The Advisors' Blog

We’ve speculated with some podcast participants about the insurance market that might develop in the wake of the Dodd-Frank clawback listing standards. As this Latham alert reminds us, “companies are not permitted to indemnify or insure any person against losses under the SEC Clawback Rules, nor are they permitted to directly or indirectly pay or reimburse any person for any premiums for third-party insurance policies that such person may elect to purchase to fund such person’s potential obligations under the SEC Clawback Rules.” However, insurance coverage may be purchased and funded by an individual executive, who must pay their own premiums out of pocket.

This Woodruff Sawyer blog discusses the key features of those policies in their current form:

Limits: As of this writing, primary insurers are offering relatively low limits, ranging from $500,000 to $1 million for each individual executive at a company. Higher limits will require additional carriers to participate on an excess basis. The amount of excess limit available will depend, in part, on interest in this type of insurance over time. We should also expect carriers to impose a per-company cap, at least in the near or medium term, depending on how many executives at any one company decide to purchase this insurance.

Simplified Application Process: The application process for this insurance should generally be streamlined. Insurers will review the company’s public filings and disclosures. This will often include evaluating the company’s compensation clawback policy, governance practices, any recent material weaknesses in internal controls over financial reporting, and any existing legal or regulatory disputes that might impact the company’s risk profile. Because the underwriting process relies heavily on publicly available information, there should be minimal administrative burden placed on the executive during the application phase.

Coverage for Compensation Repayment and Defense Costs: This insurance can cover both the compensation amounts an executive must repay and the defense costs associated with compensation clawback claims. As previously mentioned, compensation repayment can range from cash bonuses to equity awards based on the company hitting several metrics. This makes the insurance attractive not just for executives whose compensation is performance-based, but for all executives.

No Duty to Defend: One distinct feature of current forms of this insurance is they are not “duty-to-defend” policies. This means the policyholder (i.e., the executive) retains the right to select their own counsel rather than being constrained to the insurer’s panel of attorneys. This is important for executives who value autonomy and wish to retain counsel familiar with their individual circumstances in addition to having deep industry expertise.

The blog also notes that coverage is not limited to financial restatements and may also apply to non-financial triggers that companies may include in voluntary clawback policies. But it also notes that coverage won’t cover every scenario — for example, coverage won’t be available if an executive is found guilty of fraud or if reimbursement is prohibited by law.

– Meredith Ervine