D&O Liability Insurance and Sarbanes-Oxley - On a Collision Course?

Executive Insurance Advisor

PUBLISHED ON: May 1, 2003

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There has been a massive change in the nature of liability for corporate directors and officers in the wake of Enron, WorldCom and other similar events. Corporate directors and officers are rightly concerned that their liability insurance coverage has not kept up with this changing liability landscape.

The Sarbanes-Oxley Act of 2202 (HR 3763) creates rules regarding corporate responsibility, enhanced financial disclosure, corporate and criminal fraud accountability, public company accounting quality control standards and auditor independence, and rules of professional responsibility for attorneys. The CEO or CFO will be required to personally certify financial reports. The audit committee will be directly responsible to overseer outside auditors.

The Act also requires enhanced financial disclosures of off-balance sheet transactions and pro forma financial figures. The Act will modify the relationship between a public company and its outside auditors, and management will face greater scrutiny of its conduct. Acts and events covered under directors and officers liability insurance policies may face greater scrutiny on account of the Sarbanes-Oxley Act.