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A Model Financial Statement Insurance Act

Lawrence A. Cunningham

George Washington University Law School

Connecticut Insurance Law Journal, Vol. 11, 2004

Building on companion work investigating the efficacy of financial statement insurance (FSI) as an alternative to traditional auditor liability (ssrn.com/abstract=554863), this Article presents the terms of a national enabling statute to implement this concept. The Model Financial Statement Insurance Act uses the architecture of the U.S. Trust Indenture Act of 1939. It authorizes issuer application for qualification, in connection with annual proxy statement filings, of policies of financial statement insurance. The Model FSI Act deems a series of provisions necessary to achieve securities law objectives to be part of all financial statement insurance policies so proposed, and requires insurers to possess characteristics relating to financial capacity, independence from issuers and adequate regulatory supervision. It empowers the U.S. Securities and Exchange Commission to issue stop orders against such applications in cases where insurers lack such qualifications. Qualifying policies are put to security holder vote and become effective when a registered public accounting firm engaged by the insurer issues an unqualified opinion that the financial statements provide a fair presentation in accordance with generally accepted accounting principles. Later-discovered material misstatements result in covered losses under the policy, administered in accordance with terms the Model FSI Act deems included, along with other tailored policy terms not in contravention of the Act. While using a United States template, the Model FSI Act is designed to be adaptable for use in other countries and jurisdictions of the world.

Number of Pages in PDF File: 36

Keywords: gatekeepers, financial statement insurance, auditor liability, accountants' liability, securities regulation, liability insurance, directors' and officers' insurance, D&O insurance, title insurance, corporate governance, financial reporting, outside auditor

JEL Classification: M49, G22, G38

Accepted Paper Series

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Date posted: September 10, 2004  

Suggested Citation

Cunningham, Lawrence A., A Model Financial Statement Insurance Act. Connecticut Insurance Law Journal, Vol. 11, 2004. Available at SSRN: http://ssrn.com/abstract=588268

Contact Information

Lawrence A. Cunningham (Contact Author)
George Washington University Law School ( email )
2000 H Street, N.W.
Washington, DC 20052
United States
202-994-0732 (Phone)
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