shareholder lawyers salivating.

These companies might dispose of looming litigation threats by following the

example of Caremark Rx, a Birmingham, Ala.-based pharmacy benefit management company that cancelled a proposed merger with PhyCor in

1998. Then known as MedPartners, Caremark had to record pre-tax charges to earnings of about $100 million for break-up fees and other

penalties, resulting in restated earnings that were substantially below analysts' estimates.

The company's stock price plunged, and shareholder lawsuits quickly

followed. This frustrated a new management team that wanted to rev up a turnaround plan involving a recapitalization. "We could not afford to have

our time consumed with this litigation," recalls Edward Hardin, Jr., executive vice president and general counsel at Caremark.

So Caremark got rid of the litigation-by insuring it. It purchased what is

known as loss mitigation insurance from American International Group, the New York-based underwriter that pioneered the line in 1996.

"We bought the insurance to remove the cloud of uncertainty that was

impeding our ability to focus on restructuring," says Hardin. "We put the problem behind us at what we believe was a reasonable cost."

Neither he nor AIG would elaborate on the premium paid or on the value of

the settlements that AIG negotiated. Insurers of loss mitigation insist on confidentiality agreements to shield knowledge of their deep-pocketed

participation from plaintiffs' attorneys.

Gary Buchanan, a vice president at New York-based insurance broker

Marsh who formerly worked on AIG's loss mitigation team, estimates that 215 policies have been written since the first one was completed in 1996.

As more companies become snowed under by litigation, the numbers are rapidly increasing. Buchanan says he has 35 submissions for loss mitigation

policies on his desk, though not all will be bound.

Telling It All

"Many companies can't get the insurance because the level of information

they are willing to provide the underwriter is inadequate," says Buchanan. Moreover, only a handful of insurers underwrite the expensive and highly

risky policies.

AIG has the biggest market share, followed by Axcelera Specialty (which

underwrites on behalf of Swiss Reinsurance), Lloyds of London, The Travelers, Gulf Insurance (owned by Citibank) and CNA Insurance

(through Ambridge Partners, a managing underwriting agency).

AIG and Axcelera typically play in the first-dollar loss position, providing a

large sum of risk-transfer capital, while Ambridge prefers an excess loss position. "Our approach is to provide catastrophic coverage above the limits

provided by another insurer or above a very large self-insured retention taken by the insured," says Jesseman Pryor, a principal at New York-based

Ambridge.

Premiums are understandably high. Insurers in the game have full-time

attorneys and underwriters who specialize in determining litigation outcomes and settlements, and the companies typically tack on about 20% above the

anticipated settlement for their troubles.

A typical candidate for the insurance is a company about to proceed with a

merger, divestiture or significant financing. "A merger partner doesn't want

to end up with litigation that costs more than it expects," says Jack

Flug, a managing director at Marsh. "Similarly, a bank will take a dim view of a

litigation exposure on a company's balance sheet by increasing the basis points for revolving credit or new credit. The insurance makes these

problems disappear."

Buchanan says policies have been written in the face of securities

class-actions, copyright and patent infringement claims, employment practices liabilities and environmental liability issues. It can be underwritten

to cover cases on appeal as well. Loss mitigation insurance is "actually one of the safer bets" for insurers because they are analyzing "a known

situation that exists right now," he says. "Underwriters can examine it, measure it and tug at it."

No Panacea

Samsonite, the Denver-based luggage maker, found itself flooded with

shareholder litigation in early 1999 after failing to complete a widely anticipated

sale to another company. Seeking to recapitalize itself, it bought loss mitigation insurance from AIG and soon raised $55 million in new

equity that helped it retire debt.

Michael Adler, a vice president and claims analyst in the global financial

and executive risk practice of insurance broker Willis, recalls a client that used the insurance like a backdated contract when its shares first soared

and then collapsed after it unveiled a new process for manufacturing silicon chip coatings that ultimately failed. "Shareholders argued that the company

represented the machine as a hot new thing, yet failed to disclose it had problems," says Adler. The company had inadequate coverage limits on its

directors-and-officers liability insurance, he notes.

At the urging of its planned merger partner, the company picked up a loss

mitigation policy in the face of a class-action lawsuit, and the merger went through.

But loss mitigation insurance doesn't always save the day. eBT

International, a Providence, R.I.-based Web content company, was forced to restate its fourth-quarter 1998 earnings, sparking shareholder lawsuits

just as the company was restructuring and negotiating a merger. eBT secured a loss

mitigation policy from AIG for a $14 million premium (on top of a $1 million deductible), settled the suits last year for a reported $12

million, and recapitalized. However, the company went into liquidation this past May.

Chris Burns, eBT's chief financial officer, says he has no regrets. "The

insurance allowed us to regain the confidence of shareholders, investors and the financial community at large," at least in the short term, he says.

Not all deals are profitable for insurers, despite their underwriting rigor.

Marsh's Flug recalls a complicated loss mitigation policy that cost the insurer double the premium it had collected. "It was an adverse verdict that

was more adverse than anticipated," he says. "There is definitely risk here,

and the dollars involved are big."

Nevertheless, the business is growing. Marsh recently brokered a loss

mitigation policy for a client "in an M&A situation that required coverage

limits in excess of several hundred million dollars," says Flug. It could be the

largest policy on record, but it may not be enoug to cover the cost of a lawsuit. "You just never know how judges and juries will react," he says.

Lots of Paperwork

Needless to say, insurers do a great deal of due diligence before writing loss

mitigation policies. Here are excerpts from a Marsh preliminary questionnaire given to potential clients.

o Name all plaintiffs, defendants, third-party defendants and other parties to

the litigation.

o Name the court in which the litigation is pending, including docket numbers

as well as the date on which proceedings were instituted. In the event of consolidated or amended pleadings, please specify the date the earliest

complaint was filed or served.

o List names and addresses of all counsel representing any party to the

litigation. If lead counsel has been appointed to represent plaintiffs, indicate

lead counsel. Detail all defense-related expenses incurred to date and all such anticipated future expenses.

o List the history and current status of the litigation.

o Submit a copy of complaints, amended complaints, motions, discovery

requests (including notices of deposition) and answers or responses to complaints, interrogatories, discovery requests, or motions.

o Have any insurance carriers been placed on notice of the litigation or any

aspect of the subject matter thereof? (If "yes," provide copies of all correspondence relating to such notice by, or on behalf of, the applicant, all

affiliated persons and any such carrier).

o Assuming you are found 100% liable, what is the best estimate value from

a pure quantum standpoint? (Do not include prejudgment interest or costs.)

oHave you made or received a settlement offer? If "yes," describe.