The $7 trillion mutual fund business has come under scrutiny in recent months, by both New York Attorney General Eliot Spitzer and the Securities and Exchange Commission. SEC action to strengthen its oversight of the mutual fund industry has led to new rules to eliminate abusive market practices.

Mr. Kim told National Underwriter that the impetus for increases started in September 2003 with the investigation of Canary Capital Partners, an offshore hedge fund which allegedly had struck illegal agreements with mutual funds to carry out favorable trading at the expense of ordinary investors. (Last September, Attorney General Spitzer's office announced it had reached a $40 million settlement with Canary Capital Partners. The firm has also been cooperating in a wider investigation into other misconduct by mutual fund companies.)

"It all started with Canary Capital. And now, you not only have the other investigations and the potential costs associated with those, but you also have individual plaintiff actions--shareholder suits filed against the fund, fund board and the fund advisor," Mr. Kim observed. "And then you also have corporate actions filed against any publicly traded corporate advisor."

He also commented that from these developments the insurance industry is seeing a spike in liability and loss payments, and thus has been reacting by adjusting premium structure significantly. "This increase in rates is largely due to current regulatory investigations," he noted, adding that D&O and E&O rates for mutual fund companies have been increasing significantly over the past two-to-three months.

"Although it's hard to say how much they've been increasing exactly, I would say in an order of magnitude of 500 percent increase would not be unusual," Mr. Kim related.

Furthermore, he said, the rate revision process is at a very early stage and it's likely that more rate hikes will follow. "As we know, insurance programs renew every 12 months, so the recent rate increases reflect only two-to-three months' worth of clients renewed so far," Mr. Kim said. "So I think clients have to anticipate that even if they are not currently embroiled in all the current investigations, their premiums would increase."

Currently, major players in the mutual-fund product line are The Chubb Corporation in Warren, N.J.; American International Group Inc. in New York; The Hartford Financial Services Group Inc., based in Hartford, Conn.; Zurich American Insurance Company based in Schaumburg, Ill.; and the New York-based Gulf Insurance Company. "And certainly, there is also ICI Mutual, which is the industry captive. All these have had to react to current events," Mr. Kim observed.

Shelia January, senior vice president at Zurich North America Specialties, one of the major players in this arena, agreed that many mutual fund companies have seen jumps in their D&O and E&O rates in the past few months.

She noted that relatively moderate rate increases have been around for the past three years, since early 2001, for D&O and E&O coverages for mutual fund organizations, but it wasn't until last September--when the Canary Capital case surfaced--that rates began to shoot up dramatically.

"The lowest increases that I have seen in the last couple of months have been in the 10-to-15 percent area, and the highest ones--for some fund groups that have become household names in newspapers--have been in excess of 100 percent," Ms. January observed.

The amount of D&O and E&O rate hikes for mutual fund companies also depends on a couple of factors. "It depends on whether they are one of the fund groups that have been named and were involved in these activities, or if they are one of the fund groups that have been part of the inquiries and the information gathering by the SEC and state securities commissioners," Ms. January commented.

She noted, however, there are some fund groups that have not had any problems at all, "so this creates a real range in rate increases."

The rate hikes, Ms. January observed, are reflective of claims that have been reported and settlements made. But she also noted that with regard to mutual fund groups' settlements with the SEC and others, like the New York attorney general's office, it is not yet clear how much of those could possibly be covered by insurance.

"And then there are also a lot of civil cases being filed. I think further rate increases will depend very much on how this litigation and inquiries develop," she said.