The Bernard Madoff investment debacle could see the insurance industry paying out around $1 billion in claims as investors sue institutions and money managers who put funds into an alleged giant Ponzi scheme.

That is the view of Greg Flood, president of IronPro, the professional liability arm of Bermuda-based insurance group Ironshore Inc., who says Madoff's impact will add to the large claims emanating from the sub-prime mortgage crisis.

"I think there will be a lot of financial institutions that will be litigated against by people who invested in funds which then turned over a sizeable proportion of their funds to Madoff," Mr. Flood said yesterday.

"There's an estimated $3.5 billion worth of financial institutions' errors and omissions (E&O) claims in the pipeline from the sub-prime crisis. Madoff could put another $1 billion on top of that."

Mr. Flood said he was not aware of IronPro having any exposure to Madoff-related claims at this time.

Mr. Madoff was charged by US prosecutors last month with running a massive Ponzi scheme — an investment model which uses money put in by new investors as returns for other investors. Commentators have suggested that $50 billion could have been wrapped up in the Wall Street trader's scheme.

Lawsuits connected to the case have already been launched, as investors scramble to claw back some of their money. Major banks in Europe, Japan and the US have announced exposures totalling billions of dollars and some hedge funds have taken devastating blows.

The sub-prime crisis caused turmoil on the world markets, as a housing slump in the US led to a wave of defaults on mortgages and foreclosures. Companies which invested in mortgage-backed securities saw their balance sheets take a hammering and their share prices plummeted. The full impact of the wave of resulting lawsuits linked to the crash has yet to be felt by the insurance industry.

Insurers likely to face the highest claims are the biggest financial institutions insurers, such as American International Group (AIG), Ace Ltd. and Chubb, as well as Bermuda-based XL Capital and Arch Capital.

Mr. Flood said the situation had put significant upward pressure on coverage. "Overall, we've seen rates go up and for some financial institutions, we've even seen rates double," he said.

IronPro was founded in May 2007 and Mr. Flood estimated the unit wrote more than $100 million in premiums during 2008, its first full calendar year of operation.

In recent weeks, the Ironshore group has recruited four executives from AIG, which was bailed out last September by the US Government, including Ironshore's new chief executive officer Kevin Kelley. The problems of AIG and other insurers who have been hard hit by the credit crisis has influenced market trends, Mr. Flood said.

"We've seen some of the legacy carriers who have sub-prime problems, or excessive exposure to financial institutions, cut back their limits and buyers have also been cutting back on their limits," he said.

This had created opportunities for other insurers to take up the slack, Mr. Flood said, as buyers looked to spread their risk around rather than get their coverage from one major player. IronPro was well positioned to prosper in the current climate, he added.

But he cautioned: "The state of the economy is making underwriting a very challenging practice."

IronPro was initially set up in New York, and now also has offices in London, Chicago, San Francisco and Atlanta.