The implosion of the subprime lending market has spawned an explosion of litigation. With all the fireworks, risk managers are scrambling to determine coverage issues regarding insurance policies. Specifically, they are considering whether their D&O, E&O, and FI Bond policies offer protection to their financial institutions from the torrent of legal actions stemming from the collapse of the subprime securities marketplace.
The $565.3 billion subprime marketplace has been bombarded with an explosive wave of bankruptcy filings. Insurance companies are not immune to this burgeoning crisis, with AIG, the world’s largest carrier, reporting a $7.81 billion net loss for second quarter 2008, primarily due to its exposure to subprime mortgage securities.
The result has been securities litigations against the subprime lenders and the investment banks that rushed to sell subprime securities. Investor-plaintiffs have even begun to prey upon directors and officers in their individual capacities, alleging untoward conduct and egregious misman¬agement. And this is only the tip of the iceberg as more subprime players declare horrific losses with each passing day.