The scandal tearing apart the mutual fund industry has spilled over into the world of insurance by hiking up the cost of directors and officers insurance and causing ripples in life insurance circles, according to reports in the media over the weekend.

The emerging scandals in mutual fund trading and Putnam Investments? steep decline has left the insurance sector to take a good look at what it has insured.

Putnam, a unit of Marsh & McLennan, was sued for fraud and accused of a series of unethical acts in civil lawsuits by both the Securities and Exchange Commission and its own home state Massachusetts.

Since then others in the $7 trillion mutual fund trading industry have been under scrutiny, including American Funds and the well-established Fidelity Investments.

And the allegations that executives were responsible for the trading scandals are fuelling increases in corporate directors and officers? insurance prices, according to a report on Bloomberg.

And the mutual fund industry scandal has also been spilling over into the life insurance industry, according to Internet newsletter Insurance News Net.

The insurance website said that both variable annuities and variable life insurance would be affected and this had implications not only for those in the senior market but for all marketers of these products.

The mutual fund scandal started on October 28 with federal and state regulators charging that Putnam allowed some portfolio managers and certain clients to break company rules by buying and selling mutual fund shares very quickly to profit from stale prices.

Within two weeks of the scandal breaking, Putnam clients had pulled out $22 billion in managed funds.

Big names included The California Public Employees Retirement System, the biggest US pension fund, California State Teachers? Retirement System, Walmart and the Oregon Investment Council, who fired Putnam as their manager, pulling billions in assets.

Last week Putnam tried to mitigate the damage and said it would reimburse clients to settle the federal charges of improper trading.

As part of its settlement, the number five US mutual fund company agreed to pay back investors who were hurt by the short-term trading, and Putnam neither admitted nor denied any wrongdoing in the settlement, according to the SEC.

The potential surge in claims reduces the chance insurers will slow the pace of price increases on insurance for directors and officers, executives said in the Bloomberg story.

?Mutual fund D&O was always considered low-risk. It was highly sought after,? Brian Duperreault, chief executive officer of ACE Ltd. was quoted as saying in the Bloomberg story.

?All of a sudden you find out that `Wow, there?s an exposure that?s not understood.??

And the same story quoted Liberty Mutual Chief Executive Officer Edmund Kelly: ?This is going to have a huge impact. The trial bar is salivating over this one. It?ll firm up the pricing for a while.?

Bloomberg said that ACE and Liberty haven?t previously sold many policies to mutual fund companies, according to Mr. Duperreault and Mr. Kelly adding that ACE said policies today exclude liabilities stemming from market timing.

?It?s highly unlikely that anyone out there is offering that,? said Mr. Duperreault.

?We will have digested all this stuff, and now we get hit with mutual funds,? said Tony Galban, a vice president at Chubb Corp. in charge of directors and officers insurance, during a panel discussion at a Standard & Poor?s conference in New York according to Bloomberg. ?We?re getting ready to absorb some very large hits.?

Rates on directors? and officers? coverage more than doubled for large companies last year as the average cost to settle a federal securities class-action lawsuit rose to $24.3 million, 60 percent higher than the average over the previous five years, according to broker Aon Corp. and Cornerstone Research.

Aon in September forecast that average increases this year were slightly lower. Chubb, the second-largest insurer of directors and officers, said rates in the third quarter rose an average 62 percent for publicly traded companies.

The after-hours trading scandal is making this a time ?for insurers, money managers and distributors of variable insurance to take a long, hard look at their practices and procedures to ascertain if they have problems, and to institute remedial action, no matter how painful,? according to Insurance News Net.

?The life insurance industry always has prided itself on being ?squeaky clean? in its compliance with Securities and Exchange Commission requirements.

?Moreover, the issue of compliance with the ?forward-pricing? requirements of the Investment Company Act of 1940 is so fundamental to the regulatory structure of regulated investment companies that no one could contemplate that anyone could misunderstand them.?

It added: ?Everyone involved in the manufacture, sale and money management aspects of the variable insurance business should immediately investigate their operations to ensure they are compliant not only with the letter of the law but also with the spirit.

?Granted, the insurance business is competitive. But no amount of competitive advantage in obtaining sales can justify betraying the trust reposed in the industry by its customers.?