Subprime mess may spill to D&O market.

As concern over losses in the U.S. subprime mortgage market moves from the boardroom to the courtroom, insurers who underwrite the liability of major financial institutions are preparing for a new rash of claims.

At least 10 securities class actions have been filed so far, and that number is likely to grow, according to Jill Sulkes, a managing director in Marsh Inc's Financial Institutions Practice.

In addition to suits targeting the growing number of mortgage originators that recently have filed for bankruptcy, she expects subprime-related claims for directors and officers liability could be made by banks, including investment banks, hedge funds, and real-estate investment trusts.

"Many hedge funds do not carry D&O coverage, or in their case, a partnership liability policy, since most hedge funds are formed as limited partnerships," Sulkes said. "Not all hedge funds purchase that kind of coverage. In fact, it's much more rare than with publicly traded companies who do buy D&O insurance."

At least one suit filed targets an insurer. A putative class-action suit filed in U.S. District Court in Philadelphia accuses mortgage insurer Radian Group Inc. of concealing from investors the full extent of subprime losses suffered by loan servicer Credit-Based Asset Servicing and Securitization LLC, often referred to as C-Bass, in which Radian holds a 46% stake. Both Radian and fellow mortgage insurer MGIC Investment, which also holds a 46% stake in C-Bass, have confirmed they may lose their entire combined $1.03-billion investment in the company.

R. Mark Keenan, chairman of the Financial Institutions Group with New York-based policyholder firm Anderson Kill & Olick PC, expects "a smorgasbord (of claims) that really is only limited to the inventiveness of plaintiffs' counsel."

"Where I see the majority of the claims are investor claims on misrepresentations on your financial statements, or material admissions on failing to get an investor out. That could go into pensions or fiduciary liability," Keenan said.

Sulkes noted that fiduciary duty claims could include trustees' lawsuits against lenders or underwriters on behalf of investors, lawsuits by investors against trustees who were responsible for the distribution of cash flow, as well as suits filed against trustees of major pension funds claiming violations of the Employee Retirement Income Security Act.

"Generally speaking, so far, insurers have not been imposing any type of wholesale exclusions or broad-brush exclusions that specifically relate to the mortgage issues, or subprime for that matter," Sulkes said.

But Thomas Zacharopoulos, leader of the management risk practice for Integro Insurance Brokers, expects the claims to have only a negligible impact on pricing in the D&O market. In a statement, be said it was "premature to assess the impact of the subprime mortgage crisis on the overall D&O market" and that "an increase in litigation should not necessarily trigger an increase in the overall rate environment.

"While the financial sector may experience firming rates, the spillover effect into other sectors has yet to be determined," Zacharopoulos said. "If history is an indicator, the recent financial crises in Asia, Russia, and (hedge fund) Long Term Capital Management during the late 1990s had minimal impact on the global D&O market."

In addition to directors and officers liability, Sulkes said other policies potentially could provide coverage for impacted firms. She expects claims for errors and omissions against, for instance, accountants and underwriters, as well as fidelity bond claims. Sulkes said that, given the broad reach of the mortgage market, claims could be lodged by investors in a broad array of industries since U.K. and European firms have considerable exposure to the U.S. collateralized debt and loan markets.

"I think we're still at the beginning, and a lot depends on where the market goes on this," Keenan said. "If the (Federal Reserve) still lowers interest rates and the market solidifies a little, you're going to see a lot less. But if subprime just falls and falls into the depths of hell, it will all come out."

D&0 Market Share for Primary Insurers

                                    2006 Premium     Market
Company                             Volume           Share

American International Group        99,683,822        37.4%
Chubb Insurance Group               58,683,858        22.0%
XL Insurance                        17,602,235         6.6%
Aegis                               11,384,985         4.3%
Admiral Insurance Co.               10,856,659         4.1%
ACE                                 10,167,927         3.8%
Lloyd's of London *                 10,021,520         3.8%
Hartford                            8,746,087          3.3%
Old Republic                        7,838,406          2.9%
St. Paul/Travelers                  7,412,718          2.8%

* and other London underwriters

Source: Towers Perrin's 2006 Directors and Officers Liability Survey