Companies purchase directors and officers (D&O) insurance to shield management from personal liability related to the business and to attract talent. D&O policies often cover defense costs and fund settlements. Similarly, D&O coverage may provide an avenue of recovery for creditors when the company faces financial distress, including a bankruptcy filing. Potential claims against D&Os may arise from general mismanagement of the business, breaches of fiduciary duties, as well as from intentional harmful acts. It is quite common for third parties to question or second guess management decisions, and such decisions are subject to higher scrutiny once the company files for bankruptcy protection.
Yet, the protections afforded by D&O policies may be inaccessible if devoid of certain nuanced provisions. For example, the benefits of such policies have been curtailed by the breadth of some courts’ broad application of the “insured vs. insured” exclusion, which is common to D&O policies. As its name suggests, this exclusion generally bars claims brought by one or more insureds against other insureds. But some courts have expanded the exclusion’s scope to reach claims brought by or on behalf of the bankruptcy estate against insured directors and officers. Nevertheless, there are certain steps that bankruptcy and insurance practitioners can take to avoid or minimize the pitfalls of the insured vs. insured exclusion.
