Glossary

Opt-out lawsuits are a type of lawsuit in which an individual plaintiff "opts out" of the larger securities class action lawsuit that is also being brought against the same corporate defendant. Opt-out lawsuits are most often filed by an institutional investor (e.g., a bank, insurer, or pension fund). By making a claim that is separate from the larger class action, an individual plaintiff can sometimes negotiate both a larger and more rapid settlement recovery than if the plaintiff was a more passive beneficiary of the class action lawsuit. In addition, by settling on an accelerated basis, an opt-out plaintiff gets "first dibs" at the defendant's directors and officers (D&O) liability insurance policy proceeds. This is important because the defense expenditures required by complex, protracted securities litigation rapidly depletes and frequently exhausts D&O policy limits, often before monies are available to make actual claim settlements.

Optimization is the formal process by which decisions are made under conditions of uncertainty. Components of an optimization risk modeling exercise include a statement of the range of decision options, a representation of the uncertain conditions (usually in the form of probability distributions), a statement of constraints (usually in the form of limitations on the range of decision options), and a statement of the objective to be maximized (or minimized). An example of an optimization exercise is an asset allocation study.

Optimum level of risk retention is a risk financing term referring to the level of retention at which the organization achieves a comfortable balance between relative cost and cost stability.

An option is an agreement giving the buyer the right to buy or receive (a "call option"), sell or deliver (a "put option"), enter into, extend or terminate, or effect a cash settlement based on the actual or expected price, spread, level, performance, or value of one or more underlying interests.

Optionally renewable refers to a provision in a health policy, for example, that gives the insurer the right to renew the contract or not at its option on the policy's anniversary date; midterm cancellation is not permissible.

Option backdating occurs when a stock option exercise date is set prior to the date on which the option was granted and at a lower exercise price than the current market price of the company's stock. For example, assume that on January 1, 2024, a company's stock is selling for $25 per share. Also assume that the company's chief executive officer (CEO) is given a 4-year option grant covering the period from January 1, 2022, to January 1, 2026, and that on January 1, 2022, the stock was selling for $15 per share. "Backdating" the option grant by 2 years in this instance allows the CEO to purchase the stock at $15 rather than at the current $25 per share price, thereby locking in an automatic profit. Option backdating is legal, provided the backdating is clearly communicated to stockholders and as long as the effect of the backdating is properly reflected in both earnings reports and tax payments. However, there have been a number of lawsuits against corporate directors and officers alleging illegal option backdating in which these conditions were not met.

Option instruments are derivatives such as a put, call, swap, or floor designed to manage basis risk by allowing the hedger to determine when to liquidate the contract. If an option expires, it has no further value.

Option spring-loading is a practice designed to issue option grants at certain strategic times, as a means of increasing the value of such grants. The first type of option spring-loading occurs when an option is granted just before the announcement of positive corporate news, with the expectation that the news will boost the company's share price and therefore the value of the option grant. The second type of spring-loading is to grant an option immediately after the release of negative news that has already adversely impacted a company's share price. This has the effect of issuing the grant at an artificially low price, from which the stock is expected to bounce back relatively quickly, ultimately increasing the total profit that can be realized when the option grant is exercised.

Ordinance or law coverage is for loss caused by enforcement of ordinances or laws regulating construction and repair of damaged buildings. Older structures that are damaged may need upgraded electrical; heating, ventilating, and air-conditioning (HVAC); and plumbing units based on city codes. Many communities have a building ordinance(s) requiring that a building that has been damaged to a specified extent (typically 50 percent) must be demolished and rebuilt in accordance with current building codes rather than simply repaired. Unendorsed, standard commercial property insurance forms do not cover the loss of the undamaged portion of the building, the cost of demolishing that undamaged portion of the building, or the increased cost of rebuilding the entire structure in accordance with current building codes. However, coverage for these loss exposures is widely available by endorsement. Standard homeowners policies include a provision granting a limited amount of building ordinance coverage; this amount can be increased by endorsement.

Ordinary construction is characterized by noncombustible exterior bearing walls (i.e., brick, concrete, or masonry) and combustible floors, roofs, and interior walls. Less sturdy than mill construction, this type of joisted masonry construction of the exterior walls generally receives a fire-resistive rating of an hour.