Backdating's Long Shadow

"We've done our own analysis" of the backdating issue, says John Doyle, president of American International Group's AIG National Union Fire Insurance subsidiary, which specializes in D&O insurance. "We have basically put a process into place to try to make ourselves aware of the exposure that may exist."

Thus far, some 30 companies are under investigation for their past options-granting practices. The companies are generally accused of setting strike prices for options they handed out to executives long after the options were actually granted, i.e., when the stock's movement was known. Companies involved in the scandal could potentially face huge regulatory fines or lawsuit judgments or settlements.

Several of National Union's clients are already being investigated for backdating, Doyle says. "The company hasn't decided yet how to handle the claims or what its ultimate liability might be," he says. "It's very early in those discussions."

But companies under investigation -- and those that stand the risk of being investigated -- are likely to see rising rates or more restrictive policy terms. On average, companies with market caps of more than $10 billion paid an average premium of about $4.3 million for directors' and officers' insurance last year, according to a survey by the consulting firm Towers Perrin's Tillinghast division. That amount was down from the year before, when such companies paid about $5.1 million.

"It shouldn't be a surprise" if rates go up, says Lynn Turner, managing director of research at proxy advisor Glass Lewis. "They have a higher risk. You can't blame the insurance companies for that."

Specifically, insurers such as AIG may try to exclude coverage of backdating claims from their policies. And insurers could even decline to renew policies at some companies considered most at risk.