The bankruptcy context is particularly ripe for D&O claims, and it also represents a particularly difficult claims context for D&O insurers. Anyone with any doubts about just how complicated bankruptcy claims can be will want to take a look at the settlement that the various concerned parties recently reached in the bankruptcy of defunct Florida homebuilder, TOUSA, Inc.


As discussed below, various D&O insurers will be paying a total of $67 million to settle claims that had been asserted against former directors and officers of TOUSA and related entities. According to the motion papers, the settlement agreement is part of a “grand bargain” to resolve claims among the various parties in adversary proceedings filed in the bankruptcy matter, as a part of larger efforts to facilitate the entry of a liquidation plan for the TOUSA bankruptcy estate. The parties’ June 4, 2013 settlement agreement can be found here. The parties’ June 6, 2013 motion for court approval of the settlement can be found here.


The $67 million aggregate settlement amount does not include additional funds that will be contributed by at least one other D&O insurer that reportedly will be entering a separate settlement agreement, and also does reflect an additional $8.5 million that two of the insurers involved have agreed to pay toward incurred but as yet unpaid defense expenses. One of TOUSA’s D&O insurers declined to participate in the settlement, and the settlement contemplates an assignment to the bankruptcy estate and to secured lenders committee of the debtors’ and the insured persons’ rights against the non-settling insurer. The settlement agreement is subject to bankruptcy court approval.



On January 29, 2008, TOUSA and related entities filed a voluntary bankruptcy petition in the Southern District of Florida. In the years prior to the bankruptcy, related TOUSA entities had entered into a joint venture known as Transeastern JV to acquire another Florida homebuilder. In connection with the JV various TOUSA entities entered into certain debt financing agreements. The joint venture later failed.


On June 14, 2008, the unsecured creditors committee filed an adversary proceeding in the bankruptcy matter against a total of 19 former directors and officers of TOUSA and related entities. The committee alleged that the defendants had breached their fiduciary duties by failing to act in the best interests of the various TOUSA corporate entities and of the entities’ constituencies, including the creditors, and that certain of the defendant aided and abetted these breaches. During the course of ensuing proceedings, the individual defendants filed a total of six motions to dismiss the fiduciary duty claims, each of which was denied by the bankruptcy court.


The debtors and the individual defendants submitted the fiduciary duty matter as a claim to TOUSA’s D&O insurers. Certain of the insurers denied coverage for the claim. The debtors and the individuals filed an insurance coverage action as an adversary proceeding  in the bankruptcy matter seeking a judicial declaration of coverage  After the coverage action was commenced, the parties entered into an interim funding agreement that allowed for the payment of the defense fees of the individual defendants in the fiduciary duty action.


In addition, in December 2009 certain of the lenders involved in financing the failed Transeastern JV sent demand letters to the debtors and to the individual directors and officers asserting claims against them in connection with the various JV lending transactions. The debtors submitted these demands as claims to TOUSA’s D&O insurance carriers, for which several of the D&O insurers denied coverage.


In August 2010, the court ordered the parties to mediation. The list of participants in the mediation is long; it includes various creditors committees, the various debtor entities, the various entities that were involved in proving the joint financing of the failed JV, the individual defendants themselves, and as many as 12 D&O insurers.


The Settlement Agreement

It is some measure of the complexity of this matter and the number of moving parts that the mediation commenced in August 2010 only finally resulted in a settlement that could be submitted to the court in June 2013.


A total of ten of TOUSA’s D&O insurers participated in the settlement agreement submitted to the court. The ten participating insurers (and their respective contributions to the $67 million settlement and also toward additional defense expenses) are listed on page 11 of the settlement agreement. An eleventh insurer (apparently from Bermuda) reportedly will be entering a separate agreement in an amount that is not specified in the motion papers. A twelfth insurer (identified in footnote 1 on page 3 of the settlement agreement) declined to participate in the settlement, and one feature of the settlement is the debtors’ and the individual defendants’ assignment of their rights against this one non-settling insurer.


The list of the various parties and participants to this “grand bargain” settlement consumes more than two pages of the settlement agreement. As might be expected with a list of participants that long, the settlement agreement is complicated. As explained on page 9 of the motion for approval of the settlement, the $67 million settlement amount will be divided, with almost $48 million going to the unsecured creditors in connection with the breach of fiduciary duty claims; and a total of about $19 milliongoing to the various JV lenders, with this amount to be further divided among the lenders in differing amounts according to their respective interests. Presumably the separate settlement agreement with the Bermuda insurer will contribute additional amounts toward these various settlement funds.



The settlement documents does not detail how TOUSA’s D&O insurance program was arranged, but the D&O insurers’ varying payment amounts specified in the settlement agreement suggests that the insurance was arranged as a tower and that the various insurers contributed toward the settlement according to their respective attachment point in the tower, with each succeeding insurer in the tower contributing a correspondingly smaller amount.


It is not clear from the settlement papers, but it appears that the insurance programs from more than one policy year may have been implicated here  (for example, the description of the complications involved with defense counsel payments suggests that there was a dispute between at least two carriers that might have been the primary carriers). Obviously, the involvement of more than one insurance tower and questions whether only one or both of the towers had been triggered represented a further complicating factor in trying to reach a settlement agreement.


Given the bankruptcy context, it seems probable that the insurance was funded as a loss under the D&O insurance policies’ Side A coverage (providing coverage for amounts that are not indemnified, whether due to insolvency or legal prohibition). This detail may have been relatively unimportant to the various “traditional” D&O insurers. But to the extent that any of the excess D&O insurers were providing only excess Side A insurance (or Excess Side A/DIC) insurance, this is a very important distinction, because if these losses were not Side A losses the Excess Side A insurers’ coverage would not have been triggered. From outward appearances (and it is always hard tell from the outside) at least some of the contributing D&O insurers were Excess Side A insurers. If that is the case, then this represents yet another recent example where the Excess Side A limits have been called upon to contribute toward a major D&O loss.


I can only imagine how difficult it was for the various parties to reach a settlement understanding in this case.Actually, that isn’t quite right – I really can’t imagine how they reached a settlement understanding.


With all of the competing claimants and the varying and competing interests, and the various insurers – many of them disputing whether there coverage was even involved owing to questions whether more than one tower of insurance was involved – trying come up with a framework for settlement, figuring out how much each insurer would contribute, and then deciding how the various contributions would be divided among the various claimants, had to have been an absolute nightmare. Just to add to the mix, there were further complications owing to the Bermuda insurer and to the one remaining excess insurer that declined to participate in the settlement. And throughout all of this, defense costs that would erode the amount of limits remaining for settlement were being incurred.


There is probably much more besides that could be said about this settlement, particularly by someone with an inside perspective (and I encourage anyone with a perspective on this settlement to add their comments to this post, using this blog’s comment feature if possible and posting anonymously if necessary).


The one last thing I will say is that this massive settlement is yet another example of a jumbo D&O settlement outside of the context of securities class action litigation. As I have noted numerous times in recent years on this site, the mix of corporate and securities litigation is changing, and while securities class action litigation remains important, it is now one of multiple sources of significant corporate and securities litigation. Increasingly, these other types of corporate and securities lawsuits are contributing significantly to the severity of losses in this arena. The number of jumbo D&O settlements that do not involve securities class action litigation continues to grow.