Reed Smith Client Alerts

The news of major retailers, gyms and others filing or expecting to file for bankruptcy protection is yet another unfortunate reality of the COVID-19 pandemic crisis. A corporate bankruptcy can lead to a host of insurance-related issues, including claims made against directors and officers, competition for finite insurance limits, and disputes over who has rights or priority to, and can access, insurance policy proceeds. These questions are of particular concern for corporate directors and officers, who are already facing pressure to respond to the pandemic and the potential for COVID-19-related lawsuits.

Autoren: Carolyn H. Rosenberg J. Andrew Moss Emily E. Garrison Ann E. Pille

Disposable mask against Coronavirus 2019-nCoV droplet infection and an antibiotic syringe

Directors’ and officers’ liability (D&O) insurance, which is often purchased in large part to protect directors’ and officers’ personal assets in the event of insolvency, may help to mitigate the risks of these lawsuits. But not all policies are created equal. It is critical for all companies, even those not at current risk of insolvency, to review their D&O policies and other potentially applicable insurance prior to or in tandem with considering bankruptcy protection. This is especially true for companies that are nearing renewal or in the process of renewal or placement of coverage, and have the opportunity to seek to negotiate terms. When negotiating terms or reviewing policies, companies and their directors and officers should keep in mind several potential issues with respect to how D&O insurance may respond in the event of a corporate bankruptcy, including but not limited to who can access the policy proceeds after a bankruptcy filing, and whether the policy’s “Insured v. Insured” exclusion bars any potential claims asserted by trustees, creditors’ committees, or debtors-in-possession.

Policy proceeds in bankruptcy: Who has access?

Most D&O policies contain three types of standard coverage:

  • The “Side A” insuring agreement provides coverage for defense costs, settlements, and judgments arising from claims brought against directors and officers when the company cannot or is legally unable to provide indemnification.
  • The “Side B” or “corporate reimbursement” insuring agreement reimburses the company for defense costs, settlements, and judgments arising from claims or suits brought against directors and officers when the company is allowed or required to provide indemnification.
  • The “Side C” or “entity coverage” insuring agreement provides coverage for defense costs, settlements, and judgments arising from claims or suits brought directly against an entity. Public companies are typically covered only for securities claims under Side C, but private companies may have broader coverage.

When a company enters bankruptcy with a D&O policy that has shared limits that cover both individuals under the Side A insuring agreement and the company under the Side B or Side C insuring agreements, it is possible that creditors or others will argue that proceeds of the policy (including proceeds that could go towards covering the defense costs of individual directors and officers) are the property of the bankruptcy estate. If the proceeds are determined to be the property of the estate, the automatic stay provisions of the Bankruptcy Code may restrict individual directors and officers from accessing the proceeds absent an order modifying the stay.