The subprime mortgage crisis could trigger more claims on Directors and Officers policies, according to one of the world's largest insurance brokers.

D&O policies protect executives and members of a company's board from liability in the event of a lawsuit against them claiming wrongdoing connected to their business, with the coverage usually paying for the cost of defending lawsuits after a deductible and a portion of any settlement.

Insurers including Bermuda's XL Capital, offer such policies and slightly different coverage known as errors and omissions (E&O).

Marsh & McLennan warned that higher interest rates and falling property prices contributing to rising delinquencies on subprime mortgages offered to less creditworthy borrowers allied with an increased relaxation of underwriting standards has resulted in bankruptcy of more than 50 mortgage lenders, the collapse of hedge funds, increased regulatory scrutiny and ratings downgrades.

The problems have also increased fears about the potentially large exposure insurance companies and pension funds may have to large securities backed by subprime mortgages, such as collateralised debt obligations (CDOs) and collaterised loan obligations (CLOs), the insurance broker added.

And they reckon a raft of litigation could arise from these issues with mortgage lenders able to file lawsuits against banks after being forced into bankruptcy when they were asked to buy back loans.

These suits could claim that the banks imposed improper margin calls and valued the lender's underlying collateral incorrectly, said Marsh.

Equally shareholders may sue subprime lenders that have gone bankrupt, claiming that the companies, their accountants, trustees and underwriters, misrepresented or omitted details when accounting for residuals, while large insurance claims on failed subprime collateral could spark lawsuits from bond insurers claiming the originators of the mortgages underwrote the loans poorly, they went on to say.

"Although the D&O and E&O insurance market has been largely stable, if there are a high number of costly claims under these insurance policies, this trend may reverse and costs may begin to rise," said Jill Sulkes, a managing director in Marsh's Financial Institutions Practice.

XL declined to comment on the subject.