And while the Lloyd's Emerging Risks team warned in a report published back in October 2008 that a pandemic was inevitable in the near future based on historic recurrence rates of 30-to-50 years, the possibility of a worldwide disease outbreak actually occurring in 2009 was on few radar screens.

The World Health Organization raised the pandemic alert on H1N1 to its highest level--Level 6, denoting a full-fledged pandemic--in June, soon after our editors started investigating possible sources of specialty insurance coverage for disease outbreaks.

One specialty broker--Patricia Roth of S.H. Smith & Company--dubbed 2009 "the year of the contagion" in our May report on flu outbreak coverage.

In January, an insurance company executive--Peter Eastwood, the president and chief executive of Chartis' Lexington Insurance--alternatively named this the "year of the underwriter."

Mr. Eastwood, who had just taken his position as head of the largest U.S. E&S insurer in December 2008, was one of more than a dozen executives to share their predictions on the top stories likely to play out in 2009, and how their firms would deal with the challenges ahead.

Mr. Eastwood, explaining how his company will deal with the most frequently cited challenge--the economic downturn--said that "we must stay focused on what is within our control; 2009 will be the year of the underwriter."

THEN AND NOW

As we reported in the lead article of our February 2009 edition, Mr. Eastwood and other insurance and broker executives surveyed in January listed the following topics as potential top stories of 2009:

#1: It's The Economy, Stupid

#2: Claims Fallout From The Credit/ Subprime Crisis, Madoff-Type Schemes

#3: A Harder Market Ahead

#4: Federal Regulation Comes To Insurance

#5: Economic Stimulus Boosts E&S Insurance Demand

#6: Insurers Work To Preserve Capital

#7: Standard Carriers Retrench From E&S Business

How did the year actually play out?

Below, we provide the complete list of top-10 stories impacting the surplus lines and specialty insurance markets in 2009, chosen by E&S/Specialty Lines Extra Editor Susanne Sclafane.

#1: D&O/E&O Insurers Brace For Madoff Claims, Credit Crisis Impact

#2: Yes, Virginia, We Will Cover Pandemic Exposures

#3: Explosion Of Claims May Push Drywall Suppliers, Installers Into E&S Market

#4: It's The Economy, Stupid

#5: The Hard Market Minute

#6: A New Administration, A New Tort Environment

#7: Old Players Reinvent Themselves

#8: Is It Hotter In Here? Global Warming Litigation Brings Opportunities

#9: Is This National Underwriter Or Entertainment Tonight?

#10: Brokers, Insurers Describe The Most Unusual Risks To Land In The E&S Market

Not surprisingly, two topics are common to both lists--the impacts of a recessionary economy on the specialty market generally and ramification of the credit crisis and Madoff-like scandals on management liability insurers.

A digest of some of the news reported in our 2009 e-newsletters on the unexpected top-three topics follows. In a separate article, we digest the remaining seven topics.

#1: D&O/E&O Insurers Brace For Madoff Claims, Credit Crisis Impact

Leading off the year, we reported on Aon Benfield's analysis of the cost of directors and officers and professional liability (errors and omissions) insurance claims relating to the Madoff scheme--an analysis that produced a $1.8 billion best estimate.

After examining possible exposure to four categories of potential defendants which could be protected by D&O and E&O insurance, the Aon Benfield report noted that payouts by insurers of one of those defendants--Bernard Madoff Investment Securities--could be limited by policy language excluding fraudulent acts.

More recently, in one of our most widely read articles of the year, we delivered the scoop on exactly what kind of professional liability coverage Mr. Madoff purchased--none, according to Chris Cavallaro, a wholesale broker for ARC Excess and Surplus in Garden City, N.Y.

Bernard Madoff could not be convinced to buy professional liability insurance for his investment services, but legal requirements did force him to purchase a fidelity bond, the specialty broker revealed at an industry conference in November.

But that hardly lets professional liability insurers off the hook, according to the Benfield analysis, which listed potential lawsuit targets as:

o Asset management firms that ran so-called "feeder funds" (funds that directed investor capital to Mr. Madoff or his firm).

o Foreign banks and insurers that placed investors' assets and their own assets under Mr. Madoff's management.

o Charitable organizations and public institutions, whose boards may be sued by disgruntled donors for performing insufficient due diligence on investments with Mr. Madoff.

Our early editions reported statements by plaintiffs' lawyers, who said they would also pursue accountants that audited hedge funds with Madoff assets.

And this month, we report on speculation by a defense lawyer who sees the potential for ERISA-based lawsuits (alleging violations of the Employee Retirement Income Security Act) and corresponding implications for future fiduciary liability insurers.

Management and professional liability insurers had more to worry about than the Madoff affair, as evidenced by our frequent reports on the credit crisis fallout and claims emerging from bankruptcies.

Research firms counting securities class-action lawsuit filings for 2008 came up with differing tallies in December 2008 and January 2009, but they generally delivered the same type of bad news for D&O insurers who cover defendants in such suits--with all showing double-digit jumps over 2007 and all highlighting large financial firms hit by the credit crisis as a litigation hot spot.

No matter who was doing the counting, researchers cited in our January edition said 40 percent of securities class actions targeted the financial sector in 2008, prompting one expert--Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse--to forecast a necessary decline in 2009, simply because the supply of new financial firm defendants would dry up.

Meanwhile, plaintiffs' lawyers mapped out strategies to deal with the possibility that an ailing stock market would dry up cases for the foreseeable future, we reported later in the year.

For there to be litigation potential for new stock-drop cases over the next two years, "there needs to be a major re-inflation of the stock market," said Samuel Rudman of Coughlin Stoia Geller Rudman Robbins in New York, according to an article published in March. With re-inflation unlikely, he said the securities plaintiffs' bar would be looking back at 2007 stock movements to keep their practices going.

More recent reports revealed that both trends are playing out.

In July, we reported that Kevin LaCroix, author of the D&O Diary blog, had already unearthed a half-dozen lawsuits with class periods dating back to 2007. And last month, we reported statistics released by New York-based Advisen, showing all types of securities suits (including class actions) related to the Madoff Ponzi scheme and the credit crisis trailed off in third-quarter 2009.

According to Advisen, financial firms still led the pack of defendants, representing one-third of the cases filed, but the figure represented a steady decline from a first-quarter Advisen figure of 56 percent, prompting NU to question whether the trend means lower insurance rates for financial institution (FI) firms in the near future.

So far, there are still two distinct pricing patterns in the D&O market--with non-FI firms enjoying soft-market pricing, while FI firms face higher rates. But price hikes for some FI buyers that were as high as 30-to-100 percent last year are disappearing, we reported in November.

Last week, Chicago-based Aon reported that the average FI price change fell to an increase of 3.2 percent for third-quarter 2009 compared to third-quarter 2008--the first single-digit jump in more than a year. (Aon's full study is available at http://bit.ly/5FZcif)

#2: Yes, Virginia, We Will Cover Pandemic Exposures

While NU's print magazine and online news service articles were reporting risk management strategies for handling an H1N1 outbreak, while noting a general lack of traditional insurance coverage for the financial consequences of pandemics, NU's E&S/Specialty Lines Extra e-newsletter provided details of three specialty insurance offerings specifically designed to cover business income impacts of diseases and other contagions.

In the May edition, we featured Outbreak Extra Expense coverage (a standalone policy offered by Deerfield, Ill.-based Markel Corp.) and Pandemic Rx (offered by Boston-based Lexington Insurance).

In June, we featured still another offering--this one for very large insureds--designed by a broker, Hays Companies of Illinois. Initially tailored specifically for a consortium of colleges in 2008, the Hays coverage is also available to large groups of hospitals, hotel chains and even officials of national sports leagues, according to executives of the Hoffman Estates, Ill.-based broker.

The Hays product can carry a $1 million premium price tag for $100 million of coverage, executives said, going on to describe an offering--which, like the more affordable Markel policy targeting small risks, covers a broad range of contagious illnesses and even salmonella outbreaks.

"January 1 changed everything--2009 has been the year of contagious events," said one specialty broker, Patricia Roth of S.H. Smith & Company, who distributes the Markel policy. She noted that salmonella outbreaks linked to distribution of peanut butter and pistachio nuts, and subsequent fears about H1N1, when considered together, have been a "wake-up call" to potential coverage buyers.

Well-informed agents can seize this opportunity, Ms. Roth advised.

Meanwhile, insurers offering another form of specialty coverage--contingency or event cancellation insurance--seemed less bullish about the prospect of covering events that might be impacted by flu pandemics.

Chris Rackliffe, a contingency underwriter for Beazley in London, who also chairs Lloyd's Contingency Business Panel, said while coverage was available at the time of a September NU interview, underwriters were concerned about how to tackle coverage offerings going forward.

"I think most insurers are looking to exclude it" as the market looks to manage risk aggregations, he noted. "If they are going to give the coverage, it's going to be expensive, and there are going to be a lot of limitations attached."

#3: CLAIMS Explosion May Push Drywall Suppliers, Installers Into E&S Market

News of the filing of class-action lawsuits over defective drywall could start moving at-risk suppliers, builders and contractors into the surplus lines market, a specialty insurance underwriter predicted in our April article covering the specialty insurance implications of health problems and property damage that were then being linked to the installation of Chinese drywall.

Chinese drywall was imported to repair properties damaged by hurricanes in 2004 and 2005, and problems started rapidly escalating during the months leading up to our initial article, with reports that once focused on "a rotten egg smell" beginning to fuel lawsuits that alleged property damage and health issues from emitted gases.

"Once you say 'class action' [and] 'construction defect,' those [accounts] are guaranteed to go into the E&S marketplace," said Nan Meyer, managing director of products liability for Markel Corp. in Deerfield, Ill., referring to product liability risks of drywall suppliers and construction liability risks for builders or contractors that installed drywall.

Likewise, new businesses sprouting up to screen and inspect homes for the presence of Chinese drywall and to remediate damage could become underwriting opportunities for specialty insurers, she predicted.

A month later, one wholesale broker specializing in the construction segment said he still had not seen any movements from the standard to the surplus lines market.

But Dean LaPierre, senior vice president and National Construction Practice leader for Mercator Risk Services in Andover, Md., did report that potential liability issues related to Chinese drywall were definitely a topic of conversation among insurance underwriters.

With good reason.

Various reports, including a recent fact sheet from the National Association of Insurance Commissioners, say that more than 550 million pounds of Chinese drywall may have been imported and installed in at least 100,000 homes in 30 or more states. Homes with the drywall have seen corrosion in electrical wiring, air conditioning components and appliances. In addition, homeowners allege health issues, including nosebleeds and respiratory problems.

While lawyers from Nelson Levine deLuca & Horst, a Blue Bell, Pa.-based law firm quoted in our initial article, said third-party insurers might have coverage defenses under pollution exclusions and faulty workmanship language, another coverage expert recently expressed the opposite view about similar language in homeowners policies, according to a Dec. 8 article posted on NU's Online News Service.

Whatever coverage interpretations eventually win out, experts say the commercial liability insurance exposures will not rival the tens of billions of dollars of ultimate losses that commercial insurers have seen from asbestos litigation.

Unlike the asbestos situation, drywall exposures don't go back for decades, Michael Hamilton, chair of the national insurance coverage group of Nelson Levine deLuca & Horst, told E&S Extra.

Drywall may not be the next asbestos, but the numbers are potentially big, according to two Towers Perrin experts, who prepared an analysis expressly for NU.

"Based on publicly available information and experience in estimating past construction-related torts, we estimate total economic losses could fall in the $15-to-$25 billion range--numbers that rival some hurricanes but fall far short of the price tag for asbestos," wrote Towers Perrin co-authors Rachel Boles and Ronald Kozlowski in an article that's since been widely referenced beyond NU.

While the estimates are a fraction of the hundreds of billions of dollars that asbestos has drained from the economy, and while insurance losses will only be a portion of the $15-to-$25 billion total economic cost for Chinese drywall, the consultants warned against complacency.

Although they cited coverage issues and self-insured retentions that could limit recoveries from commercial insurers, "asbestos, construction defect and even hurricane scenarios have already taught private insurers how wrong initial thinking on insured damages can be, underscoring the need for careful monitoring of claims experience as the drywall cases unfold," Ms. Boles and Mr. Kozlowski advised.