Have you contributed to Madoff’s legal defence costs?

Not all insurance disputes should be won by the insured, especially if they are fraudulent.

Usually I’m furious when I hear that an insurance claim has been declined. This time I was pleased; Lloyd’s of London successfully defended themselves in a US court when Madoff tried to appeal that Lloyd’s were wrong to cut off the funding of his defence costs.

Lloyd’s had already parted with $4 million whilst the legal eagles prepared their cases. They pulled the plug after one of his cohorts pleaded guilty to fraud of one sort or another. Evidence of illegal acts is one of the triggers for insurance problems. Once an allegation is made underwriters will refuse to continue paying defence costs or any damages awarded. Until then, the policy wording (a legally binding contract) meant that they were obliged to pay for defence costs for Madoff, other Directors, Officers and decision makers of the company that purchased the cover.

This may seem odd yet the wording of the contract states that there has to be evidence of fraud, or another type of breach, before insurers can turn off the claims tap. In this case, the reason for the admission of guilt could be anything from a guilty conscience, a shorter sentence, a smaller fine or some form of persuasion that you and I won’t know about – having not been accused of infringing the law or fleecing thousands of innocent investors.

The defence costs are covered if one of the “controlling minds” of a company (or charity) is accused of a “wrongful act” in their duty as a director (or trustee). Breach of fiduciary duties is considered a wrongful act yet it is not covered if illegal or deliberate.

There are loads of other examples of what are considered wrongful acts and surprisingly few exclusions on these policies. That’s because they’re a relatively new form of cover. Over time, as claims that shouldn’t be paid are, underwriters will start to exclude the most common instances. Most policies don’t cover fines or punitive damages. They are there to protect the innocent, not the bloody minded.

So how do you know if you contributed? If you have such a policy with a Lloyd’s underwriter part of your premium may now be lining the pocket of one of America’s legal eagles. If you see a picture of them when this truly momentus case comes to court (Jacko’s lawyers became celebrities) consider that you might have funded their tie or specs. Which isn’t so bad if they’ve got taste.

You can’t prevent your premium being used to defend people that appear to be crooked yet you can ask your insurance company for a summary of claims they have settled. If you think they’re settling claims that you won’t be making perhaps you can choose an alternative which is more appropriate.

Top Tip

You can defend yourself against your own innocent mistakes and even wrongful acts of your peers. Make sure you don’t turn a blind eye and assume that insurance will protect you. Insurance protects income and reputation if arranged properly. It will not prove useful if things have been ignored or buried.

See our top tips page for simple ways to help yourself today.