* Scrutiny of D&O policies rises along with claims
* Insurers wary of huge payouts to cover legal bills
* Insurers may refuse coverage and sue to limit costs
By Ben Berkowitz and Myles Neligan
BOSTON/LONDON, July 24 Some of the world's
largest insurers for corporate directors and officers could be
on the hook for hundreds of millions of dollars in claims over
the next few years to cover legal costs for people caught up in
the LIBOR scandal.
As a result of those costs, which insurers fear could
accumulate for the next few years, already rising insurance
rates stand to go even higher for all companies.
Directors and officers (D&O) insurance pays a wide range of
defense costs for executives who get sued as a result of
business decisions, from the initial inquiries all the way
through the last stages of trial or settlement.
The sums involved are substantial. Consultants Towers Watson
reported that in 2011, companies with more than $10 billion in
assets on average carried $187.5 million in insurance coverage.
More than a dozen banks are under investigation by
authorities in Europe, Japan and the United States over the
suspected rigging of the London interbank offered rate (Libor),
a key interest rate used to price trillions of dollars worth of
Last month, Barclays paid a $453 million fine after
admitting that its traders attempted to manipulate Libor, which
is used to price loans and mortgages. While the traders at the
center of the probe would be unlikely to be senior enough to
have D&O insurance, their bosses would, and claims are already
According to one brokerage industry source, big claims could
push costs up for everyone. Rates for coverage were already
rising this year -- at least 5 percent over last year, brokers
say - because insurers were squeezed after years of price
"Any industry is nervous when it doesn't know what the
parameters are. We're going to be spending the next
three-to-five years getting our heads around how much this is
going to cost," the source said.
Already, bankers looking to buy coverage are facing intense
scrutiny from insurers. Among the biggest names in the market
are companies like AIG, XL and Chubb.
"If someone's applying for coverage now, the underwriters
will probably ask 'Why now, not last year?'" said Richard
Canter, president of SKCG Group, which provides insurance
advisory services to financial firms.
"Either the underwriters will price the product accordingly
or, if there's any potential for a claim and they don't
(already) have coverage the underwriters will just exclude that
issue," he said.
COURT FIGHT AHEAD
To be sure, whatever the losses end up being, they will be a
fraction of what insurers pay out for other kinds of events.
U.S. insurers lost more than $10 billion in the second quarter
of 2012 just from natural disasters like hail storms and heavy
winds, dwarfing whatever D&O claims could generate.
Still, in most cases of alleged Libor manipulation
investigations are ongoing and many potential victims are still
researching how they may have been affected, and what civil and
criminal penalties and remedies are available.
"When claims first come in there's an element of wait and
see, but as it's begun to mature, the feeling is that whatever
happens they're going to end up paying a lot of money. The big
fear across most of the market is who else is going to get
dragged in," said a second London-based brokerage source.
One experienced D&O litigator said it is likely that
insurers will fight to avoid paying out.
"The insurers are likely regarding this as a potentially
large exposure, in terms of the financial institutions that
they've insured, and are likely to contest these claims," said
Alex Hardiman, an attorney at Anderson Kill & Olick in New York
who specializes in insurance litigation.
"I think that if, as appears likely, there is a lot of
shareholder litigation that comes out of the Libor issues, then
I think they will certainly put up a bunch of defenses to
coverage," he said.
Insurers will be hoping that criminal charges are brought in
as many cases as possible, as D&O policies typically become
invalid when the underlying actions are found to be illegal.
"It's kind of sad to say, but we're rooting for them all to
be criminals," the second brokerage source said.
Another risk insurers face is that if customers can prove
financial products were priced incorrectly due to Libor
manipulation, errors and omissions insurance policies could be
triggered as well.
For example, if a bank fudged its Libor submissions, and
there was evidence that a customer of that bank paid too much
for a financial product due to that "error" in rate setting or
"omission" of information could be cause for enormous damages.
"In the event customers can prove they've suffered a
financial loss ... that's the area I'm sensing insurers are
apprehensive about," said Matthew Rolph, head of management
liability in the UK for brokers Marsh Inc.
Part of the problem, insurance brokers say, is that in cases
like this there is so much more focus on individuals than there
used to be. Whereas at one time covering a company was enough,
now executives are more acutely aware of the risks they face
personally, both criminally and civilly.
"Collectively, we're seeing real scrutiny around individual
risk profiles, more so than we've seen in previous years," said
Rolph. "You're seeing the vilification of individuals, fairly or
unfairly, in the public domain, and it's very much resting on