Accessing The D&O Liability Coverage of a Bankrupt Corporation

An automatic stay in bankruptcy prevents anyone from accessing the property of the debtor estate, including the directors’ and officers’ liability (D&O) policies which insure individual directors and officers of the estate as well as the debtor. That does not mean, however, that the policy limits can be treated as a slush fund to satisfy creditors’ claims against the estate. The policy limits (or proceeds) remain available to settle covered liability claims against the covered individuals or, if they exist, covered liability claims against the company which survive the bankruptcy proceeding.

In deciding whether the D&O policy proceeds are subject to the stay, courts look to whether the policy only provides coverage to directors and officers (Side A coverage), or whether it also provides coverage to the debtor (Side B coverage or Side C coverage).  In the former case, the proceeds are not considered property of the estate. However, if the individuals and the company both maintain legitimate claims for coverage under Side B or C of the policy, the result can turn on the specific facts unique to the case. Where the individuals and the estate have legitimate competing claims against the policy, “the bankruptcy court must balance the harm to the debtor if the stay is modified with the harm to the directors and officers if they are prevented from executing their rights to defense costs.” Even in cases where the D&O policy proceeds are considered property of the estate, courts may nonetheless grant relief from the stay “to allow the insurer to advance defense costs payments when the harms weigh more heavily against the directors or officers than the debtor.”  Id. at 544.

Read the blog post: Accessing The D&O Liability Coverage of a Bankrupt Corporation