Risk Management

AFC Beats Insurer in D&O Case

The company's insurance carrier had tried to rescind the policy, which took effect three weeks before a restatement that resulted in a $15 million ...
Stephen TaubSeptember 28, 2007

A federal court has ordered the former insurance carrier of AFC Enterprises to pay the company $24 million in a dispute involving its directors’ and officers’ liability policy, AFC says.

The franchisor and operator of Popeyes Chicken & Biscuits had sued Executive Risk Indemnity, a unit of Chubb Group, after the carrier attempted to rescind the D&O policy for the 2003 policy year, during which AFC announced a restatement of prior years’ financial statements. AFC settled a securities lawsuit stemming from the restatement for $15 million in 2005.

Executive Risk was ordered to pay AFC $20 million in damages, representing the policy’s full liability limit, plus $4 million in prejudgment interest. AFC says it expects that after paying the plaintiffs in the securities lawsuit plus related legal expenses and fees, it will net $9 million to $10 million from the award.

In December 2003, AFC restated previously reported earnings by $27.4 million over a three-year period as a result of what the company’s management called “accounting errors.” The restatement pared profits by $21.3 million for fiscal 2001 and $9.2 million for 2000.

According to Business Insurance, the insurer claimed in its complaint that the information it relied on in underwriting AFC’s D&O coverage was “fraudulent, materially false, and misleading” and that, among other things, AFC had not informed the insurer of a need to restate results for certain periods — even though it announced planned restatements only three weeks after the policy’s inception.

AFC successfully argued that the need to restate was not known until an audit had been completed, according to the publication.