Ensuring D&O coverage in bankruptcy context is key

The legal issues that arise when a company files for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code are complex and can create some uncertainty as to the extent of coverage available to both the entity and the directors and officers of the company, according to industry experts.

“From a broker’s perspective, your first priority is to make sure the leaders, the executives, the directors and officers are covered in the context of bankruptcy,” said Rob Yellen, New York-based executive vice president of Willis Towers Watson PLC’s FINEX North America practice.

“There’s also, in a D&O policy, coverage for the company. In the bankruptcy context, there can be tension between those two things,” said Mr. Yellen.

Several key provisions in a D&O policy can help buyers ensure that they have adequate coverage in a bankruptcy setting, according to industry experts.

“Make sure the policy definitions are broad enough to provide coverage for any sort of claim or litigation or investigation that could be brought or commenced against a director or officer,” Paul Ferrillo, New York-based litigation shareholder, Greenberg Traurig LLP, said in written comments.

“Most important of these are claims brought by a bankruptcy or litigation trustee, liquidator or creditors’ committee,” said Mr. Ferrillo. “If there is coverage, it would typically be a ‘carveout to the insured versus insured’ exclusion,” he wrote.

Another important D&O policy provision is a straightforward “priority of payments” clause that covers the directors and officers claims before any claims of the company are considered, Mr. Ferrillo wrote.

If the economy moves into a recessionary environment in the second half of 2019, these different aspects of the D&O policy, including the Side A difference in conditions coverage, the priority of payments provision and extended reporting periods are going to “come to the fore very quickly,” said Paul King, Dallas-based senior vice president and national executive professional solutions technical director, executive and professional solutions for USI Insurance Services LLC.