Stock option timing scandal to be felt in D&O insurance

July 24, 2006

Already, insurers are asking businesses questions about whether they have any exposure to option-grant timing, especially in industries like technology where options have been more prevalent as an employee compensation and retention tool.

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If investors think they’re safe from the scandal involving the suspicious timing of executive stock option grants, they may want to consider this: Even if they aren’t invested in companies caught up in that mess, it could still cost them big.

That’s because this controversy could lead to big changes across corporate America in the policies for directors and officers insurance.

Not only are rates expected to rise, but insurers could also be more restrictive in the coverage they offer or what they pay out in claims.

More than 50 companies— from industry bellwethers like Apple Computer Inc. and Home Depot Inc. to many smaller technology companies—are facing questions about whether they manipulated the timing of options grants to boost their value to the recipients and properly disclosed what resulted in outsized and potentially illegal profits for many executives. Shareholders have already started filing lawsuits, some naming board members or corporate officers for their alleged breach of fiduciary duties.

Companies that have acknowledged some link to the controversy could find it “difficult to obtain renewal terms at palatable rates and may be forced to accept potentially restrictive terms,” said Kevin M. LaCroix, who advises clients on D&O liability issues at OakBridge Insurance Services in Beachwood, Ohio.

And others, even if they have no connection to the scandal, could face higher rates as the insurance industry tries to cover itself in the face of increased risk. Already, insurers are asking businesses questions about whether they have any exposure to option-grant timing, especially in industries like technology where options have been more prevalent as an employee compensation and retention tool.

That means the aftereffect of this scandal is already being felt even before most companies have determined if they have done anything wrong. While timing the issuance of stock option grants may be wrong if it is done to maximize executive payouts, it isn’t yet known what securities laws could have been violated or what role top corporate officials played in these alleged schemes.

“This issue hits a lot of people the wrong way,” said Robert P. Hartwig, chief economist at the Insurance Information Institute. “But this practice might not be considered strictly illegal.”

c:Copyright 2006 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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