Backdating's Long Shadow

The stock-options-backdating scandal is starting to have some wider reverberations.

In the wake of the initial reports that some companies had suspiciously handed out favorably priced options to executives, the affected stocks tumbled, and analysts started investigating which companies -- and stocks -- would be the next likely suspects.

Amid the scrutiny and uncertainty, the broader market plunged, and some analysts have blamed this in part on the scandal.

Now comes the hint of a possible aftereffect: greater scrutiny from the insurance industry.

Companies accused of backdating will have a tougher time renewing their policies that cover the actions taken by directors and officers, industry experts say. Worse yet, even the companies that are perfectly innocent could face tough questions about their options plans -- and, as a result, potentially higher rates.

"We believe that D&O [directors and officers] insurers' concerns about their exposure to option-grant claims will have a significant impact on the current D&O insurance cycle for all public companies," says John Doernberg, the senior managing director of Carpenter Moore, an insurance brokerage owned by the Nasdaq, in a note to clients last week.

Directors and officers' policies typically cover payouts for shareholder lawsuits, and even regulatory fines. Without it, companies themselves -- or their directors personally -- would be responsible for the claims.

In general, D&O policies come up for renewal once a year, at which time the rates and terms are the subject of renegotiation.

To calculate the risk for having to insure backdating claims, insurance firms are doing their own investigations of options plans and grants, those in the industry say. At the very least, public companies that have dished out options in the past should be prepared to give out detailed information to insurers about their grants.