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Addleshaw Goddard’s insurance practice is linking up with its newly created class actions group as the firm repositions itself in expectation of an economic downturn.
The firm has made the move as it expects to see an increase in insurance group litigation orders in the UK as a result of the US mortgage crisis sparking the transatlantic and global credit crunch.
Richard Leedham, the firm’s head of insurance and reinsurance, said the current economic climate is a totally new phenomenon and has left the insurance market needing advice on what the repercussions for the industry will be.
“There’s an expectation that insurers with significant portfolios of D&O [directors and officers] policies will be hit hard,” explained Leedham.
“Shareholder class actions in the US, for instance, are already being started and there’s likely to be a sub-prime ripple effect over to the UK.”
How big the ripple effect will be in the UK depends on how companies have managed their sub-prime mortgages (low-rate loans on which borrowers could not meet repayments).
“The market needs to know whether there was any negligence, fraud or recklessness in the way these sub-prime mortgages were handed out before the market will know where it stands,” said Leedham.
“Overall, with sub-prime debts having been spread across so many financial institutions, the market knows that there’ll be some impact on the industry.”
This has already been seen, with Bermuda-based insurer XL Capital, which has a large D&O portfolio, expecting a worst-case scenario of having to pay $400m (£199m) of the overall estimated loss of $3bn (£1.49bn) to small and midcap companies due to loose lending practices to high-risk or sub-prime borrowers.