U.S. News

D&O Insurers Take Hit From Subprime Payouts

Mary Thompson,|Reporter

Subprime-related losses and lawsuits are on the rise, and they are going to prove costly to corporate directors, or at least to the companies that insure them from liabilty.

Subprime Hits the Boardroom

Subprime-linked payouts by providers of directors and officers insurance are expected to be higher than the payouts for any other single event in history.

"There really has been nothing that has been quite as widespread and broad as this in the past," said David Bradford, chief executive at Advisen, a provider of research to the insurance industry. "Everything in the past has been more focused. This is really cutting across the entire financial services sector."

In a recently released report, it estimates subprime-related payouts by D&O insurers for 2007 and 2008 will total $3.6 billion for both years. Compare that to the $3 billion in total payouts D&O insurers made in 2006.

Corporations typically buy this insurance for their directors and officers to cover,  among other things, legal costs directors may incur to defend themselves against shareholder suits. It also protects the board members' personal assets from being targeted by plaintiffs.

To date, Advisen notes 130 companies around the world have taken subprime-related writedowns totalling $257 billion dollars. These losses have spawned 191 related lawsuits.  Of these, 54 are securities class action suits — suits Advisen says are "the single most significant source of losses" to D&O insurers.

Bradford calls this number "staggering" when compared to suits filed in similar crises in the past. Another difference with subprime: it is not just one link in the subprime chain being targeted, like mortgage lenders. Bradford says investment banks, commercial banks, bond insurers, ratings agencies and homebuilders face lawsuits too.

The insurers expected to dole out most of these higher payouts are AIG , Lloyd's and Chubb . Advisen notes these are the top three underwriters of D&O insurance, accounting for almost 50 percent of the volume.  Still, even with subprime-related payouts forecast to be higher than past crises, Advisen says it is "unlikely to decimate the industry."