When Worlds Collide: The Battle for D&O Insurance Proceeds in Bankruptcy
Directors and officers of large companies expect their benefits to include insurance protecting them from third-party claims arising from actions they take performing their corporate duties. This coverage, known as directors and officers (D&O) insurance, indemnifies directors and officers and pays defense costs in actions brought against them in their corporate capacities. Directors and officers rely on this coverage when making hard decisions and taking risks on behalf of the company. However, if the company files for bankruptcy, or is placed into a receivership, they may find themselves battling for their D&O benefits with a trustee or receiver who contends that the proceeds belong to the debtor's estate. How can this happen?
This article examines the increasingly common conflict over D&O proceeds between state fiduciaries and insureds. These fights will arise more frequently in high-stakes financial fraud cases with criminal cases pending against the directors and officers in addition to securities violations alleged against the company. While most companies purchase D&O coverage with sufficiently high limits, when a company collapses due to alleged financial fraud such as a Ponzi scheme, the resulting creditors' claims may exceed the policy limits and the company's other unencumbered assets. This sets the stage for a battle over proceeds.