The negative effect of the financial crisis on insurers writing errors and omissions coverage and liability cover for directors and officers will be dampened by several favorable factors, according to a new report from Moody's Investors Service.

In its analysis in “D&O/E&O in the Cross-hairs of the Financial Crisis,” New York-based Moody's said that even though the financial crisis has hit D&O and E&O underwriters on several fronts, the ratings agency has taken almost no ratings actions on such insurers because of solid overall financial profiles and other factors.

Hardened rates for some accounts and the slow nature of professional liability claims—securities and other kinds of litigation often takes years to resolve—has muted the impact on insurers' financial results, Moody's said.

“Slower loss development presents challenges establishing adequate price and loss reserves,” Moody's said in the report. “But such development also tends to prevent immediate capital shock because losses and/or defense costs often aren't paid out for several years, and reserves can be managed accordingly.”

Moody's also said underwriters have been helped by several recent defendant-friendly court decisions and by the pervasiveness and global nature of the crisis, which makes it difficult for plaintiffs to establish wrongdoing by a particular company or its executives.

In addition, the aggregate, annual limits in D&O policies mean that the total impact on insurers could be less than anticipated, Moody's said. Although research groups have noted high levels of securities litigation in recent years, those figures include multiple lawsuits against the same company, and any one company would be indemnified by D&O insurers only up to the aggregate limit.

In some cases, legal costs alone will exhaust coverage limits, Moody's said. For loss years 2007 through 2009, 90% of insured losses will be defense costs, the report said, citing Advisen Ltd.

Because of aggregate coverage limits, Moody's said the number of insured defendants named in suits is a more important indicator of insured losses than the number of securities class action filings.

About 20% of losses from securities class action settlements will be insured, according to an Advisen estimate.

Judges have granted about 70% of the more than 50 motions to dismiss heard in securities class action cases since 2007, Moody's said.

The report also noted research indicating that insurers tend to pay less in cases with a parallel action by the U.S. Securities and Exchange Commission. That is potentially because the SEC action increases the likelihood of management being found culpable, which could trigger a coverage exclusion, Moody's said.

Moody's said E&O losses are more widely distributed among policyholders but more concentrated among insurers.