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Bad news for D&O insurers?

Scandal-plagued News Corp. faces lawsuits

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Bad news for D&O insurers?

NEW YORK—Allegations and litigation against News Corp. continue to mount over the media giant's phone hacking scandal, raising questions about the company's ultimate financial liability—and how big a hit its professional liability insurers will take.

According to market sources, Chubb Corp. writes New York-based News Corp.'s primary D&O coverage of $20 million or $25 million out of a total of at least $160 million to $180 million in coverage.

In addition, Chartis Inc. provides an excess layer of $15 million of coverage above Chubb's layer. Chartis also is the lead Side A coverage insurer, providing an additional $25 million of Side A cover, sources say.

To date, 10 people have been arrested in connection with the hacking scandal at Rupert Murdoch's media empire; the company's News of the World tabloid has been shut down; top officials at Scotland Yard have resigned; there has been parliamentary scrutiny; political fallout has engulfed British Prime Minister David Cameron; and there have been bribery charges, among other developments.

In addition, U.S. Attorney General Eric Holder has said an investigation is under way in response to reports that News Corp. employees hacked the phones of victims of the Sept. 11, 2001, terrorist attacks. An FBI spokesman confirmed that the allegations are being investigated.

Last week there were new charges that News of the World had hacked into the phone of a British woman whose 8-year-old daughter was murdered by a repeat sex offender in 2000.

The issue has received congressional attention as well. U.S. Sen. Frank Lautenberg, D-N.J., has asked Mr. Holder and Securities and Exchange Commission Chairman Mary L. Schapiro to investigate News Corp.'s possible violation of the Foreign Corrupt Practices Act of 1977, which prohibits bribes to foreign government officials.

The scandal already has prompted several lawsuits.

A shareholder derivative lawsuit, led by plaintiff Gregory L. Shields, was filed in federal district court in Manhattan against News Corp. and its directors and officers. Two others have been filed in Delaware's Chancery Court in Dover by the Massachusetts Laborers' Pension & Annuity Funds and by Amalgamated Bank.

In addition, shareholder Lewis Wilder is the named plaintiff in a class action complaint filed against the corporation and its directors in New York.

In the meantime, public figures including English soccer player Ashley Cole, whose phones allegedly were hacked by News Corp. employees have filed suit against the corporation, according to reports.

Any litigation filed so far is only the “tip of the iceberg,” said Scott L. Vernick, a partner with law firm Fox Rothschild L.L.P. in Philadelphia.

The alleged bribes could create liability under the FCPA in the United States and the U.K. Bribery Act, said Edward Kirk, a partner with Clyde & Co. in New York.

News Corp. outside directors have retained New York-based law firm Debevoise & Plimpton L.L.P. to represent them in connection with litigation and investigation of the company, according to the law firm.

News Corp. had no comment. Warren, N.J.-based Chubb and New York-based Chartis also did not comment.

Observers say there is likely to be an exclusion in the policy for criminal activity by directors or officers of the company that applies if there is a final adjudication, but not if there is ultimately a settlement.

David M. Gische, a partner with Troutman Sanders L.L.P. in Washington, who is not familiar with the particulars of News Corp.'s coverage, said several policy forms would provide coverage for defense costs for criminal cases, at least to the extent that they lead to an indictment. Mr. Gische said “less likely, but possible” is the availability of defense costs if “it were simply a criminal investigation,” he said.

The D&O insurance may be insufficient to cover all the costs, said Michael Chester, a principal with law firm Boundas, Skarzynski, Walsh & Black L.L.C. in New York. Pointing to News Corp.'s outside directors retaining attorneys at Debevoise & Plimpton, Mr. Chester said defense costs alone could be rather large.

Allegations in the securities class actions that information was misrepresented to the marketplace “could be a source of tremendous exposure,” said Mr. Chester.

“It's going to cost hundreds of millions of dollars” to emerge from the situation, but the company will survive, said Richard J. Bortnick, a West Conshohocken, Pa.-based member of law firm Cozen O'Connor.

News Corp. is “too big” to fail, “and unless you can find a direct link to the people at the top, it'll be hard to blame them for things they can justifiably, or plausibly, say they had no knowledge of or involvement in,” even if they created the atmosphere that led to the situation, Mr. Bortnick said.