Marsh Inc. the world's largest insurance broker and risk adviser, on Monday warned financial institutions they may face more claims as a result of the subprime mortgage crisis.
Marsh, a unit of Marsh & McLennan Companies, said in a statement that insurers, banks and rating agencies could face greater liability claims under directors and officers (D&O) and errors and omissions (E&O) policies.
Among the biggest insurers offering these policies are American International Group Inc., Chubb Corp. and Ace Ltd.
Although this market has been largely stable, if there are a high number of costly claims, the trend may reverse and costs rise, said Siobhan O'Brien, a senior vice president of Marsh.
Countrywide Financial Corp., the largest U.S. mortgage lender, has already seen several lawsuits against the company as it struggles with foreclosures and delinquencies, which in July reached their highest levels since at least 2002.
Directors and officers insurance protects the top officials of a company against charges that they erred, did not fulfill their duty or committed an illegal act. Errors and omissions policies protect against claims by customers that a company made mistakes or failed to perform on a contract.
Attorneys in the insurance industry agreed with the Marsh study.
This is a big deal, said James Wood, co-chair of the insurance practice at LeBoeuf, Lamb, Greene & MacRae in San Francisco. We expect this to grow in terms of litigation.
Marsh said potential litigation could include lender lawsuits against banks because some lenders have been forced to file bankruptcy when they were asked by the banks to buy back loans.
Shareholders will sue lenders that have gone into bankruptcy along with their accountants and trustees.
Insurers themselves may sue lenders for poor underwriting and individual investors in mortgage-backed securities may accuse funds of failing to follow investment guidelines and standard risk management procedures, Marsh said.