This could be the most catastrophic year in the history of directors' & officers' (D&O) insurance, AIG senior vice chairman Thomas Tizzio has warned.

At the Bermuda Insurance Symposium, Tizzio said D&O insurers had experienced a 200% increase in exposure to class actions brought by shareholders between 1996 and 2000.

He said recent corporate collapses such as Enron would further increase the focus on D&O as possible target areas for both monitoring and legal action.

"They'll be the subject of greater scrutiny. And who is going to pay for these investigations, these awards?"

He said professional liability underwriters had been hit by a 109% increase in claims payouts over the past year.

The UK market is already seeing rates rise by about 25%, a leading underwriter said.

Chris Hill, D&O specialist with Hiscox, said UK rates were following a trend set in the US, where they were rising between 50% and 100%.

Huge claims on both sides of the Atlantic will result in Lloyd's insurers incurring losses more than double the D&O premiums.

Hill said the market's 1998 loss ratio (claims expenses divided by premiums) was 219%.

"Insurers are to blame for being so eager to write this class of business without stopping to think and looking at their aggregate exposures," he said.

Enron's use of off-balance sheet vehicles to hide debt has prompted reports of insurers refusing to cover companies using such methods.

Two of Enron's D&O insurers, Royal Insurance Company of America, a subsidiary of Royal & SunAlliance, and St Paul Mercury Insurance, filed court papers saying they plan not to honour their policies.

The insurers' filings to the court do not cancel the cover, but set out an intention not to be bound by the policy due to misrepresentation.

They are among ten companies participating in Enron's D&O cover, providing a programme with limits of $350m (£245m).

It is normal practice for an insurer to be liable for defence costs until dishonesty or wrongdoing is proved.

But Edward Smerdon, partner in insurance law firm Reynolds Porter Chamberlain, said the insurers could simply void the policy on the basis that the risk was misrepresented when it was renewed on 1 September last year.

Enron filed for bankruptcy in December.

"The board must have had an inkling something was badly wrong by September.

"One could argue there's a strong case of misrepresentation.

"It doesn't even have to be dishonest - it could be a negligent misrepresentation of the risk."