Marsh UK recently issued a warning to European financial services sectors, including insurance companies, hedge funds, banks and ratings agencies, that “they may be exposed to greater Directors’ and Officers’ Liability (D&O) and Errors and Omissions (E&O) Liability claims in the wake of the sub-prime mortgage crisis in the United States.”
Marsh linked rising mortgage delinquencies among high-risk, or sub-prime, borrowers in the United States to an “increased relaxation of underwriting standards,” which has to the bankruptcy of several US mortgage lenders and increased regulatory scrutiny.
“With trading in Collateralized Debt Obligations (CDO), Col-lateralized Loan Obligations (CLO) and Mortgage Backed Securities (MBS) as financial investment instruments growing globally, so concern is rising in the European and international financial markets about their impact on the investments held by companies in US assets,” said the announcement.
Marsh listed several scenarios as creating potential litigation linked to D&O and E&O liability:
Lenders’ lawsuits versus the banks: As lenders are unable to do business without capital, many have been forced to file bankruptcy when they were asked to buy back loans. Claims of improper margin calls and flawed valuation of underlying collateral on the part of banks and other institutions that purchased or financed the loans are likely.
Shareholders’ lawsuits versus lenders, accountants, trustees and underwriters: Sub-prime lenders that have gone into bankruptcy may face extensive accusations. Shareholders could make claims of misrepresentation and omission related to accounting, as well as claims of bad valuation and poor underwriting standards.
Insurers’ lawsuits versus lenders: Large insurance claims on failed sub-prime collateral may lead to accusations of poor underwriting on the part of lenders.
Investors’ lawsuits versus trustees: There may be claims of breach of fiduciary duty on the part of the trustees responsible for the distribution of cash flow.
Trustees’ lawsuits versus lenders and underwriters on behalf of investors: Trustees might seek damages from lenders and underwriters. The claims are likely to be along the lines of fraudulent conveyance and breach of contract related to loan servicing.
Individual investors’ lawsuits: If and when the investors in mortgage-backed securities post poor returns as a result of failing sub-prime backed investments, the individual investors may accuse the funds of not taking on suitable and prudent investments and failing to follow investment guidelines and standard risk management procedures. There will also be claims of misrepresentations, omissions, bad pricing and mark-ups. (Source: Dr. Faten Sabry, NERA Economic Consulting, “The Subprime Meltdown”)
Commenting on the D&O risks arising from sub-prime, Siobhan O’Brien, a senior vice president in Marsh’s Financial Institutions Practice stated: “The European financial services sector is increasingly realising the implications for the sub-prime issue outside the United States. …
“European insurance companies, hedge funds, banks and ratings agencies must continually assess the risks raised by the sub-prime crisis and examine their D&O and E&O exposures.”
O’Brien noted that the European D&O market has been mostly stable in recent years. However, a high number high number of costly D&O and E&O claims could reverse the trend and send prices upward, O’Brien said.
Source: Marsh UK
Topics Lawsuits USA Claims Europe Underwriting Professional Liability
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