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Insurance News - Special Edition on Directors & Officers and Liability Insurance: Financial Restatements and your D&O Insurance Policy

Date

February 1, 2003

AUTHOR(s)

Daniel W. Payette


With the advent of new legislation and regulations dealing with corporate governance and disclosure issues, there has been an increase in the restatement of financial statements by commercial corporations. One would seldom think of establishing a relationship between such a restatement and your corporation’s D&O Liability Insurance Policy. Yet, in some circumstances, there can be.

When analyzing an application for an insurance policy, be it D&O Liability Insurance, CGL insurance or others, an insurer will obtain various information in order to underwrite the risk. Generally, the insurer will obtain a copy of the company’s financial statements. Based on that and other information obtained, the insurer will then decide whether to offer coverage, at what price and under what conditions.

When the financial statements are restated, the insurer may want to take a hard look at the restated financial statements and compare these to the initial financial statements to see if there were any misrepresentations made which could justify nullifying the contract.

It is therefore important to think about this issue upon restating your financial statements. When such restatement does not substantially modify the information initially issued, it would be important that the text be clear about it. For example, if the restatement is required for technical or accounting reasons but has no impact on the results, this should be underlined.

The impact of restatement should also be foreseen when purchasing D&O Liability Insurance Policy in the first place. As a policyholder, you should avoid having a restatement exclusion in the policy which could prevent you from obtaining coverage under the D&O policy for actions resulting from the restatement. Moreover, you should ask for a severability clause in the insurance policy in order to restrict the impact of the restatement to those responsible. Finally, other products are emerging, such as personal director’s liability insurance coverage which you may want to look into.

* With the contribution of Jean-René Gauthier, Corporate Finance and Mergers & Acquisitons Group (Montréal)

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