London insurers face the prospect of claims worth hundreds of millions of pounds arising from the sub-prime mortgages debacle in the United States, as class-action lawsuits begin to pour into American courts.

At least ten claims have been lodged against mortgage providers in the US, claiming that the banks hid from shareholders the true risks posed by the home loans that they had sold to people with bad credit histories. Ratings agencies and investment banks face litigation from investors who bought asset-backed securities based on the bad loans, and lawyers and accountants who advised on the creation and purchase of the securities are in the firing line as well.

The companies being hit by multimillion-dollar legal actions are expected to claim on their errors and omissions (E&O) and directors’ and officers’ (D&O) insurance to cover the cost of their defence.

An underwriter for a leading insurer said: “There’s D&O and E&O exposure all over the place. Wherever someone had their fingers in the pie, someone’s going to get sued.”

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Jonathan Davies, a partner at Reynolds Porter Chamberlain, the law firm, said: “While much of the legal action that will result in insurance claims is likely to be launched in the US, it’s likely to be the London insurance market that has to pick up the lion’s share of the bill.”

Marsh, the world’s biggest insurance broker, said that already it had received notifications of claims from its clients, some of whom had bought cover in London. Siobhan O’Brien, a senior vice-president at Marsh’s financial institutions practice, said that insurers would not know the full extent of their losses until American financial regulators had finished their investigations and stock market fluctuations had calmed.

“When it starts levelling out, that’s when we’ll really see the [law] suits coming in,” Ms O’Brien said. “The tentacles of this are very far-reaching.”

E&O covers companies against claims arising from errors in their professional services. The insurance could be used by funds that bought securitised sub-prime mortgages or by lawyers who advised clients to buy the securities. D&O covers executives against claims that they have mismanaged a company. The cover could be used by the managers of retail banks that sold sub-prime mortgages to bad debtors. E&O and D&O insurance covers legal costs and damages payments but not penalties levied by regulators.

Countrywide Financial, America’s biggest mortgage lender, was hit by a securities class-action lawsuit in California on August 15. It alleges that the bank and “certain of its officers and directors violated federal securities laws by making false and misleading statements regarding the changing quality of the company’s mortgage loan portfolio”. On Friday Countrywide was forced to borrow $11.5 billion (£5.8 billion) from other banks to ensure that it could continue in business.

An underwriter said that London insurers were more likely to receive E&O claims. “D&O will stay mainly in the US,” he said.

Ms O’Brien said that the cost of cover had fallen by 10 per cent to 15 per cent in the first half, but gave warning that companies renewing their policies should expect close scrutiny of their involvement in the sub-prime sector.

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