Insurance policies known as ?Bermuda wraparounds? may be the next target of US prosecutors and regulators.

Business news website TheStreet.com reported yesterday that the policies are ?designed to solve a problem for US companies in the 17 states where it?s illegal to sell insurance against punitive damages?.

Punitive damages are awarded by US juries against companies and individuals to punish them for wrongdoing in civil cases. The awards are given over and above measurable damages to plaintiffs and can in the billions of dollars.

TheStreet.com story said some states, including California, New York, Florida and Pennsylvania ban companies from buying insurance for punitive damages ?to prevent blank-cheque indemnification for wrongdoers who might otherwise think twice if faced with a stiff penalty?.

?Bermuda wraparounds are a creative way for corporations to thwart the will of both legislatures and juries via rules that allow them to buy policies from the Bermuda subsidiaries of most major US insurance companies,? the story said.

?These offshore punitive-damages policies, which are enforceable under Bermuda law and can be sold only by Bermuda-based brokers, fill a potentially big gap in coverage for many companies.?

But TheStreet.com said that critics of the policies are now calling on regulators to examine them in the wake of other probes.

Insurers in recent months have come under fire from New York State Attorney General Eliot Spitzer and the Securities and Exchange Commission over alleged bid-rigging between insurers and brokers and over finite reinsurance policies which are allegedly used to ?smooth? quarterly earnings results without the knowledge of investors.

?I?ve been screaming about this for years,? Eugene Anderson, a partner with Anderson Kill & Olick, a New York law firm that specialises in insurance litigation, told TheStreetcom. ?This whole thing is just a way to make something look like something it?s not.?

TheStreet.com said Bermuda has became a haven for so many insurers because its ?liberal regulations permit insurers to underwrite a broad swath of policies that are either prohibited or limited in the US?.

A number of Bermuda-based subsidiaries of big insurers such as ACEand Chubb openly market Bermuda wraparounds on their Web sites.

The Bermuda insurance brokering arm of HSBC, the big British bank, touts the wraparound policies as a way to avoid turning a ?bad suit into a catastrophic one?.

Theodore Boutrous, an attorney with Gibson Dunn & Crutcher in Los Angeles, said excessive punitive damages are harmful no matter who is footing the bill.

?What I look at is the costs imposed on our legal system,? Mr. Boutrous told TheStreet.com.

?If insurance is available to cover punitive damages, that doesn?t mean reform isn?t needed to fix the system. Insurance costs money, and it imposes costs on the company.?