Litigation: company stock plans more prone to suits.

Companies that offer their stock to employees through an employee stock ownership plan (ESOP) or 401(k) plan are increasingly vulnerable to fiduciary liability lawsuits, according to a white paper developed for the Chubb Group of Insurance Co. "The Perils of Holding Company Stock in Sponsored Plans" provides companies with an overview of the current regulatory and legal environment as well as steps that may help a company mitigate its fiduciary liability exposure.

"While many employers find company stock to be a beneficial feature of their employee benefit plans, it may also create a liability exposure for the plan, the company, the plan fiduciaries, directors and officers," said Evan Rosenberg, senior vice president and global specialty lines manager, Chubb Specialty Insurance. "The number of fiduciary liability lawsuits continues to grow, fueled by the stock market decline of 2000 to 2002. As a result, more companies find that despite their adherence to the Employee Retirement Income Security Act of 1974 (ERISA), their decision to offer employees company stock as one investment option among many is being tested by groups of plaintiffs' lawyers whenever a stock's price experiences a sudden and significant decline."

According to the white paper, authored by Bob Eccles and Dave Gorden, attorneys with O'Melveny & Myers LLP, the potential liability in these cases may total billions of dollars. As case law continues to evolve, companies should consider taking steps to reduce the potential for expensive litigation and liability awards. Among the suggestions:

* Consider whether plan investment in company stock makes sense for the company and how those objectives rank compared to the potential liability exposure;

* Develop a clear fiduciary structure and stick to it;

* Determine if it is necessary to periodically review the prudence of the continued plan investment in company stock;

* Communicate carefully and accurately when discussing company stock with employees.

"Another valuable loss control tool is a fiduciary liability insurance policy," Rosenberg adds. "No matter how strong their risk management program is, every company today is at risk of being sued by plan participants."