Even though securities suits related to the Madoff Ponzi schemeand the credit crisis trailed off in third-quarter 2009, financialfirms were still the leading type of company sued with one-third ofthe cases filed, a research firm reported.

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In New York-based Advisen's report about securities lawsuitsfiled in the third quarter of 2009, the firm introduced a new"sector impact metric," designed to reveal what percentage of suitsfall in various industry groups, explained David Bradford,co-founder and executive vice president.

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According to the report, 56 securities suits out of a total of169 filed in the quarter named financial institutions. Mr. Bradfordnoted that while FI suits represent 33 percent of the total for thequarter, that percentage is down from prior quarters. (During thefirst quarter, for example, FI suits represented 56 percent of thedefendants in securities suits.)

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"The diversity of different industries being thrown into thesesuits was greater during the third quarter," Mr. Bradfordnoted.

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Separately, Advisen reported that D&O insurance priceincreases for FI firms averaged 30 percent, while some insuredshave seen jumps "much, much higher," according to Mr. Bradford.

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Will the lower suit percentages mean that financial firms mightsee insurance rates change direction soon?

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"It's inevitable. The D&O marketplace is really marked bydifferent industries becoming the flavor-of-the-month forsecurities litigation," Mr. Bradford said. "Obviously, FIs havebeen pretty much hammered in the past couple of years, but thefocus will move away in the not-too-distant future once the heat'soff them, and I think they will certainly start to see a littleflexibility on the part of underwriters as far as stabilizing, andeven bringing down the premiums."

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Mr. Bradford also confirmed that some insurers are jumping intothe FI market to take advantage of current rate levels. "Becauserates are so high, they're much more attractive insureds at thistime, but I don't see a lot of rate competition going on to getthat business at this point," he said.

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Chris DiLullo, a senior vice president in Lockton's Washington,D.C. office, confirmed that hikes for some FI buyers were as highas 50-to-100 percent last year.

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"They're not at that magnitude right now," he added. "I thinkfor the most part, those classes have gone through the renewalprocess already, and the adjustments have been made. There areexceptions to this, but I think the general sentiment ismaintaining where they are now, as opposed to whacking them withanother 100 percent this year."

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Still, there are some FI classes that continue to presentplacement challenges for brokers, according to Mr. DiLullo,identifying private equity firms, real estate investment trusts andbanks as examples.

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"The phenomenon of the pay-to-play scandal that's going on withthe New York attorney general has really been a fairlywide-reaching concern that has impacted lots of PE firms," he said,referring to a probe by New York Attorney General Andrew Cuomo (andmore recently the U.S. Securities and Exchange Commission) intofees paid to politically connected middlemen–known as placementagents–by PEs and other investment firms that sought business fromthe state pension fund.

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"As a result, some of the leading PE [insurers] are looking foradditional rates because they're now experiencing some lossesthrough their general partnership liability book," Mr. DiLullosaid.

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PE firms also are feeling the impact of bankruptcies because oftheir investments in portfolio companies, he said.

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Referring to REITs (real estate investment trusts that invest inand manage properties as their primary business), Mr. DiLullo saidplacement challenges arise from the fact that they're leveraged,debt-sensitive organizations. "You can have a good result with aREIT, but REITS with significant amounts of debt maturities in thenext one-, two- or three years are going to be looked at a littlebit more critically," he added.

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As for traditional depository institutions in the bankingsector, he said underwriters are concerned about the implicationsof regulatory actions–particularly the Federal Deposit InsuranceCorp. "There are a record number of bank takeovers by the FDIC, sounderwriters that have written those classes of business for yearsare selectively looking to get off of risks," he reported.

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HOT TOPIC: PE INDEMNIFICATION

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Turning to an emerging risk management issue for PEs and venturecapital firms, Mr. DiLullo said "there's a big conversation goingright now around indemnification," explaining that these firms aretrying to better manage the order of indemnification obligations toofficers when there are losses at portfolio companies in which theyinvest.

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PE and venture capital firms have their people on the boards oftheir portfolio companies, he continued. "Those individuals can,and usually are indemnified by the portfolio company, but they alsoreceive indemnification at the general partnership or the fundlevel," he explained.

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"So if a claim occurs, and there's no clarity and specificityabout the order of the indemnification–the sequencing of who isindemnifying first and who is indemnifying second–there can andhave been some unintended consequences," he said.

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In particular, this has led to situations where the generalpartnership indemnified, and then fully expected the portfoliocompany would indemnify, "and either they didn't or they couldn't,"he added.

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Some courts have decided that absent some clarity on the orderof priority, "a portfolio company would not necessarily legallyhave to indemnify," he noted.

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There's no standard way to "memorialize where indemnification isgoing to come from and in what order," Mr. DiLullo confirmed. "Ithink generally people expect the portfolio company to indemnify,and to the extent they can't because of financial reasons, then itwould go up to the general partnership level."

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Directors and officers insurance policies reimburse insuredcompanies for fulfilling their indemnification obligations throughcoverage part B, also known as Side B. Mr. DiLullo noted, however,that "in the catastrophic situation, where the portfolio companymay be insolvent and the need for indemnification fairlysignificant, the general partnership would not only be on the hookfor the Side-B deductible, but their limits might not besufficient."

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"So it has the ability [potential] to cause the GP a financialoutlay that they didn't expect," he said.

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Mr. DiLullo said he has not seen the lack of clarity overindemnification fuel any coverage disputes between a carrier forthe general partnership and a carrier for a portfolio company.

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"The indemnification issue is emerging. It's early days still,but it's something people are looking into," he said.

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