When Two Worlds Collide: Understanding D&O Coverage in the Bankruptcy Setting


Corporations purchase directors' and officers' liability insurance in an effort to recruit and/or retain top executives. Indeed, the fundamental purpose of D&O insurance is to protect directors and officers from personal loss for claims that are not indemnified by the corporation. Despite the fact that, at its core, a D&O policy is intended to protect a corporation's directors and officers, any D&O policies also afford coverage to the corporation itself, either in the form of reimbursement coverage for its indemnification obligation or direct coverage for its own liabilities. Increasingly, corporations are attempting to access the proceeds of D&O policies, causing the dilution or even complete depletion of policy limits, thereby leaving the directors and officers exposed to personal liability. And, in some instances, corporations are actively seeking to prevent a director or officer from obtaining coverage under D&O policies in order to preserve the proceeds for their own use.

The conflict between the corporation, on the one hand, and directors and officers, on the other hand, over policy limits is being played out in bankruptcy courts across the country wherein judges are increasingly being called upon to resolve these disputes. In this forum, fundamental principles of insurance contract law and bankruptcy law collide, often leaving directors and officers wondering what happened to the D&O policy they bargained for.

Understanding how this collision occurred requires an understanding of certain Bankruptcy Code provisions that, under certain circumstances, trump the express language of a D&O policy. This article addresses the intersections between the Bankruptcy Code and the D&O policy, as well as the result of efforts to avoid the application of Bankruptcy Code provisions to a D&O policy.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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