The Year in Emerging Risks

Policyholder Advisor & Alert

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PUBLISHED ON: April 11, 2011

The time is ripe to take a look back at key developments in insurance recovery in 2010 — and trends that are likely to be salient in 2011.

Bank failures continue to loom: In 2010, 157 U.S. banks failed, costing the FDIC $22.4 billion — the highest tally since 1992, the peak of the savings and loan crisis. At that time, the FDIC sought aggressively to recoup a portion of its losses through lawsuits against directors and officers. Moreover, from 1990 to 1995, federal officials prosecuted almost 2,000 bank insiders. Bank officers would do well to assume that the past is prelude, though the legal action is just getting started. Early this year, the FDIC said that as of mid-December it had authorized lawsuits against 109 directors and officers of failed financial institutions, seeking to recover nearly $2.5 billion. The FDIC is also reportedly conducting approximately 50 criminal investigations targeting executives, directors and employees of recently failed banks. The FDIC's problem list is over 884 banks.

Institutions whose directors and officers are subject to such suits, investigations and prosecutions should look to their D&O policies. They should note, too, that D&O insurance companies' past efforts to deny coverage for suits brought by statutory receivers by invoking the "insured vs. insured" exclusion have for the most part proved unsuccessful.

Shareholder and bondholder action against banks is also increasing: Late in the year, several foreclosure fraud class action lawsuits were filed, some seeking treble damages under RICO, with a number of large financial institutions among the targets. Banks are also fending off multiple foreclosure-related investigations, including one by all 50 state attorneys general. Bondholders likewise are targeting banks, alleging misrepresentations in the sale of collateralized debt obligations and other toxic securities. In all of these cases, D&O insurance should provide crucial protection to officers and directors.

Gulf oil spill: The release of millions of gallons of oil into the Gulf of Mexico following the explosion on the Deepwater Horizon oil rig entails billions of dollars in losses and liabilities for the principle companies involved, e.g., BP, Halliburton, Transocean and others. While hundreds of on-shore businesses that suffered business interruption losses will look to the BP fund established to compensate for such claims, many have opted out of the settlement and are suing the companies involved in building and operating the rig. Many may also seek coverage under time-element business interruption insurance included in their own property insurance policies.

Climate change liability risks won't go away: Late in 2010, the United States Supreme Court agreed to hear an appeal in American Electric Power Co. Inc. et al. vs. State of Connecticut et al., in which a coalition of states and environmental groups sued several large coal-burning utilities, alleging that greenhouse gas emissions from the utilities contributed to beach erosion, droughts and floods. If the Supreme Court allows the suit to go forward, a raft of similar suits likely will follow. American Electric is one of three such suits currently pending in U.S. District Courts, one of which, Kivalina vs. ExxonMobil Corp., has led to the first insurance coverage dispute concerning liability for greenhouse gas emissions. Should the Supreme Court uphold the Second Circuit in American Electric , then, as day follows night, greenhouse gas liability will become a major insurance coverage battleground. Under commercial general liability policies, much dispute will probably center on interpretation of the polluter's exclusion.

D&O liability for climate change: Directors and officers can be sure that increased regulation of greenhouse gas emission will lead to increased liability. A raft of SEC regulations address disclosure of a company's climate-change-related issues, including legislation that may have a material effect on a public company, or conditions that may reduce demand. Alleged failure to comply with these disclosure requirements may lead to suits against directors and officers.

Notwithstanding the large anticipated costs to the insurance industry stemming from the recent earthquake and tsunami in Japan, insurance markets remain soft in most property-casualty lines, and policyholders are thus well-positioned to purchase insurance products that will actually work when needed. As always, maximizing insurance protection will require informed purchasing, proactive claims pursuit and aggressive pushback when insurance companies delay or deny coverage.