As the Department of Justice and the Securities Exchange Commission continue to uncover backdated stock options, insurance carriers are sitting up and taking notice.

Directors and officers who recently renewed their executive risk coverage were likely questioned on the issue. About 120 cases are under investigation, while 20 class-action lawsuits and more than 100 derivative actions remain filed in state courts.

But as insurance carriers increasingly raise their concerns, what has been revealed is a myriad of varying policy language and inconsistencies across the board. For shrewd observers, however, the language boils down to a few key points:

• One principal question in every policy is what constitutes a "wrongful act." Was the alleged wrongdoer an officer of the company while receiving increased gains acting in the capacity as an officer?

• When did the act occur? The date of the option grant, or the date when options were exercised, could be of particular interest with respect to retroactive or prior-acts date language.

—If you have moved to a new D&O carrier since the previous securities litigation was filed, the old and new carriers will most likely dispute which policy the litigation should fall to.

—The maximum liability of the carrier, if successful in "tying the claims together" alleging they are interrelated claims, would only be the aggregate limit of the policy in place when the original securities litigation took place. Depending on the severity of the previous litigation, the previous policy may have been eroded, making the new stock-option litigation a self-insured event.

• The definition of "claim" may also surface. Most language requires a written demand of monetary or non-monetary relief to trigger a claim. This begs the question whether the carrier would respond during an investigation, when an actual demand has yet to be made.

• Close attention should be paid to the definition of "loss." Stock-option backdating likely could be construed as an ill-gotten gain, rather than damages under most definitions of loss. Disgorgement of ill-gotten gains are generally against public policy and uninsurable.

• Attention must be paid to language that triggers fraud and personal profit exclusions—in fact vs. final adjudication vs. final determination or some other variation.

There are several exclusions within many policies that could be used to deny coverage. These include fraud, personal profit and the insured vs. insured exclusion. Much depends on the specific allegations and in what form a claim is brought: derivative or securities action.

Finally, the severability language tied to the exclusions must be examined to determine if coverage exists and if the acts of one can be imputed to others.

While the executive risk insurance market remains stable, it is still uncertain what long-term effects could come from this. For now, however, the reaction has been increased scrutiny about the practice of granting stock options both in the past and the present.

Regardless of the effect on the marketplace, this issue presents an opportunity to more closely examine current practices and policies surrounding equity compensation, and prepare for the renewal discussions with D&O underwriters.

If you have questions or would like further consultation on this issue, please do not hesitate to contact any member of our Executive Risk Practice:

Jim Lash | Read Bio | Contact
Jeff Leder | Read Bio | Contact
Tony Gielty | Read Bio | Contact
Tony Bonacuse | Read Bio | Contact
Scott Stewart | Read Bio | Contact
Brian Sullivan | Contact

The surety industry lost money for four straight years following the terrorist attacks on New York City, and not until 2005 did the market finally rebound. The recovery wasn't without its causalities, however. Active reinsurance companies providing surety now number less than half those of the late 1990s. Nearly a dozen companies have called it quits.

But while 2006 will likely prove to be another profitable year, the industry is still shell-shocked from its greatest loss of the century. Not surprisingly, surety today is driven by considerably more restrictions from its reinsurers, while flexibility has largely become a thing of the past.

Coverage exclusions and limitations are more rigid than ever, handcuffing carriers from any creative underwriting. In most cases, policies that stray from the tight and narrow create often-insurmountable obstacles for construction placement.

A few savvy construction firms, however, have found that teaming their bond specialist, accounting firm, bankers, brokers and other financial specialists has helped maximize their potential for capacity.

When a construction company has a better handle and understanding of its overall finances, underwriters tend to reward them with capacity. In some cases, the move has created a competitive edge over those who still struggle with the former model and don't understand that capacity is nearly twice as competitive today as it was just five years ago.

For more information, contact Jim Chapman:
jim.chapman@hylant.com

Hylant Group's Large Account Practice announces the launch of its Property Risk Practice—a dedicated team of industry-leading professionals assembled to exclusively serve large global accounts in property accounts.

Led by Vice President Tina Bentley, the practice is comprised of individuals with extensive experience customizing risk management programs for Fortune 500 companies with facilities in the United States and around the world.

"We are in a unique position in that we are unencumbered in our approach in accessing markets and utilizing networks. We can draw on any underwriting market or network in the world," Bentley said. "This allows us much greater flexibility to develop more effective and cost-efficient programs. It also allows us to offer a la carte pricing and products to increase coverage and lower costs. Each program depends on the specific needs of the client, and no two are alike."

For more information, contact Tina Bentley:
Christina.Bentley@hylant.com
(248) 822-2221

Tina Bentley | Read Bio
Bess Rumman | Read Bio
Kevin O’Donnell | Read Bio