Madoff Feeder Funds Sue Casualty Insurers for Breach of Contract and Seek to Recoup Costs of Defending Against Liability Suits

In the continuing fallout from the Bernard Madoff Ponzi scheme, certain funds affiliated with MassMutual Life Insurance Company (the Feeder Funds or the Funds) that invested client money with Madoff and his fraudulent investment management operation, are being sued by their clients for various alleged breaches of duty.  In response, the Feeder Funds decided to seek indemnity and defense from their insurers under their primary and excess fidelity bonds and director and officer liability insurance policies.  Because the primary fidelity bond carriers refused to contribute to the cost of defending some of the lawsuits, the Funds filed suit against the primary fidelity bond carriers for breach of contract in the Delaware Chancery Court.  Specifically, the Funds claim that the insurers that provided the Funds with surety bonds and executive and officers coverage have failed to meet their obligations to cover the legal cost of defending against the lawsuits.  The Funds are seeking an apportionment of defense costs among them and a declaration of their respective rights and obligations under the policies.  We discuss the factual background of the case, the court’s legal analysis and the implications for hedge fund D&O insurance arrangements.

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