D&O Insurers Becoming Suspicious of Companies' Options Dating Practices

June 20, 2006 (PLANSPONSOR.com) - While the Securities and Exchange Commission (SEC) , the Department of Justice and other regulatory organizations have begun investigating companies suspected of backdating stock options, the insurance industry is apparently taking its own look at the issue.

According to the Wall Street Journal, insurance providers who cover directors and officers, or D&O insurers, haven’t raised executives’ premiums – yet. But, they have begun asking questions about their clients’ practices, such as whether they have ever backdated options or received an inquiry from the SEC on the timing of grants.

“The underwriters are obviously concerned that it’s going to be a major source of claims,” said John Schwonke, a senior vice president at ABD Insurance and Financial Services, according to the WSJ. ABD, a major D&O insurer, insures clients at more than 100 publicly traded companies.

This skepticism could lead to higher costs for executives’ liability protection, which could increase premiums or reduce coverage for directors and executives, according to the WSJ.

D&O insurance costs rocketed after accounting scandals such as Enron Corp’s in 2002, but since new insurers have entered the market, competition has caused premiums to decrease in the past two years.

D&O insurance is set up to protect executives from personal losses that could occur as a result of decisions they make running companies, according to the WSJ, and can compensate the company or its officials for expenses such as legal fees.

Future Forecast

Insurance industry consulting firm Tillinghast reported in its latest annual survey that it expects D&O prices to rise again because more claims are being filed, and they are becoming more expensive, according to the WSJ. Also, the survey’s primary author, Elissa Sirovatka, said the current backdating stock options inquiries could be the catalyst that sets off the rise, and increases could be focused on the industries that are under heavy scrutiny, such as the technology industry.

According to the study, a US for-profit company with $5 billion in assets had D&O coverage of as much as $104.8 million on average, the WSJ reported. The average total premium for US companies was $257,223. US for-profit companies paid about 18% less on average in 2005 for D&O premiums than in 2003.

According to the WSJ, the premium increases will not be fully realized for months or years, as shareholders and others continue to file lawsuits against companies suspected of backdating options.

La wsuits have accumulated over the past few months. Heavy & General Laborers’ Pension and Annuity Funds sued security software company McAfee in a federal court in the Northern District of California, alleging “constructive fraud” through the backdating of stock options. Employer-Teamsters Pension Health and Welfare Funds has filed a similar lawsuit against technology company Juniper Networks (See Two US Pension Funds Sue Over Stock Options Backdating ).

ThePublic Employees Retirement System of Ohio  and the Teachers’ Retirement System of Ohio  filed an options dating suit against United in US District Court for the District of Minnesota. The two funds hold over five million shares of UnitedHealth stock (See  UnitedHealth Sued Again Over Option Dating Allegations ).