INSURANCE companies are cutting the amount of cover they are prepared to offer big drug manufacturers against litigation amid fears of a surge in new lawsuits from patients.

Analysts say that underwriting capacity — the maximum amount that an insurer is willing to lose to a single client — has plunged by $150 million (£80 million) in the past two weeks to $600 million. If insurers continue to reign back their cover at this rate, most big drug companies will effectively be left uninsurable by the end of the decade.

Already most of the larger companies have been forced to share the risks of legal action as a pre-condition to getting outside cover. However, the reluctance of insurers to foot legal bills could leave drug makers facing losses of tens of billions of dollars.

The latest crisis was compounded when AIG, one of the biggest players in drug liability cover, cut its underwriting capacity in half to $25 million. The US insurance giant also ordered the Allied World Assurance Company, its Bermuda-based offshoot, to reduce capacity by a similar amount. It is understood that risk assessors are reviewing the limits at a third company in the group.

David Thomas, an expert in liability cover at Willis, the London insurance broker, said last night that the situation was unlikely to improve. “The perception among pharmaceutical companies is that insurers are eliminating cover at the first sign of a problem — real or imagined,” he said. He also said that insurers were imposing tough new conditions.

Swiss Re, another big player in the market, recently told potential clients that it would write liability cover only if companies agreed to onerous reporting requirements. It now insists that companies notify it within 60 days of any material change to the regulatory position of any drug in its portfolio. “The concern is that the consequence will be the exclusion from cover of significant product lines where there is no evidence of a major problem,” Mr Thomas said.

It is understood that policies up for renewal are already being amended to exclude Cox-2 inhibitors, the class of drug to which Vioxx, the anti-inflammatory medicine, belongs. Merck withdrew that drug last autumn after it was linked to more than 30,000 heart attacks.

Analysts estimate that up to 30 drugs are now on the exclusion list, with more to follow.

The cost of insurance has risen fivefold in the past three years as the number of class-action lawsuits in the US has soared.

One reinsurance company estimated that its losses in the sector were 200 times higher than the level of premiums that it had received over the past decade. The crisis is expected to deepen this year in the US, where Merck is fighting several class actions.

Analysts estimate that the company faces a potential litigation bill of $17 billion or more. Last month Merck said that its insurance cover ran to $630 million.