Emerging insurance losses were the focus of several of 2009'stop stories for the E&S/specialty lines segment--with a Ponzischemer, a pandemic and an imported product bringing unexpectedexposures into focus this year.

While the continuing soft market and a down economy had the mostimmediate impacts on business for excess and surplus lines andspecialty brokers and insurers over the past 12 months, theunexpected appearance of Bernard Madoff, Chinese drywall and H1N1in our e-newsletter this year pushed articles about this trio tothe top of our subjective list of the key developments for2009.

Mr. Madoff's Dec. 11, 2008 arrest would actually come the dayafter we selected our Top-10 E&S/specialty lines insurancestory list for 2008, and we began reporting on the specialtyinsurance industry ramifications in the lead article of our January2009 edition. The insurance impacts are still being assessed, asevidenced by an article on potential fiduciary liability insuranceimplications in this edition.

Likewise, the effects of Chinese drywall on Southeasternhomeowners had started to emerge in 2008, but the insurancecoverage implications for builders, drywall suppliers andcontractors had yet to be fully examined until we reported on themin the April 2009 edition of E&S/Specialty LinesExtra.

And while the Lloyd's Emerging Risks team warned in a reportpublished back in October 2008 that a pandemic was inevitable inthe near future based on historic recurrence rates of 30-to-50years, the possibility of a worldwide disease outbreak actuallyoccurring in 2009 was on few radar screens.

The World Health Organization raised the pandemic alert on H1N1to its highest level--Level 6, denoting a full-fledged pandemic--inJune, soon after our editors started investigating possible sourcesof specialty insurance coverage for disease outbreaks.

One specialty broker--Patricia Roth of S.H. Smith &Company--dubbed 2009 "the year of the contagion" in our May reporton flu outbreak coverage.

In January, an insurance company executive--Peter Eastwood, thepresident and chief executive of Chartis' LexingtonInsurance--alternatively named this the "year of theunderwriter."

Mr. Eastwood, who had just taken his position as head of thelargest U.S. E&S insurer in December 2008, was one of more thana dozen executives to share their predictions on the top storieslikely to play out in 2009, and how their firms would deal with thechallenges ahead.

Mr. Eastwood, explaining how his company will deal with the mostfrequently cited challenge--the economic downturn--said that "wemust stay focused on what is within our control; 2009 will be theyear of the underwriter."

THEN AND NOW

As we reported in the lead article of our February 2009 edition,Mr. Eastwood and other insurance and broker executives surveyed inJanuary listed the following topics as potential top stories of2009:

#1: It's The Economy, Stupid

#2: Claims Fallout From The Credit/ Subprime Crisis, Madoff-TypeSchemes

#3: A Harder Market Ahead

#4: Federal Regulation Comes To Insurance

#5: Economic Stimulus Boosts E&S Insurance Demand

#6: Insurers Work To Preserve Capital

#7: Standard Carriers Retrench From E&S Business

How did the year actually play out?

Below, we provide the complete list of top-10 stories impactingthe surplus lines and specialty insurance markets in 2009, chosenby E&S/Specialty Lines Extra Editor SusanneSclafane.

#1: D&O/E&O Insurers Brace For Madoff Claims, CreditCrisis Impact

#2: Yes, Virginia, We Will Cover Pandemic Exposures

#3: Explosion Of Claims May Push Drywall Suppliers, InstallersInto E&S Market

#4: It's The Economy, Stupid

#5: The Hard Market Minute

#6: A New Administration, A New Tort Environment

#7: Old Players Reinvent Themselves

#8: Is It Hotter In Here? Global Warming Litigation BringsOpportunities

#9: Is This National Underwriter Or EntertainmentTonight?

#10: Brokers, Insurers Describe The Most Unusual Risks To LandIn The E&S Market

Not surprisingly, two topics are common to both lists--theimpacts of a recessionary economy on the specialty market generallyand ramification of the credit crisis and Madoff-like scandals onmanagement liability insurers.

A digest of some of the news reported in our 2009 e-newsletterson the unexpected top-three topics follows. In a separate article,we digest the remaining seven topics.

#1: D&O/E&O Insurers Brace For Madoff Claims,Credit Crisis Impact

Leading off the year, we reported on Aon Benfield's analysis ofthe cost of directors and officers and professional liability(errors and omissions) insurance claims relating to the Madoffscheme--an analysis that produced a $1.8 billion best estimate.

After examining possible exposure to four categories ofpotential defendants which could be protected by D&O andE&O insurance, the Aon Benfield report noted that payouts byinsurers of one of those defendants--Bernard Madoff InvestmentSecurities--could be limited by policy language excludingfraudulent acts.

More recently, in one of our most widely read articles of theyear, we delivered the scoop on exactly what kind of professionalliability coverage Mr. Madoff purchased--none, according to ChrisCavallaro, a wholesale broker for ARC Excess and Surplus in GardenCity, N.Y.

Bernard Madoff could not be convinced to buy professionalliability insurance for his investment services, but legalrequirements did force him to purchase a fidelity bond, thespecialty broker revealed at an industry conference inNovember.

But that hardly lets professional liability insurers off thehook, according to the Benfield analysis, which listed potentiallawsuit targets as:

o Asset management firms that ran so-called "feeder funds"(funds that directed investor capital to Mr. Madoff or hisfirm).

o Foreign banks and insurers that placed investors' assets andtheir own assets under Mr. Madoff's management.

o Charitable organizations and public institutions, whose boardsmay be sued by disgruntled donors for performing insufficient duediligence on investments with Mr. Madoff.

Our early editions reported statements by plaintiffs' lawyers,who said they would also pursue accountants that audited hedgefunds with Madoff assets.

And this month, we report on speculation by a defense lawyer whosees the potential for ERISA-based lawsuits (alleging violations ofthe Employee Retirement Income Security Act) and correspondingimplications for future fiduciary liability insurers.

Management and professional liability insurers had more to worryabout than the Madoff affair, as evidenced by our frequent reportson the credit crisis fallout and claims emerging frombankruptcies.

Research firms counting securities class-action lawsuit filingsfor 2008 came up with differing tallies in December 2008 andJanuary 2009, but they generally delivered the same type of badnews for D&O insurers who cover defendants in such suits--withall showing double-digit jumps over 2007 and all highlighting largefinancial firms hit by the credit crisis as a litigation hotspot.

No matter who was doing the counting, researchers cited in ourJanuary edition said 40 percent of securities class actionstargeted the financial sector in 2008, prompting one expert--JosephGrundfest, director of the Stanford Law School Securities ClassAction Clearinghouse--to forecast a necessary decline in 2009,simply because the supply of new financial firm defendants woulddry up.

Meanwhile, plaintiffs' lawyers mapped out strategies to dealwith the possibility that an ailing stock market would dry up casesfor the foreseeable future, we reported later in the year.

For there to be litigation potential for new stock-drop casesover the next two years, "there needs to be a major re-inflation ofthe stock market," said Samuel Rudman of Coughlin Stoia GellerRudman Robbins in New York, according to an article published inMarch. With re-inflation unlikely, he said the securitiesplaintiffs' bar would be looking back at 2007 stock movements tokeep their practices going.

More recent reports revealed that both trends are playingout.

In July, we reported that Kevin LaCroix, author of theD&O Diary blog, had already unearthed a half-dozenlawsuits with class periods dating back to 2007. And last month, wereported statistics released by New York-based Advisen, showing alltypes of securities suits (including class actions) related to theMadoff Ponzi scheme and the credit crisis trailed off inthird-quarter 2009.

According to Advisen, financial firms still led the pack ofdefendants, representing one-third of the cases filed, but thefigure represented a steady decline from a first-quarter Advisenfigure of 56 percent, prompting NU to question whether thetrend means lower insurance rates for financial institution (FI)firms in the near future.

So far, there are still two distinct pricing patterns in theD&O market--with non-FI firms enjoying soft-market pricing,while FI firms face higher rates. But price hikes for some FIbuyers that were as high as 30-to-100 percent last year aredisappearing, we reported in November.

Last week, Chicago-based Aon reported that the average FI pricechange fell to an increase of 3.2 percent for third-quarter 2009compared to third-quarter 2008--the first single-digit jump in morethan a year. (Aon's full study is available at http://bit.ly/5FZcif)

#2: Yes, Virginia, We Will Cover PandemicExposures

While NU's print magazine and online news servicearticles were reporting risk management strategies for handling anH1N1 outbreak, while noting a general lack of traditional insurancecoverage for the financial consequences of pandemics, NU'sE&S/Specialty Lines Extra e-newsletter provideddetails of three specialty insurance offerings specificallydesigned to cover business income impacts of diseases and othercontagions.

In the May edition, we featured Outbreak Extra Expense coverage(a standalone policy offered by Deerfield, Ill.-based Markel Corp.)and Pandemic Rx (offered by Boston-based Lexington Insurance).

In June, we featured still another offering--this one for verylarge insureds--designed by a broker, Hays Companies of Illinois.Initially tailored specifically for a consortium of colleges in2008, the Hays coverage is also available to large groups ofhospitals, hotel chains and even officials of national sportsleagues, according to executives of the Hoffman Estates, Ill.-basedbroker.

The Hays product can carry a $1 million premium price tag for$100 million of coverage, executives said, going on to describe anoffering--which, like the more affordable Markel policy targetingsmall risks, covers a broad range of contagious illnesses and evensalmonella outbreaks.

"January 1 changed everything--2009 has been the year ofcontagious events," said one specialty broker, Patricia Roth ofS.H. Smith & Company, who distributes the Markel policy. Shenoted that salmonella outbreaks linked to distribution of peanutbutter and pistachio nuts, and subsequent fears about H1N1, whenconsidered together, have been a "wake-up call" to potentialcoverage buyers.

Well-informed agents can seize this opportunity, Ms. Rothadvised.

Meanwhile, insurers offering another form of specialtycoverage--contingency or event cancellation insurance--seemed lessbullish about the prospect of covering events that might beimpacted by flu pandemics.

Chris Rackliffe, a contingency underwriter for Beazley inLondon, who also chairs Lloyd's Contingency Business Panel, saidwhile coverage was available at the time of a September NUinterview, underwriters were concerned about how to tackle coverageofferings going forward.

"I think most insurers are looking to exclude it" as the marketlooks to manage risk aggregations, he noted. "If they are going togive the coverage, it's going to be expensive, and there are goingto be a lot of limitations attached."

#3: CLAIMS Explosion May Push Drywall Suppliers,Installers Into E&S Market

News of the filing of class-action lawsuits over defectivedrywall could start moving at-risk suppliers, builders andcontractors into the surplus lines market, a specialty insuranceunderwriter predicted in our April article covering the specialtyinsurance implications of health problems and property damage thatwere then being linked to the installation of Chinese drywall.

Chinese drywall was imported to repair properties damaged byhurricanes in 2004 and 2005, and problems started rapidlyescalating during the months leading up to our initial article,with reports that once focused on "a rotten egg smell" beginning tofuel lawsuits that alleged property damage and health issues fromemitted gases.

"Once you say 'class action' [and] 'construction defect,' those[accounts] are guaranteed to go into the E&S marketplace," saidNan Meyer, managing director of products liability for Markel Corp.in Deerfield, Ill., referring to product liability risks of drywallsuppliers and construction liability risks for builders orcontractors that installed drywall.

Likewise, new businesses sprouting up to screen and inspecthomes for the presence of Chinese drywall and to remediate damagecould become underwriting opportunities for specialty insurers, shepredicted.

A month later, one wholesale broker specializing in theconstruction segment said he still had not seen any movements fromthe standard to the surplus lines market.

But Dean LaPierre, senior vice president and NationalConstruction Practice leader for Mercator Risk Services in Andover,Md., did report that potential liability issues related to Chinesedrywall were definitely a topic of conversation among insuranceunderwriters.

With good reason.

Various reports, including a recent fact sheet from the NationalAssociation of Insurance Commissioners, say that more than 550million pounds of Chinese drywall may have been imported andinstalled in at least 100,000 homes in 30 or more states. Homeswith the drywall have seen corrosion in electrical wiring, airconditioning components and appliances. In addition, homeownersallege health issues, including nosebleeds and respiratoryproblems.

While lawyers from Nelson Levine deLuca & Horst, a BlueBell, Pa.-based law firm quoted in our initial article, saidthird-party insurers might have coverage defenses under pollutionexclusions and faulty workmanship language, another coverage expertrecently expressed the opposite view about similar language inhomeowners policies, according to a Dec. 8 article posted onNU's Online News Service.

Whatever coverage interpretations eventually win out, expertssay the commercial liability insurance exposures will not rival thetens of billions of dollars of ultimate losses that commercialinsurers have seen from asbestos litigation.

Unlike the asbestos situation, drywall exposures don't go backfor decades, Michael Hamilton, chair of the national insurancecoverage group of Nelson Levine deLuca & Horst, toldE&S Extra.

Drywall may not be the next asbestos, but the numbers arepotentially big, according to two Towers Perrin experts, whoprepared an analysis expressly for NU.

"Based on publicly available information and experience inestimating past construction-related torts, we estimate totaleconomic losses could fall in the $15-to-$25 billion range--numbersthat rival some hurricanes but fall far short of the price tag forasbestos," wrote Towers Perrin co-authors Rachel Boles and RonaldKozlowski in an article that's since been widely referenced beyondNU.

While the estimates are a fraction of the hundreds of billionsof dollars that asbestos has drained from the economy, and whileinsurance losses will only be a portion of the $15-to-$25 billiontotal economic cost for Chinese drywall, the consultants warnedagainst complacency.

Although they cited coverage issues and self-insured retentionsthat could limit recoveries from commercial insurers, "asbestos,construction defect and even hurricane scenarios have alreadytaught private insurers how wrong initial thinking on insureddamages can be, underscoring the need for careful monitoring ofclaims experience as the drywall cases unfold," Ms. Boles and Mr.Kozlowski advised.