Will 'clawback' efforts against ex-CEOs roil D&O market?

Chastened by restatements and shareholder lawsuits, a number of major companies have been seeking to recoup money paid out to former CEOs and other top executives in bonuses. This kind of "clawback" effort, in turn, could trigger new insurance considerations, especially in the directors and officers' (D&O) segment.

Consider some recent developments:

* Fannie Mae's federal regulator is seeking to recoup $100 million in "performance" bonuses paid to former executives at the mortgage giant.

* American International Group (AIG): Under former CEO Maurice "Hank" Greenberg, the company overstated its 2000-04 net income by $4 billion. At the same time, Greenberg received $24.5 million in bonuses. In 2005, AIG sued for control over $20 billion worth of AIG shares owned by a firm that Greenberg runs, but it has yet to recoup any of the bonus money.

* Bristol-Myers Squibb: Under former CEO Charles Heimbold, the company overstated its 1999-2001 revenue by $2.5 billion and profit by $900 million. At the same time, Heimbold received $6.4 million in bonuses. The company hasn't been able to collect on those bonuses, but has since adopted a policy to recoup bonuses if executive misconduct leads to a restatement.

* Qwest Communications: Under ex-CEO Joseph Nacchio, the company improperly recognized $3.8 billion in revenue from 1999-2002. Simultaneously, Nacchio received $31.2 million in bonuses and long-term incentive payments. Although Qwest hasn't managed to recover any of that money, Nacchio faces criminal charges and has been awaiting a civil fraud trial. Qwest has since adopted a policy to recoup certain bonuses if senior executives commit misconduct.

The term "clawback" itself is relatively new to executive compensation, but has been frequently used in efforts to recoup money from mutual fund managers or real estate developers. Don Glazier, an executive with Integro Insurance Brokers, sees a situation where lawsuits--perhaps some of them derivative suits, in which the companies also would be potential beneficiaries--could mushroom, putting company officers who granted the bonuses at risk.

"If this becomes a trend, and suits are filed, there is a potential hole in insurance coverage that won't respond," Glazier says. "Some carriers may have to adopt an aggressive attitude toward exclusions. At minimum, there will be some gray areas, and some coverage litigation. This would be a new risk that the carriers did not anticipate."

Principal carriers of D&O insurance include AIG, St. Paul Travelers Cos., Chubb and XL Insurance, Glazier notes, and "there is a ton of capacity. Pricewise, it's a flat to softening market." But the exclusion issue could become big, especially if there are claims related to unwarranted bonuses, perceptions of ill-gotten gains and when or if former executives would have to give those back.

Plaintiffs' attorneys are going to look closely at what's coming out in upcoming company proxies, and will be keeping an eye out for "egregious cases," Glazier adds. While Sarbanes-Oxley anti-fraud provisions "may not provide much ammunition, this area is new, and no one really knows what to expect."

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