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Toyota's recalls will have little impact on the credit of auto and commercial lines insurers, according to a rating organization, but a law firm said directors and officers carriers could face major exposure.

An analysis by Moody's Investors service said for auto insurers there is the chance of limited subrogation recoveries, while commercial lines carriers face the possibility of some personal injury and product liability lawsuits and product recall policy claims.

However, the Blue Bell, Pa.-based law firm of Nelson Levine deLuca and Horst took note of a proposed class-action lawsuit filed last week, Stackhouse v. Toyota Motor Corp., against the manufacturer and certain of its officers and directors, alleging that Toyota's stock was exchanged at an over-inflated price as the result of Toyota's failure to advise shareholders of the issues that ultimately led to the recalls.

The Moody's analysis, written by Pano Karambelas, said Moody's does not expect auto insurers' recall-related recoveries will be meaningful relative to earnings or capitalization. For commercial lines carriers, the report said it is difficult to figure the precise impact of exposures, but a major credit impact is not expected.

Moody's noted that the largest U.S. auto insurers are beginning case reviews of their claims databases to see whether they can recover monies through subrogation claims for accidents involving Toyota acceleration and braking problems.

Any recoveries, the firm said, are not expected to "be meaningful relative to earnings or capitalization" and will depend on the number of accident claims from prior years that can be identified as consistent with the defects and vehicle models of the present recall.

Moody's noted that State Farm--the largest U.S. auto insurer, with a market share of 20 percent--had alerted the National Highway Traffic Safety Administration in 2007 about a spike in accidents involving the recalled models.

Claims databases of the largest auto insurers, in the past, have allowed these companies to be aware of vehicle defects early on, Moody's said, mentioning that State Farm had alerted the NHTSA about problems with Firestone tires in 1998, which eventually resulted in a major recall.

Serious accidents caused by the Toyota defects have proved quite rare thus far, and a similar infrequency is likely to exist in prior-year claims reviews, said Moody's.

On Monday, the federal Transportation Department said its total of number of complaints linking Toyota defects to fatal crashes now totals 34.

And last week the Attorneys Toyota Action Consortium announced that 25 law firms throughout the nation have joined to seek class-action status for lawsuits filed against Toyota Motor Corp.

Subrogation recoveries, the Moody's report said, are likely to be immaterial for personal lines carriers because the cost to repair the defective parts is relatively inexpensive, and it found it unlikely that the recall will cause rate increases for policyholders.

Commercial lines carriers, Moody's found, are exposed on a number of coverage fronts, since Toyota, its suppliers and its dealers face potential lawsuits involving personal injury and product liability claims, a number of which seek class-action status.

Suits by consortium members claim that the vehicles of recall-affected Toyota owners lost value and the owners lost use of their cars.

The auto manufacturer, according to the rating firm, also faces mounting and substantial recall-related expenses, the impact of a production stoppage of all vehicle models affected by the recall, and damage to its reputation.

"We don't expect that commercial insurers will face meaningful liability for recall-related expenses. The market for product recall insurance is broadly dispersed among many carriers, including the London market, and capacity is limited, both in the aggregate and in terms of policy limits, which tend to be small in relation to the current recall," said Moody's.

The report found that a number of parts suppliers may benefit from recall insurance. Moody's said while the number of serious accidents related to the recall is small, "a number of open questions make it difficult to precisely dimension the insured loss impact of class-action suits related to product liability."

These were said to include a lack of disclosure regarding Toyota's use of third-party insurance, the number of claims from prior years and the duration of the auto manufacturer's prior knowledge of the safety issues.

"The recall will likely cause liability insurers to review their exposure profile to products coverage and increase rates. Warranty insurers may also raise their rates, which may lead to higher all-in vehicle costs for consumers," the report said.

Meanwhile, in their "Crisis Management Coverage Alert" written for the NLDH law firm by Michael A. Hamilton, Joseph F. Bermudez and Suzanne M. Meintzer, the trio noted that based on the scope of recent international Toyota recalls, it is likely that primary as well as excess layers of D&O insurance coverage will be impacted.

"To the extent punitive damages are at issue, there will be a question as to whether the impacted D&O policies will cover these types of damages," they added.

The attorneys remarked that "no two crisis-management and product-recall issues are identical. Indeed, some more recently issued D&O policies exclude coverage for shareholder derivative suits brought pursuant to the Securities Exchange Act of 1934--precisely the type of suit at issue in the Stackhouse action."

They concluded that "although the ultimate financial impact of the Toyota recalls upon insurance companies is yet to be determined, one thing is clear--recent international product recalls, like the Toyota recalls, are only increasing."

In related news, the Lockton brokerage put out a report--"Supply and Demand Growing for Product Recall Insurance," in which the Toyota situation is prominently mentioned.

"The interest by buyers in this insurance protection has steadily increased, with the recent Toyota recalls sparking even more discussion," wrote Ian Harrison, a Lockton executive director in London. "We have seen a steady growth in both supply of insurance capacity and expertise in this area, so buyers have attractive options."

Harrison characterized the increase in both supply and demand for recall insurance as "a very good sign of a healthy market."

The report said there are eight lead insurance markets, primarily based in London, that offer a variety of policy wordings, response consultants and different industry specializations for this exposure.

This provides a level of choice and competition not seen before for primary product recall and contamination risks, Lockton reported.

On an excess basis, capacity remains available, allowing programs of $200 million-plus to be placed for catastrophic exposures if required, according to Harrison.

Special Reports /

Toyota Recall Losses, Recoveries Assessed For Insurers

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