NEW YORK (Bloomberg) — American International Group Inc., Chubb Corp and other insurers may lose money on coverage of US corporate boards for the first year since at least 2002 as investors burned by sub-prime losses open more lawsuits.

"It's all coming home to roost," Mike Rice, chief executive officer of Aon Corp.'s financial services group, said in a July 17 phone interview. "If the trends continue for the last six months it would stand to reason that profitability is going to be difficult for 2008."

AIG, the world's largest insurer by assets, and Chubb have demanded price increases from banks for the third consecutive quarter to build reserves against a potential increase in claims, Rice said. Rates quadrupled on the riskiest clients in the three months ended in June, he said.

"The sub-prime event is leaving little room for error on their book of business," Rice said. Class-action lawsuits are poised to rise 33 percent this year and the size of settlements continues to advance, according to Rice.

Aon, the world's biggest insurance broker, helps clients shop for directors and officers coverage, and monitors the market. It plans to release a second-quarter report on the industry later this week.

Plaintiffs in a class-action securities suit can seek to recover a portion of their losses directly from board members and executives by arguing that the company officials were negligent or made misleading statements. Companies routinely buy D&O insurance to protect their executives from liability.

Shareholders are turning to the courts for retribution after the collapse of sub-prime mortgage market led to $447 billion in losses at the world's biggest banks and a 19-percent drop in the S&P 500 Index from its record high on October 9. More than half of the 110 federal securities class actions filed in the first half were related to sub-prime, according to Aon.

Insurers, encouraged by a drop in lawsuits as stock prices surged in 2003-2006, piled into the market for directors and officers coverage and prices declined amid increased competition. Annual D&O premium in the US is about $9 billion, according to Rice.

D&O insurance rates for banks rose an average of 13 percent in the second quarter, Rice said. Still, overall prices fell 6.1 percent in the period, the 19th consecutive year-on-year decline, as carriers competed for business with smaller, non-financial companies, according to Rice.

AIG, based in New York, is the largest US directors and officers insurer, followed by Warren, New Jersey-based Chubb, according to a ranking of 2006 premiums by Towers Perrin.