July 11, 2023
D&O Insurance & Dodd-Frank Clawbacks
Given the no-fault nature of the clawback requirement, the inclusion of “little r” restatements and the need to clawback pre-tax dollars, one commonly-asked question about the Dodd-Frank clawback rule is whether it’s possible for companies to protect executives against the risk of a clawback through insurance or indemnification. As described in this Aon alert, both are prohibited, which has caused companies to consider their insurance policies. Here’s an excerpt from the alert that addresses how the clawback rule will impact D&O insurance coverage going forward:
The SEC rule is a no-fault policy and does not evaluate misconduct. It explicitly prohibits a public company from not only indemnifying officers in the event the clawback rule is invoked, but also from paying or reimbursing the premium for any such insurance policy on behalf of the executive officers. Any existing insurance coverage that provides indemnity for the return of erroneously awarded compensation in an actual compensation clawback event will no longer be available once the final exchange rules go into effect.
Most market standard Side A Difference-in-Conditions (A/DIC) policies include coverage for “facilitation costs” or costs and expenses associated with the return of amounts incurred or required to be paid pursuant to Section 954 of the Dodd-Frank Act. We expect that Side A/DIC policies and insurers will continue to provide this coverage going forward.
As Ali Nardali of K&L Gates highlighted in a recent podcast, it seems likely that a robust insurance market will develop here, but executives will have to pay their own premiums.
– Meredith Ervine