corporation agrees to waive the automatic stay so
that proceeds can be used to fund the defense.
Common Coverage Fights
Former directors and officers of a bankrupt company face significant financial risk. Many of their
prebankruptcy actions are carefully examined to
determine if any actionable wrongful conduct contributed to or caused the insolvency, particularly
in this era of heightened corporate scrutiny and
accountability.
When a bankruptcy trustee or other third party
brings claims against a company’s former directors and officers, insurance companies often argue
that such claims made on behalf of the bankruptcy
estate trigger the so-called “insured versus insured”
exclusion. Most courts note that the exclusion was
originally intended to prevent collusive lawsuits
brought by one insured against another to reap the
benefits of the D&O policy. In bankruptcy, insurance companies seek to apply the exclusion to bar
truly adversarial claims against directors and officers by arguing that a bankruptcy trustee, creditors’
committee or assignee of litigation rights stands
in the debtor’s shoes for purposes of commencing actions, and are therefore an “insured” so that
coverage might be denied the directors and officers
under the exclusion. The majority of courts opining
on this coverage defense have upheld the policyholder’s claim for insurance coverage, agreeing that
there is no identity of interest between a trustee
or other third party and the pre-petition debtor,
and that the claims are being brought on behalf of
creditors, not the debtor. Adding an express carveout to the insured-versus-insured exclusion that
includes claims brought by a debtor-in-possession,
a Chapter 11 trustee, creditors or other bankruptcy
constituencies is a good way to avoid having to
litigate this issue in the first place. Insurance companies should be receptive to incorporating these
carve-outs because they do not affect the exclusion’s
primary purpose of preventing collusive lawsuits.
On the flip side, a fair number of D&O policies
contain endorsements with a “bankruptcy” exclusion,
which purports to preclude coverage for suits brought
by a bankruptcy trustee that “arise out of ” a bankruptcy. Unfortunately, there is a split of authority on
the enforceability of such exclusions. One line of cases
holds that section 541(c) of the Bankruptcy Code
invalidates contractual terms that are conditioned on
the insolvency of the debtor or on the commencement
of a bankruptcy case; hence, the exclusion is unenforceable. Other courts rely on contract interpretation
to hold that broadly worded exclusions for actions
“arising out of bankruptcy” should be enforced, but
have not considered how section 541(c) might alter
that analysis. Regardless, policyholders should carefully analyze whether such an exclusion should be
included in their D&O policy.
Be Vigilant!
Policyholders must be particularly watchful when
they attempt to navigate the intersection of bankruptcy and insurance, where many factions vie for
critical insurance assets and insurance companies
are looking to exploit the resulting chaos. Failure to
be vigilant could leave you standing at the side of the
road with no coverage when it is most needed. s
Dennis J. Nolan is a shareholder in Anderson Kill’s
New York office and chair of the firm’s Bankruptcy
and Restructuring Group. Mr. Nolan concentrates his
practice in bankruptcy and restructuring and insurance recovery, and has extensive experience representing debtors, creditors’ committees and unsecured
creditors in complex Chapter 11 reorganizations.
212-278-1659
[email protected]
Marshall Gilinsky is a shareholder in Anderson
Kill’s Washington, DC, office and practices in the
Insurance Recovery, Captive Insura nce and Commercial Litigation Groups. Mr. Gilinsky is a member
of Anderson Kill’s Financial Services Industry Group,
the Hospitality Industry Practice Group as well as the
Banking and Lending group. He is an experienced
commercial litigator who applies his complex analysis skills with extensive experience in insurance coverage analysis and litigation and dispute resolution.
Mr. Gilinsky’s insurance coverage practice is focused
on property insurance, commercial general liability
insurance, errors and omissions, and directors’ and
officers’ insurance.
202-416-6554
[email protected]
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