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Stock-option controversy will cost clean companies, too

Published July 4, 2006

If investors think they're safe from the scandal involving the granting of executive stock options, they may want to consider this: Even if they aren't invested in companies caught up in the controversy, it could still cost them big.

That's because across corporate America there could be big changes in the policies for directors' and officers' insurance, which is used to shield top executives and board members from personal losses for the decisions they make while on the job.

Not only are rates expected to rise, but insurers could be more restrictive in the coverage they offer or what they pay out in claims. Who will get stuck with the tab for such changes? Shareholders at public companies all around, of course.

D&O insurance, which is renewed annually and is paid for by the company, is expensive. Companies with market capitalization of more than $10-billion paid an average premium of $4.3-million for D&O insurance in 2005, according to Towers Perrin's Tillinghast consulting division.

Since the insurance typically reimburses the company or its top officials for expenses such as legal costs or regulatory fines, a plethora of future claims could be on the horizon because of the option-timing controversy.

More than 50 companies - from industry bellwethers like Apple Computer Inc. and Home Depot Inc. to many smaller technology companies - are facing questions about how they granted options and whether proper disclosures were made about what resulted in outsized and potentially illegal profits for many executives.

All this is sure to be spooking the insurance industry, which paid out hundreds of millions of dollars in D&O claims after the business scandals in the early part of the decade that led to the collapse of some big names in corporate America.

D&O rates surged nearly 72 percent from 2001 to 2003, and then started to retreat, falling 10 percent in 2004 and 9 percent last year, according to Tillinghast.

But the decline in rates may be short-lived. 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 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.

"Prices will go up, and coverage will go down," said R. Mark Keenan, a partner at the law firm Anderson Kill & Olick who specializes in insurance coverage. "The insurance industry is going to use this as an excuse to dramatically increase premiums."

Shareholders will see costs rising, eating away at profit margins all over corporate America - except, of course, if they are invested in an insurance company.

Rachel Beck is the national business columnist for the Associated Press. Write to her at

[Last modified July 4, 2006, 01:29:26]

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