Microsoft has released an update for Windows Live Writer. This update fixes four problems that occur when Windows Live Writer publishes posts to Blogger.

• An error occurs when you publish a post that contains images to Blogger : File Upload Failed: Object reference not set to an instance of an object.
• You cannot publish images to your Windows Live Writer album on Picasa if the folder already contains 500 images : File Upload Failed: The remote server returned an error: (500) Internal Server Error.
• When you click a thumbnail image to view a larger image, a file download box appears.
• Link to images that were previously published to a blog in the blogspot.com domain are broken when the blog is migrated to a custom domain.

As of now the update KB951125 is only present being distributed via Microsoft Update.

Read more about article KB951125 here.