D&O and E&O costs could rise as a results of the US sub-prime crisis, warns Marsh

Marsh is warning the European financial services sector, including insurance companies, hedge funds, banks and ratings agencies, that they may be exposed to greater Directors’ and Officers’ Liability (D&O) and Errors and Omissions (E&O) Liability claims in the wake of the sub-prime mortgage crisis in the US.

Higher interest rates and falling property prices have contributed to rising mortgage delinquencies among high-risk, or sub-prime, borrowers in the US.

This, coupled with increased relaxation of underwriting standards, has led to the bankruptcy of several US mortgage lenders and to increased regulatory scrutiny.

Concern is rising in the European and international financial markets about their impact on the investments held by companies in US assets.

Potential litigation, and arising out of D&O and E&O Liability, include insurers’ lawsuits versus lenders. Large insurance claims on failed sub-prime collateral may lead to accusations of poor underwriting (misrepresentations and omissions) on the part of lenders.

“If there is a high number of costly claims under D&O and E&O insurance costs may begin to rise

Siobhan O'Brien

Commenting on the D&O risks arising from sub-prime, Siobhan O’Brien, a senior vice president in Marsh’s Financial Institutions Practice said: “The European financial services sector is increasingly realising the implications for the sub-prime issue outside the US. Some European banks have frozen certain funds and the European Commission has also announced that it will review the credit ratings industry’s voluntary code of practice after reports that it has been to slow to advise clients on the crisis.”

“European insurance companies, hedge funds, banks and ratings agencies must continually assess the risks raised by the sub-prime crisis and examine their D&O and E&O exposures. Potential claims are likely to arise from wrongful acts by the company and the directors and officers in the form of allegations of mismanagement with respect to sub-prime lending or their investment portfolios, their lending and foreclosure practices and the suitability of the products sold. The potential of regulatory investigations may bring about claims by shareholders or borrowers.”

“In recent times the European D&O market has been largely stable. However, if there is a high number of costly claims under D&O and E&O insurance, this trend is likely to reverse and costs may begin to rise,” added O’Brian.