Insurers braced for flurry of financial crisis-based lawsuits

One of the most prominent and prescient of these lawsuits involves the UK's Royal Bank of Scotland (RBS). The institution and four of its former directors are being sued by a group of shareholders alleging that they were misled about the financial health of the bank during a 2008 share sale. The sales valued shares at 200p and raised £12bn. However, six months later the share value fell to 65p and then by January 2009 to 11p. The bank was then given a £45bn state bailout that left 57% of the institution under state ownership. The group, RBOS Shareholders Action Group, represents 12,000 individuals and 100 institutions and its claim, which was issued in the UK High Court on 3 April, may reach as much as £4bn. The group alleges that investors were given the impression that, at the time of the rights issue, the bank was strengthening when it was actually deteriorating and that information regarding capital ratios and losses were omitted from the prospectus.hideIf the allegations are proven, it would put the bank in contravention of Section 90 of the Financial Services and Markets Act 2000, says the shareholder group, and would leave the bank liable for losses incurred after the rights issue. Should the lawsuit be successful, it would trigger a directors and officers' liability policy worth £200m that is led by London-based insurer Novae. The bank also faces another multi-million pound lawsuit from a group representing 21 institutional shareholders that was issued on 29 March. Other financial institutions that have seen their share price fall in the wake of the financial crisis may also face a number of investors and shareholders in the courts. In the US, Bank of America has been branded a lawsuit risk by analysts pending a ruling by a federal judge in New York on a $2.4bn settlement on claims that shareholders were misled by the bank prior to agreeing the $50bn purchase of Merrill Lynch in December 2008. In addition to these cases, insurers should also brace themselves for a flurry of negligence claims relating to the financial crisis and the subsequent crash in property values, according to UK law firm RPC. Typical claims may see mortgage lenders target surveyors and property valuers alleging negligently overvalued commercial premises and residential property development sites-claims which could trigger companies' indemnity insurance coverage. Such claims have to be made within six years of the alleged negligence, therefore any claims related to events prior to the 2007 credit crunch or the peak in house prices (November 2007 according to Land Registry data) must be filed this year. According to RPC partner Paul Castellani, such claims may well be more opportunistic as organisations try to beat the deadline. "One of the problems with these claims is that they are often launched on the basis that the meltdown in 2007 and 2008 now looks so obvious in hindsight, which mislead claimants into thinking they have a strong case," he said. However, the courts will ask whether the fall in asset values was so clear-cut at the time. On that basis many of these claims will be unlikely to succeed. "But even unsuccessful claims cost a lot of money for professional indemnity insurers to defend," he added. Since the financial crisis, lenders have already been responsible for many 'blanket notifications' of an intention to pursue a claim. These notifications have been made to insurers despite the fact that it is uncertain whether they are sufficient to stop the time limit from expiring. "With the deadline for financial crisis claims fast approaching, there will probably be one last push from the lenders in the next few months to trigger professional indemnity policies of valuers," says Alexandra Anderson, Partner at RPC. "Once we reach August and the six year anniversary of the property market peak is reached, insurers may regard the surveyors' indemnity market as more benign."

Insurers braced for flurry of financial crisis-based lawsuits

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