More than 100 companies are under internal or Securities and Exchange Commission investigation because of the backdated stock-options issue.
Because of this, the insurance industry has warned of potential directors' and officers' claims, and hinted at the industry's interests in not paying those claims, said William G. Passannante, co-chairman of the Insurance Recovery Group at law firm Anderson Kill & Olick PC.
In fact, Passannante said, policyholders are already paying higher D&O premiums and facing tightening terms on policies, in anticipation of these claims.
Passannante said many of his clients, chief financial officers, have asked him, "Why am I buying this?"
For many corporations, however, D&O coverage is a prerequisite for seating a new director on their board.
Passannante, speaking at a policyholder seminar in Philadelphia, added that he didn't believe backdating would become a big D&O issue.
Still, companies looking for cover could find it in the "Side A Tower" policy, according to Passannante, which brings D&O coverage back to its original intent--to protect the individual assets of the individual board members.
The cover is nonrescindable and has fewer exclusions on defense of claims.
It acts as an excess policy, said Passannante, kicking in only when the corporation can't or won't pay to defend.
Traditionally, D&O policy options are Side A for individual cover, Side B for corporate expenses and entity coverage for securities claims.
In July, the Justice Department formed a task force in San Francisco to investigate stock-option backdating.
As of September, the Internal Revenue Service had joined the probe, along with the FBI and the U.S. Attorney's Office.
The SEC has so far charged executives from two technology companies related to the backdating issue.
Backdating options is a technically legal, though ethically ambiguous, way to offer executive incentives, but it must be properly accounted for in securities filings.
In a September Senate Banking Committee, according to wire reports, members attacked the practice as dishonest and greedy.
--By Matthew Brodsky
November 1, 2006
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