During the second afternoon session of the first day of the PLUS D&O Symposium, the panelists discussed the complex underwriting issues that arise when the company to be insured is insolvent, in bankruptcy, or close to bankruptcy. The panelists discussed the following topics and provided the following insights:

  • Bankruptcies have been on the rise in 2008 and 2009 (there were 49% more bankruptcies in 2008 than 2007, and 52% more bankruptcies in 2009 than 2008).
  • When a company is in bankruptcy, it is at increased risk of being named in a securities class action. In 2008, a company in bankruptcy had a 77% chance of being named in a securities class action, whereas companies not in bankruptcy only had a 2% chance of being named in such a suit.
  • The panel provided an overview of the legal and regulatory schemes governing the bankruptcy of companies, including the particularities of bankruptcies of banks. The panel noted that much of the case law arising out of the savings and loan crisis of the 1980’s is instructive to coverage issues involving bankrupt banks today, including the following issues:
    • Regulatory Exclusion: a number of courts upheld this exclusion and it could apply today to exclude coverage.
    • Insured v. Insured Exclusion: many decisions have addressed whether various key players in the bankruptcy setting (i.e., trustees, regulators, etc.) are Insureds for purposes of triggering this exclusion.
    • Bankruptcy/insolvency exclusion: a number of decisions have upheld this exclusion.
    • Definition of Claim: is a Cease and Desist Order a “Claim”? (The case law on this point may be of limited utility given the evolution of the definition of Claim in D&O policies) .
  • The panel listed certain key provisions that policyholders should insist upon when negotiating the terms of their D&O policies, including:
    • “Waiver of stay” provisions, which certain bankruptcy courts will recognize and which increase the chance that individual directors will be able to access policy proceeds.
    • “Order of Payments” provisions that specify that the policy must pay Side A claims before Side B or Side C claims.
    • A definition of Insured that includes the debtor in possession to ensure that bankruptcy coverage is available after the company enters bankruptcy.
    • Carve-outs to the Insured v. Insured exclusion to ensure that claims brought by the debtor in possession, trustee, etc., are not excluded.
    • A definition of Claim that includes administrative and regulatory proceedings.
    • A Side A retention of $0 (or a limited amount).
    • A provision requiring interim funding or advancement of defense fees.
  • Finally, the panelists discussed strategies directors and officers might employ to ensure that they have adequate insurance coverage when the company is close to, but not yet, in bankruptcy. The panel noted that it appears that deciding to strip entity coverage from an existing D&O policy could raise a number of bankruptcy issues, particularly where the directors making the decision to do so would potentially personally benefit from this action. An alternative strategy is to purchase Side A coverage, although this may be difficult or expensive where the company is close to bankruptcy.