The Impact of a Corporation’s Bankruptcy on Its D&O Insurance

Carrie E. Cope’s chapter on Directors’ and Officers’ Liability Insurance in the New Appleman Insurance Law Practice Guide includes discussions on the impact of the corporation’s bankruptcy on indemnification. If the corporation’s indemnification obligations to directors and officers were incurred prior to the date the bankruptcy proceedings were instituted, indemnification payments cannot be made without the bankruptcy court’s approval. Directors and officers who feel they are entitled to indemnification from the corporation must file a proof of claim with the bankruptcy court and the claim will typically be treated as a general unsecured claim. Policy proceeds may be subject to an automatic stay which would bar the corporation from advancing costs to directors and officers. But the Fifth Circuit has held that while D&O policies belonged to the bankrupt corporation’s estate, the proceeds of the policies belonged to the directors and officers covered under the policies.

Another issue in the bankruptcy context is whether the “insured vs. insured” exclusion often found in D&O liability insurance policies excludes coverage for a bankruptcy trustee’s claims on the ground that the trustee stands in the corporation’s shoes for purposes of asserting claims against the directors and officers. The courts are not uniform on this issue. One bankruptcy court has reasoned that the exclusion should apply because the transfer of claims to a third party is unlikely to affect the availability of coverage as the legal theory, the injured party, and the facts underlying the claim will remain the same. Yet another bankruptcy court held that the “insured vs. insured” exclusion does not apply to trustees, because there is no threat of collusion (in contrast to situations where both the corporation and its directors could seek coverage under a D&O policy.)

See New Appleman Insurance Law Practice Guide §§ 37.06[6], 37.13[10] on Lexis.com.