The litigation "explosion" that forced U.S. financial companies into courtrooms last year to defend money-losing investments and bad loans may have ended with the recovery of equity markets, Aon Corp. said.
U.S. securities class actions in the first nine months of this year fell 20% from the year earlier, to 130, with 49 claims related to the credit crisis, the Chicago-based insurance broker said Friday. These lawsuits climbed to a four-year high in 2008, with 210 cases, according to Stanford Law School and Cornerstone Research.
"The decreasing number of claims may signal an end to the litigation explosion for financial services firms," said Mike Rice, the head of Aon's financial services group.
Insurers that sell coverage for lawsuit costs tied to management errors or negligence, a group that includes American International Group Inc., Chubb Corp. and XL Capital Ltd., may curb price increases or reduce rates next year, Aon said. Prices paid by financial companies for such insurance rose 3.2% in the three months through Sept. 30 after climbing at least 10% in each of the four previous quarters, Aon said.
The Standard & Poor's 500 Index has advanced about 22% this year after dropping 38% in 2008. Credit markets have improved, with corporate bonds returning about 27% this year, compared with minus-11% in 2008, according to data from Bank of America Corp.'s Merrill Lynch & Co.
In a bear market, where prices are cratering, that's when you get the lawsuits," said Bill Pollock, the chairman of National Insurance Partners, an Austin risk management consulting firm. "When you look back at times when the markets are doing well, there are no damages."
New claims under directors and officers policies at Chubb fell 5% in the third quarter, Chief Operating Officer John Degnan said in October. "The predicted wave of directors and officers litigation does not seem to be materializing yet," Degnan said in a conference call in July. "We are now about two years into this developing claims scenario in an arena which has been traditionally characterized by a rush to the courthouse on the part of plaintiffs' lawyers."
Investors have little chance of extracting damage awards from executives and board members at companies that lost money betting on subprime mortgages, said Michael McGavick, XL Capital's chief executive officer.
"It's very hard to pick out the management team that did something wrong to the level that the law requires," he said. "Being collectively stupid is not a basis for a lawsuit."