An investigation by U.S. regulators into backdating ofexecutives' stock options could have a major impact on thedirectors and officers insurance markets in the United States andLondon, according to a report from Aon Limited.

The London-based insurance broker noted that the Securities andExchange Commission and the Department of Justice are investigatingat least 54 companies that allegedly allowed their executives tobackdate their option grants to benefit from an advantageousmovement in share price.

On July 20, the SEC and DOJ filed their first civil and criminalactions related to stock option backdating. Prior to the SEC andDOJ filing, there were several civil cases filed byshareholders.

The SEC case involves Gregory L. Reyes, 43, of Saratoga, Calif.,former chief executive officer, president and chairman of BrocadeCommunications Systems Inc., and Stephanie Jensen, 48, of LosAltos, Calif., former vice president of human resources of thecompany. The two are alleged to have routinely backdated stockoption grants between 2000 and 2004.

Their alleged actions include falsification of records thateventually resulted in the restatement of Brocade's earnings for1999 through 2004.

The SEC also filed a civil suit against Antonio Canova,Brocade's former chief financial officer, for failing to takeaction after learning of the falsification.

Aon said that insurers offering D&O policies are gearing upfor increased claims activity from both criminal and civil actions.Some carriers are even contemplating whether to include backdatingas a policy exclusion going forward, the broker added.

While the ongoing litigation is currently based in the UnitedStates, it is likely that the United Kingdom and Europe, wherebackdating is not allowed, will feel the ripple effect, Aonwarned.

Major institutional investors, who have already been lobbyingU.S. regulators for stricter regulations and limitations onexecutive pay prior to the backdating scandal, will be consideringwhether to join in any class action lawsuits in the United Statesto protect their funds' investments, which would increase exposure,Aon said.

Adam Codrington, executive director within Aon's ProfessionalRisks unit, said: "At the moment there have been no insurer payoutsfrom a D&O perspective. However underwriters are paying a greatdeal of interest to this issue. As the scandal unfolds, we arelikely to see much more focus on the cost of D&O insurance anda possible restriction of terms and conditions.

"At the very least, insurers will want to see very strictprocedures and processes in place when it comes to the offering ofstock options."