that,” he said. “You'd also have to prove that parties you're suing made false statements.”

Mr. Silk said private lawsuits that are not brought as class actions will face fewer hurdles–allowing claims that plead only gross negligence and allowing plaintiffs to bring third parties into suits as defendants for aiding and abetting.

Fund-of-fund investors “have more avenues for recovery than director investors,” but “they are not easy avenues.”

Discussing the challenges facing direct investors, Mr. Friedman said there are only two real avenues of recovery–the Securities Investor Protection Corporation and as a creditor in the bankruptcy of Madoff Investment Securities.

SIPC, which maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms, has already mailed out more than 8,000 customer claim forms to Madoff investors, SIPC announced in a Jan. 5 statement.

In a recent press advisory, Marshall Gilinsky, a policyholder's attorney with Anderson Kill & Olick, suggested a third potential avenue of recovery for investors. “Some blue-chip homeowners policies…include limited coverage for losses like those arising out of investments in Madoff's hedge funds.”

On the Webcast, Mr. Friedman explained that SIPC claim recoveries are limited to $500,000 per customer. He also addressed concerns of some investors, hesitant to file claims for recovery of amounts invested with Madoff because they have redeemed money over the years and fear that trustees will come after them to return that money.

Mr. Friedman said he believes too much attention has been given to this issue in the business press, suggesting that only the largest investors would be subject to demands, often referred to as clawbacks.

Separately, Kevin LaCroix, an attorney who authors “The D&O Diary,” an Internet blog site with information on securities litigation trends and D&O insurance, is keeping track of securities class-action lawsuits against Mr. Madoff, his firm, or the feeder firms that invested their clients' funds with Madoff. Through Jan 12 he tallied 10 federal securities class actions and three state actions.

Mr. LaCroix also counted a dozen additional cases against related defendants. These include a recent case filed against Tremont International Insurance Limited. This case alleges that the insurer, an entity owned by Tremont Capital Management, breached its duties by offering Tremont-related funds as investment options for the variable investment account component of the policies, and that the Tremont-related funds were heavily invested with Madoff, Mr. LaCroix explained on a recent blog entry.

In a Jan. 12 blog entry at www.dandodiary.com, Mr. LaCroix–a partner for Oakbridge Insurance Services, a Beachwood, Ohio-based insurance brokerage–also discussed potential obstacles lawsuit defendants might face in securing coverage from their D&O and E&O insurance policies.

Conduct exclusions, particularly personal profit and fraud exclusions, may be asserted as coverage defenses by insurers, he said, noting that while the fraud exclusions might only apply to insurance for Mr. Madoff, the personal profit exclusion could come into play in other cases.

“Investors have already claimed that the feeder funds inappropriately exacted management fees or other compensation without conducting appropriate due diligence or otherwise earning their fees. However, an adjudicated determination of these allegations would be required for the profit exclusion to preclude coverage,” Mr. LaCroix wrote.

He said that based on his experience, he believes many investment advisory firms and hedge funds buy relatively lower limits of insurance coverage. He pointed to a factor beyond exclusions that could restrict the total insurance losses.

“In many cases, the available insurance involved…could quickly be exhausted by defense costs alone,” Mr. LaCroix said.

For more information:

o A copy of the Aon Benfield report is available upon request, the firm said. Aon Benfield will continue to update this preliminary analysis and revise results as new information becomes available.

o The Web conference referenced in this article, presented by Securities Docket and sponsored by NERA Economic Consulting, is available on both firm's Web sites: www.securitiesdocket.com and www.nera.com.

NERA is a New York-based unit of the Oliver Wyman Group, an MMC company.

Securities Docket, the Global Securities Litigation and Enforcement Report, publishes news concerning securities class actions, enforcement and white-collar matters, and regularly holds free Webcasts featuring leading attorneys.