depending on the jurisdiction, will be granted an
unsecured claim for unpaid SIR amounts under the
attachment point.
The Fight for Proceeds
Corporate directors and officers continue to feel the
ripples of the great financial tsunami of 2008. With
increased litigation and regulatory enforcement,
the importance of reliable protection for senior
management under companies’ D&O insurance has
never been greater. Corporate bankruptcies raise
the stakes exponentially. D&O insurance is a critical asset in bankruptcy and triggers fights between
directors and officers, who seek the proceeds to
defend against and settle claims asserted against
them, and debtors (or trustees) and creditors’ committees, who want to enhance the estate’s value.
Because many D&O policies have a single limit for
both defense costs and damages, there is an inherent tension between D&Os’ use of proceeds to pay
attorneys’ fees and the company’s desire to retain
proceeds to pay its own claims. A recurring dispute
in bankruptcy is whether D&O policy proceeds belong to the estate or to individual directors and officers (as opposed to the policies themselves, which
are universally considered estate property). If the
proceeds are property of the bankruptcy estate, the
automatic stay may preclude directors and officers
from accessing them.
Most courts hold that D&O claims involving side A
coverage — which affords direct coverage to the directors and officers for acts for which the corporate
organization is not legally required to indemnify
them — are not estate property. Because the proceeds are paid directly to the directors and officers,
the debtor does not have a property interest in the
proceeds. Nevertheless, if side A defens