The backdating issue still has forward momentum. On Dec. 27, 2006, UnitedHealth Group Inc. announced that the Securities and Exchange Commission was formally investigating its stock-options practices. The feds' eyes are also on CEO Steve Jobs of Apple Computer Inc. after an internal investigation there. Directors' and officers' policyholders and insurers are still trying to figure where the scandal, and their policies, will go next.
Meanwhile, policyholders can learn certain lessons out of current cases if they're concerned about their own backdating practices, according to Jonathan M. Cohen, partner at Gilbert Heintz & Randolph in Washington, D.C.
One lesson is to understand that insurance, legal defense and business strategy are all intertwined when it comes to dealing with a backdating issue. It's been a common mistake of companies, Cohen said, to handle defense issues at the onset of an investigation, and worry about insurance recovery later. An insurance strategy must be formulated early on, with defense and overall business goals in mind.
"There may be strategies that you prefer to take for your overarching business aims or to defend that may put you in a position where you're not maximizing the chances of recovery," he said in a phone interview. "And you basically need to balance those competing concerns against each other."
For instance, a defendant in the courts characterizes a case of backdating as negligence, only to find that the D&O policy wording excludes acts of negligence. Or the company settles a case without admitting wrongdoing to avoid an exclusion in the D&O policy, though settling might not be the optimum defense outcome, insurance excluded.
Another lesson for D&O policyholders to take out of recent backdating cases is to recognize that many insurance policies are only a "single pot of money," Cohen said. "Tensions" may exist when each director or officer at a company is reaching into the same pot. Cohen, an attorney for policyholders, stated that individual officers might even consider retaining their own lawyers.
For D&O policyholders in general, the "moral of the story" of the ongoing backdating scandal is that they should know the wording of their policy, said Jerry Oshinsky of Dickstein Shapiro LLP, speaking at a D&O legal issues telecast organized by Mealey's in December. Going forward, Oshinsky said, wording and exclusions could be negotiated during the next renewal.
"There is a competitive marketplace out there," he said.
Yet insurers are also weighing the spate of backdating-related claims, especially in light of the fact that many are resulting out of derivative suits.
"That's kind of throwing everybody for a loop," said attorney Kevin M. Mattessich, who works out of Cozen O'Connor's New York office. "There's a debate over to what extent can a derivative suit really be covered."
"The insurers are all paying defense costs at the moment, but I think at some point that could change," he said, "depending on what direction these individual lawsuits go."
Insurers might come out with a special coverage for derivative cases, Mattessich added, or offer incremental defense coverage or D&O policies with refined wording on covered claims. Policyholders might also find underwriters asking more probing questions at renewal about backdating and compensation.
February 1, 2007
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