Bankruptcy and D&O coverage.

• Author: MURRAY, SUSANNE
• Position: Bankruptcy planning

When bankruptcy looms or is in fact filed, board members must reexamine their current coverage. The ramifications of a bankruptcy filing raise significant insurance issues.

THERE IS CONCERN in the D&O marketplace that a filing for bankruptcy can detrimentally effect the value of a directors and officers insurance policy. In the bankruptcy context, the question is whether the proceeds of the insurance policy become an asset of the bankruptcy estate, which could mean that a bankruptcy trustee or administrator could "direct" payments under the policy.

This is not an issue that has been determined by the courts to date in connection with recent D&O forms. Instead, it is one being raised directly by underwriters in an effort to warn insureds about potential problems, so that the insured can make an informed decision about what coverage to purchase.

Directors and officers insurance is intended to protect individual directors and officers from liability for claims asserted against them. D&O policies traditionally provided this coverage only to the individuals, and not to the corporation itself (except to the extent that the entity indemnified the individuals and sought reimbursement of amounts paid on their behalf).

'Entity coverage' enhancement

To alleviate the constant dispute between insureds and insurer over what amount or percentage of amounts incurred in defense/settlement/judgment of a claim were properly allocated to the individual directors and officers (and therefore covered by the policy), insurers began offering "entity coverage (coverage for the corporation itself) for securities claims. Since securities claims are the single largest category of claims asserted against directors and officers, and since the entity is virtually always named as a defendant as well, this was a substantial enhancement to coverage. The majority of insureds purchase entity coverage for securities claims. (Note that on private company and not-for-profit forms, there maybe entity coverage for all types of claims.)

Other types of insurance policies have been construed to be assets of a "bankrupt estate" (a company in bankruptcy) because such policies insured the corporate entity or were otherwise for the benefit of the corporate entity. However, the traditional D&O policy did not fall into this category. The question now is whether the addition on the policy of entity coverage changes this analysis. Because this is an unknown, it needs to be discussed when a...