Insurers could face massive claims and unlimited fines if they fall foul of the new offence of “market abuse”, created by the Financial Services and Markets Act.

From next year, the Financial Services Authority will be able to penalise companies it believes are guilty of insider share trading with unlimited fines and compensation orders, without reference to the courts.

Another punishable market abuse would be releasing wrong or misleading information to the Stock Exchange.

The offence is the Government's response to headline scandals such as the collapse of Baring's bank through the actions of former employee Nick Leeson, and the 1980s Guinness insider-trading affair.

Jonathan Davies, partner in insurance law firm Reynolds Porter Chamberlain, said the FSA's new powers could affect insurers in three ways: as stock market quoted companies; as investors dealing in shares; and as providers of liability and legal expenses cover.

He warned: “The Guinness share support scheme and Nick Leeson's manipulation of the Nikkei futures contract are examples of the kind of cases where the FSA might want to exercise its powers to impose very significant restitution orders.”

These orders would seek to restore any losses caused by market abuses, and would be in addition to any fines imposed by the FSA.

Davies said the term market abuse could also apply to unintentional behaviour, or a lack of diligence on the part of a company. He therefore advised insurers to tighten their risk management procedures to prevent the leak of price-sensitive information.