Make your D&O policy bankruptcy-friendly: hope for the best but plan for the unthinkable when negotiating your D&O coverage.

• Author: Weiss, Stephen J.
• Position: Brief Article

WILL MY D&O POLICY Continue to protect me if my company seeks bankruptcy protection? Many directors and officers have thought about this question since last December when Enron Corp. filed its petition for Chapter 11 reorganization.

The answer depends in large measure on the terms of your D&O policy. While some policies provide little or no protection for you if your company goes under, others are bankruptcy-friendly, providing valuable coverage.

What specific policy changes would help make your policy more bankruptcy-friendly? The following list identifies a few that, as a package, should prove most helpful:

Eliminate the Provision Terminating Coverage When Bankruptcy Is Filed. Some D&O policies cut off coverage when a trustee, receiver, or liquidator is appointed following the filing for bankruptcy protection. The policy remains in effect until the end of the stated term but only as to wrongful acts occurring prior to the appointment of the trustee or other official. This is not particularly helpful for members of management who stay on to run the company and want the protection of the D&O policy to continue after their company files for bankruptcy. Seek a provision that provides post-filing coverage. Drawing from policies currently in the marketplace, such a provision could read as follows: "The appointment of any trustee, receiver, or liquidator, or the company becoming a debtor-in-possession, shall not be considered an event that terminates coverage for wrongful acts that occur after such event."

Modify the Insured-versus-Insured Exclusion. All D&O policies have an insured-versus-insured exclusion. Typically, this exclusion bars claims made by one insured (such as the company) against another insured (such as a director of that company). It is not uncommon to see suits brought by a trustee in bankruptcy of a debtor corporation against that corporation's directors and officers. When such a suit is filed, the directors and officers seek payment of their defense costs from their D&O insurer. Some insurers have declined to pay defense costs in this situation, contending that the trustee stands in the shoes of the debtor corporation, thereby bringing this suit within the insured-versus-insured exclusion. To sidestep this issue, negotiate an endorsement that narrows this exclusion so that it does not apply to a claim brought by a bankruptcy trustee against a director or officer.

Add a Priority-of-Payment Provision. The filing of a bankruptcy...