Legal actions launched in the US over bad loans may have to be paid for by London market insurers

?UK insurers could face claims worth hundreds of millions of pounds in the wake of the sub-prime mortgage crisis in the US.

While much of the legal action that will result in claims is likely to be launched in the US, the London insurance market will pick up the lion’s share of the bill, warned a leading lawyer.

Jonathan Davies, partner at Reynolds Porter Chamberlain law firm, said: “Securities fraud class action cases are now beginning to be launched against US listed companies that have been caught up in the sub-prime maelstrom.

“If investors’ losses persist then we may see the cost to insurers of defending and settling such potentially huge claims start to rise again.”

Marsh has also warned the insurance industry of its potential exposure to greater directors’ and officers’ liability (D&O) and errors and omissions (E&O) as class-action lawsuits pour into American courts.

A Marsh spokesman said: “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.”

Almost a dozen lawsuits have been filed against US mortgage providers, accusing banks of covering up the risks posed by home loans sold to people with bad credit histories.

It is believed the mortgage providers will seek D&O and E&O to cover the cost of their defence.

The majority of the large US banks are insured by American companies, however, the London market does have a book of mortgages for smaller regional banks and does occasionally write for larger institutions.

Out of the potential litigation arising from the D&O and E&O liability is the spectre of large insurance claims on failed sub-prime collateral leading to accusations of poor underwriting.

Siobhan O’Brien, a senior vice president at Marsh, said insurers could also be impacted from an investment perspective because often companies invested in the mortgage industry because it was seen as safe.

O’Brien said the sub-prime mortgage debacle could affect the ratings of insurance companies if investment portfolios were seen to be reducing.

Marsh has already been notified of claims from its clients, however, O’Brien said it was still too early to predict the extent of the loss for insurers.

Nick Allen, product leader, professional and financial risk at Royal & Sun Alliance, said the company did not have direct exposure to US mortgage lenders, but if there were a spill over into the UK, it could have an effect on large companies.

He said: “There will be more scrutiny on the directors of large UK companies.

“If there is a falling of profits of these companies, it’s likely the shareholders will look for someone to blame.”

Who's suing whom

As companies scramble for their piece of the pie in the US sub-prime mortgage debacle Marsh has compiled a list of potential litigants arising out of D&O and E&O liability.

Lenders v banks
Insurers v lenders
Investors v trustees
Individual investors'lawsuits
Shareholders v lenders, accountants, trustees and underwriters
Trustees v lenders and underwriters on behalf of investors