‘Litigation explosion’ for bankers may have ended, Aon says

The ‘litigation explosion” that forced U.S. financial firms into courtrooms last year to defend money-losing investments and bad loans may have ended with the recovery of equity markets, Aon Corp. said.

U.S. securities class action suits in the first nine months of 2009 fell 20 percent from the same period in 2008 to 130, with 49 claims related to the credit crisis, the Chicago-based insurance broker said Friday in a statement. The lawsuits climbed to a four-year high in 2008, with 210 cases, according to Stanford Law School and Cornerstone Research.

“The decreasing number of claims may signal an end to the litigation explosion for financial services firms,” Mike Rice, head of Chicago-based Aon’s Financial Services Group, said in the statement.

Insurers that sell coverage for lawsuit costs tied to management errors or negligence, a group including American International Group, Chubb Corp and XL Capital, may curb price increases or lower rates next year, Aon said. Prices paid by financial firms for the insurance gained 3.2 percent in the three months ended Sept. 30, after climbing at least 10 percent in each of the four prior quarters, Aon said.

The Standard & Poor’s 500 Index has advanced about 22 percent in 2009 after dropping 38 percent in 2008. Credit markets have improved, with corporate bonds returning about 27 percent this year, compared with a negative 11 percent in 2008, according to Merrill Lynch & Co. data.

“In a bear market, where prices are cratering, that’s when you get the lawsuits,” said Bill Pollock, chairman of National Insurance Partners, an Austin, Texas-based risk management consulting firm, in an interview at Bloomberg’s headquarters in New York. “When you look back at times when the markets are doing well, there are no damages.”

New directors and officers claims at Chubb dropped 5 percent in the third quarter, Chief Operating Officer John Degnan said in October.

“The predicted wave of directors and officers litigation does not seem to be materializing yet,” Degnan said in a conference call in July. “We are now about two years into this developing claims scenario in an arena which has been traditionally characterized by a rush to the courthouse on the part of plaintiffs’ lawyers.”

Investors have little chance of extracting damage awards from executives and board members at firms that lost money betting on subprime mortgages, Michael McGavick, XL chief executive officer, said at a conference last week.

“It’s very hard to pick out the management team that did something wrong to the level that the law requires,” McGavick said at a conference last week. “Being collectively stupid is not a basis for a lawsuit.”