The high price of directors’ and officers’ (D&O) insurance is bad enough. But there may be a bigger anxiety: Can an insurer pull a company’s existing coverage if an executive or board member makes a reporting miscue?
To be sure, court-ordered D&O policy cancellations, also known as “rescissions,” are rare. But insurers could pursue more of them if restatements mount, insurance experts say.
After all, it’s relatively easy for insurers to meet the legal standard for rescissions. Unlike plaintiffs in shareholder suits, insurance carriers seeking to rescind coverage aren’t required to prove fraud in many states, explains Joe Monteleone, vice president and claims counsel with Hartford Financial Products. All the underwriter must show is that the misrepresentation “was material to its evaluation of risk,” he adds.
The CFO and CEO signatures required under the Sarbanes-Oxley Act might also prove hazardous from an insurance standpoint. While D&O underwriters routinely ask senior officers to sign off on financials, certifications made under the new law could supply insurers with more legal proof of misrepresentation, says Robert Hartwig, chief economist of the Insurance Information Institute.
One way CFOs can avoid rescissions is to keep risk managers in the loop about reporting and governance procedures. “Some risk managers are so removed from senior management that I question…how in the world they can attest to the validity of some of the statements they have to submit,” says Jeff Pettegrew, vice president of insurance and risk management for Westaff, a Walnut Creek, California-based company that supplies companies with temporary officer workers.
The facts on an insurance application can become a condition of the policy, he suggests. “If I say the board meets every six months and they don’t, the policy could be negated,” adds Pettegrew.