He explained that the $25 million bond was required for Mr. Madoff's firm, because the investment manager, who has since been convicted of orchestrating an elaborate $65 billion Ponzi scheme, also operated a clearing trade business.

That was "a viable business where he cleared trades for Fidelity, Vanguard and companies like that."

"He was as smooth as silk," Mr. Cavallaro said, recalling his impression of Mr. Madoff during the two years he dealt with him in brokering the bond prior to the discovery of the massive fraud.

The business came to Mr. Cavallaro's office through a retail insurance agent, who also happened to be Mr. Madoff's brother-in-law, Mr. Cavallaro said, reporting that the retailer was among the individual investors who entrusted–and lost–millions of dollars to Mr. Madoff.

The carrier, who was on the risk for 15 years, "immediately filed a recission action to the bond," Mr. Cavallaro also reported.

Although he did not reveal the name of the carrier for the financial institution bond, he did say the insurer returned the last year's policy, and that the check has since been forwarded to the bankruptcy trustee.

"The trustee never cashed it," he said.

Regarding possible coverage under the bond (had it not been rescinded), Mr. Cavallaro said Mr. Madoff was the principal under the bond, "so there was probably no coverage anyway. He went on to speculate, however, that the bond could come into play eventually because other employees of Madoff's firm might be found to be complicit to the fraud.

Mr. Cavallaro's remarks came after another broker, Phyllis Chechile, managing director of Frank Crystal & Company, recounted a rash of Ponzi schemes emerging during the economic downturn in the wake of the credit crisis.

His talk also followed an explanation from legal expert David DiBiase, a managing partner with the Los Angeles-based law firm Anderson, McPharlin & Conners LLP, of the limitations of bonds and crime insurance policies for financial institutions that might face actions from third-party victims of fraud seeking restitution for their losses.

"Simply because a crime has been committed does not mean there will be coverage available for the consequent loss under a crime policy" or financial institution bond, he said, noting that these first-party policies typically pay off in the event of employee dishonesty or other situations that insured financial institutions can't simply guard against with good controls and risk management practices.

Edward Gallagher, general counsel for the Washington-based Surety & Fidelity Association of America, suggested that insured institutions that appeared to have adequate controls, which have since been exposed as inadequate as the result of frauds, may face tougher insurance underwriting scrutiny when their policies come up for renewal.

Later, Mr. DiBiase quoted language of a 1993 court decision–related to the Michael Milken junk bond scandal–to underscore the negative answer to the question of whether a financial institution bond covers an insured entity for third-party claims brought against it by customers.

"While Milken [and] others were engaged in dishonest acts against members of the investing public,…they did not cause a loss under the bond. In short, they did not steal from Drexel Burnham. They stole for Drexel Burnham," the court said, referring to the firm where Mr. Milken worked when he hatched his scheme.

"Drexel Burnham was the insured," and the insurer was not going to "pay Drexel Burnham because its people stole from other people," Mr. DiBiase said, summarizing the court's view.

"I'm not surprised Mr. Madoff's crime insurer is of that same view," Mr. DiBiase added, referring to Mr. Cavallaro's revelation that the financial institution bond carrier chose to rescind the bond.

Mr. Cavallaro went on to share a story about the lengths to which insureds and brokers will go to "stuff" their investment losses "into the insurance box" by trying to find coverage under any policies available.

He related that the retail agent for a private company that had $20 million of its employee benefits funds invested with Mr. Madoff called the wholesale broker, saying "We need to get some kind of restitution out of insurance."

Mr. Cavallaro's firm speculated that there might only be a small amount of coverage under a $500,000 ERISA bond (coverage required by the Employee Retirement Income Security Act for employee benefit plan fiduciaries), and that even that was uncertain. Mr. Cavallaro's firm had not placed that particular bond, but he said there could be some coverage if the bond had some kind of third-party coverage provision.

Mr. Cavallaro didn't go into any further detail about how that coverage might kick in if it was available, instead focusing on the retailer's reaction for the PLUS crowd.

"Let's sue the fiduciary," the retailer said.

Mr. Cavallaro explained that the private company had a fiduciary liability insurance policy with a $3 million limit, and what the retailer was suggesting was for the wholesaler to try to encourage employees of the private company to sue the insured to recover that $3 million limit.

"What happens if they win and it's $20 million?" Mr. Cavallaro said. Then the $17 million would come out of the pocket of the insured–the retailer's customer, he pointed out.

"That's the way people's minds work," he exclaimed, seemingly exasperated by the notion of this retail agent hanging his client out to dry with a short-sighted plan to get at professional liability insurance coverage.