As a result of those costs, which insurers fear could accumulate for the next few years, already rising insurance rates stand to go even higher for all companies.

Directors and officers (D&O) insurance pays a wide range of defense costs for executives who get sued as a result of business decisions, from the initial inquiries all the way through the last stages of trial or settlement.

The sums involved are substantial. Consultants Towers Watson reported that in 2011, companies with more than $10 billion in assets on average carried $187.5 million in insurance coverage.

More than a dozen banks are under investigation by authorities in Europe, Japan and the United States over the suspected rigging of the London interbank offered rate (Libor), a key interest rate used to price trillions of dollars worth of financial products.

Last month, Barclays (>> Barclays PLC) paid a $453 million fine after admitting that its traders attempted to manipulate Libor, which is used to price loans and mortgages. While the traders at the center of the probe would be unlikely to be senior enough to have D&O insurance, their bosses would, and claims are already rolling in.

According to one brokerage industry source, big claims could push costs up for everyone. Rates for coverage were already rising this year -- at least 5 percent over last year, brokers say - because insurers were squeezed after years of price weakness.

"Any industry is nervous when it doesn't know what the parameters are. We're going to be spending the next three-to-five years getting our heads around how much this is going to cost," the source said.

Already, bankers looking to buy coverage are facing intense scrutiny from insurers. Among the biggest names in the market are companies like AIG (>> American International Group, Inc.), XL (>> XL Group plc) and Chubb (>> The Chubb Corporation).

"If someone's applying for coverage now, the underwriters will probably ask 'Why now, not last year?'" said Richard Canter, president of SKCG Group, which provides insurance advisory services to financial firms.

"Either the underwriters will price the product accordingly or, if there's any potential for a claim and they don't (already) have coverage the underwriters will just exclude that issue," he said.

COURT FIGHT AHEAD

To be sure, whatever the losses end up being, they will be a fraction of what insurers pay out for other kinds of events. U.S. insurers lost more than $10 billion in the second quarter of 2012 just from natural disasters like hail storms and heavy winds, dwarfing whatever D&O claims could generate.

Still, in most cases of alleged Libor manipulation investigations are ongoing and many potential victims are still researching how they may have been affected, and what civil and criminal penalties and remedies are available.

"When claims first come in there's an element of wait and see, but as it's begun to mature, the feeling is that whatever happens they're going to end up paying a lot of money. The big fear across most of the market is who else is going to get dragged in," said a second London-based brokerage source.

One experienced D&O litigator said it is likely that insurers will fight to avoid paying out.

"The insurers are likely regarding this as a potentially large exposure, in terms of the financial institutions that they've insured, and are likely to contest these claims," said Alex Hardiman, an attorney at Anderson Kill & Olick in New York who specializes in insurance litigation.

"I think that if, as appears likely, there is a lot of shareholder litigation that comes out of the Libor issues, then I think they will certainly put up a bunch of defenses to coverage," he said.

Insurers will be hoping that criminal charges are brought in as many cases as possible, as D&O policies typically become invalid when the underlying actions are found to be illegal.

"It's kind of sad to say, but we're rooting for them all to be criminals," the second brokerage source said.

PUBLIC SCRUTINY

Another risk insurers face is that if customers can prove financial products were priced incorrectly due to Libor manipulation, errors and omissions insurance policies could be triggered as well.

For example, if a bank fudged its Libor submissions, and there was evidence that a customer of that bank paid too much for a financial product due to that "error" in rate setting or "omission" of information could be cause for enormous damages.

"In the event customers can prove they've suffered a financial loss ... that's the area I'm sensing insurers are apprehensive about," said Matthew Rolph, head of management liability in the UK for brokers Marsh Inc.

Part of the problem, insurance brokers say, is that in cases like this there is so much more focus on individuals than there used to be. Whereas at one time covering a company was enough, now executives are more acutely aware of the risks they face personally, both criminally and civilly.

"Collectively, we're seeing real scrutiny around individual risk profiles, more so than we've seen in previous years," said Rolph. "You're seeing the vilification of individuals, fairly or unfairly, in the public domain, and it's very much resting on the individual."

(Reporting By Ben Berkowitz; Editing by Alwyn Scott and Leslie Gevirtz)

By Ben Berkowitz and Myles Neligan