Bankruptcy and the D & O Policy - Are My Personal Assets Protected?
It starts with inclusion of “Entity Coverage” provided by the D & O Policy. Originally the d & o policy only provided two covers: (A) for the D’s & O’s (their personal assets) for non-Indemnifiable claims; and (B) for Corporate Reimbursement of Indemnifiable claims against the D’s & O’s. There was no coverage available for the Entity itself if it was named in a suit.
In the mid 1990’s, AIG (now Chartis) was the first carrier to offer coverage for the “Entity” in addition to covers (A) and (B) as described above. Other carriers soon followed. Then there was a period where the availability of “Entity” coverage was very limited. The limited supply was mainly driven by claims paid by carriers under this new insuring agreement.
A major effect of adding “Entity” coverage is the dilution of the available dollars protecting the personal assets of corporate D’s & O’s and the business entity for reimbursement obligations. Said differently, the limits of the policy are no longer dedicated solely for the benefit of the Directors and Officers and indemnification funding obligation on the part of the business owed to the D’ &O’s. (Of course, procurement of greater limits of coverage will assist in dealing with this issue to a great degree.)
Another major consequence associated with adding “Entity” coverage within a D & O policy is directly related to the issue of bankruptcy. Basically the presence of “Entity” coverage could lead a bankruptcy court to foreclose the director’s and officer’s ability to access policy proceeds leaving them to foot the bill on their own. This would be a problem for me! How about you? The matter became very visible when it received a lot of hype in the few years after the collapse of Enron.
Nevertheless case law suggests (at least in most jurisdictions I believe) that this issue should not be a major concern if handled properly by your insurance advisor.
There are two ways to handle protecting the policy’s availability to the D’s and O’s (today) for the situation of bankruptcy. The first is an “Order of Payments” provision in the policy that specifies that the directors and officers have the first right to policy proceeds. It is understood or at least believed that the bankruptcy courts will enforce these provisions and allow the D’s & O’s access to policy proceeds. Because of this type of priority provision in the Enron bankruptcy proceeding the bankruptcy court lifted the automatic stay, to the extent it applied, to allow Enron’s D’s & O’s to have access to the D & O policy proceeds for the purpose of paying their defense costs in litigation against them.
Another method to protect the D’s and O’s is to procure Excess Side A Only Directors and Officers Liability Insurance coverage. These policies are designed to cover only the liabilities of the Directors and Officers and should include drop down provisions to cover the D’s and O’s if the primary policy covering both them and the entity is not available to do so. Because these policies do not insure the entity itself, they are unlikely to be considered assets of the bankruptcy estate.
I hope this explanation helps.
If you really want to lock down the risk to protecting your personal assets as a Director or Officer of any business, you do both!