Among the looming economic consequences of the pandemic is the likelihood of a huge surge in bankruptcy filings. A rise in bankruptcies will in turn likely lead to an increase in the number of bankruptcy-related litigation claims against directors and officers of the bankrupt companies, which in turn could lead to insurance coverage issues under the companies’ D&O insurance policies. In the following guest post, Alicia Garcia and Kate Hausmann, Complex Claim Specialists with Hiscox USA, and James Talbert and Elan Kandel of the Bailey Cavalieri law firm take a look at the issues that could arise in the bankruptcy context with respect to the policies’ Insured vs. Insured Exclusion. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.
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No Coverage for Legal Expenses Incurred in Declaratory Judgment Action
In an interesting decision that touches on a number of basic D&O insurance coverage issues, a federal district court judge applying Oklahoma law has ruled that a company’s management liability insurance policy does not provide coverage for legal expenses a former company executive incurred in a declaratory judgment action that had been filed by another company executive to determine the parties’ rights under a profit sharing agreement. The court concluded that there was no coverage because the individual seeking coverage had not been named as a defendant in the lawsuit by reason of his status as an insured person. Even more interestingly, the court concluded further that, even though the individual had been named as a defendant in the declaratory judgment lawsuit, he had not incurred “Defense Expenses” in the lawsuit, and therefore suffered no “Loss.” Western District of Oklahoma Judge David Russell’s June 30, 2020 redacted opinion in the insurance coverage action can be found here.
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D&O Insurer’s Duty to Advance Defense Costs Applies to Covered Claims, Not Potentially Covered Claims
Many traditional liability insurance policies contain provisions specifying that in the event of a claim the insurer has the duty to defend the insured. However, many management liability insurance policies do not impose a duty on the insurer to defend the insured; rather, these policies usually provide that insureds will defend themselves, with the obligation on the insurer to advance defense costs as they are incurred, subject to all of the policy’s terms and conditions. However, because defense obligations under the more traditional duty to defend arrangement are well established and more familiar to many courts, courts sometimes attempt to resolve issues arising under duty to advance policies by referring to principles established with regard to duty to defend policies.
In a recent decision, the Ninth Circuit declined to apply duty to defend principles to interpret a D&O insurer’s duty to advance, holding that the insurer’s duty to advance extended only to actually covered claim and not to potentially covered claims as would be the case under a duty to defend policy. The appellate court also affirmed the district court’s rulings with respect to the applicability of the policy’s wage and hour claims exclusion; the policy’s definition of “loss,” precluding coverage for amounts deemed “penalties” in the applicable statute; and the insured vs. insured exclusion. A copy of Ninth Circuit’s June 17, 2020 opinion can be found here.
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The Insured vs. Insured Exclusion’s Bankruptcy Claim Coverage Carve-Back
As I noted in yesterday’s post, there could be a significant number of bankruptcies in coming months, and D&O claims in the bankruptcy context could give rise to insurance coverage disputes. In addition to the possible coverage issues I noted in yesterday’s post (pertaining bankruptcy exclusions, in particular), another issue that could arise is whether or not coverage for claims brought on behalf of the bankrupt debtor’s estate or on behalf of unsecured creditors is precluded by the insured vs. insured exclusion found in most policies.
Most insured vs. insured exclusions include a carve-back preserving coverage for claims brought by trustees and other estate representatives. In a recent ruling that broadly considered the scope and purpose of the insured vs. insured exclusion’s bankruptcy claim coverage carve-back, a New York intermediate appellate court concluded that the carve-back applied to preserve coverage for a claim brought by a Creditor Trust formed to pursue post-confirmation legal actions on behalf of unsecured creditors. The May 14, 2020 opinion in Westchester Fire Insurance Company v. Schorsch can be found here.
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A Current Hot D&O Insurance Question: Are Bankruptcy Exclusions Enforceable?
As a result of the economic fallout from the coronavirus outbreak, a number of businesses will struggle to survive. Some may wind up in bankruptcy. Indeed, a May 28, 2020 Harvard Business Review article (here), suggests that there could even be a “bankruptcy pandemic” – an “explosion” of bankruptcy proceedings that could “overwhelm” the bankruptcy courts. A number of companies have already filed for bankruptcy, and there undoubtedly will be more to come.
D&O insurance underwriters are well aware of these concerns, and are taking these possibilities into account, both with respect to the financial underwriting they are requiring, and with respect to the terms and conditions they are offering. In some instances, the D&O underwriters are including bankruptcy exclusions or creditors’ claims exclusions among the terms offered. These exclusionary provisions potentially represent a significant diminution of coverage. However, a recent law firm memo raises the question whether or not the type of bankruptcy exclusion that some carriers are offering are, in fact, even enforceable.
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Guest Post: Implications of PPP Certifications for D&O Coverage
In a recent post (here), I discussed the possibility investigative, regulatory, and enforcement actions in connection with funds disbursement under the Paycheck Protection Program. In the following guest post, Peter M. Gillon of the Pillsbury Winthrop Shaw Pittman LLP law firm takes a closer look at the kinds of claims that may arise in connection with the PPP, as well as the D&O insurance issues that the claims may present. A version of this article previously was published as a Pillsbury Client Alert. The author wishes to acknowledge the assistance of Daniel Gillon (Duke Law 2021). I would like to thank Peter for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Peter’s article.
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In Lieu of D&O Insurance, Musk Agrees to Provide Tesla with “Coverage”
Readers know that I have been following the SEC enforcement action and the securities class action litigation arising from Tesla CEO Elon Musk’s infamous “take private” tweets. I recently noted that the court in the securities suit about the tweets ruled that the case can go forward. I am sure I am not the only one who has wondered while thinking about these events what kind of D&O insurance Tesla carries. While the question of what kind and amount of D&O insurance might be applicable to the pending claims is interesting, what may be even more interesting is that, according to a recent SEC filing, Tesla recently decided to forego D&O insurance for the current period based on an undertaking by Musk to provide the company and its board with equivalent “coverage,” as discussed below.
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Business Insurance Webinar: D&O Risks from COVID-19
At Noon EDT on Wednesday April 22, 2020, I will be participating in a free hour-long Business Insurance webinar with my good friends Priya Cherian Huskins of Woodruff Sawyer and Bill Passannante of the Anderson Kill law firm on the topic of D&O Risks from COVID-19. The session will be moderated by Business Insurance’s Gavin
Guest Post: D&O Insurance Issues Arising from the COVID-19 Crisis
As I have noted in numerous post on this blog (most recently here), among the many different types of fallout from the current coronavirus outbreak are the potentially significant implications for corporate liability and for D&O insurance. In the following guest post, Lawrence J. Bracken, Geoffrey B. Fehling and Lorelie S. Masters of the Hunton Andrews Kurth LLP law firm consider these implications, including the types of claims that may arise and the impact the pandemic may have D&O insurance policyholders and their insurers. I would like to thank the authors for allowing me to publish their article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to publish a guest post. Here is the authors’ article.
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Coronavirus and D&O Insurance: An Interim Update
Much has changed since I published my first coronavirus-related post a month ago. The number of confirmed cases and of deaths has soared. Much of the country is now on lockdown. School, work, business — so much of basic social and economic activity has stopped. Much has changed in the D&O arena as well. There have been both claims and underwriting developments, and a number of trends have emerged. In the post below, I discuss some of these developments and trends. I recognize that my observations are limited by my own personal perspective; it is my hope that others will share their observations about the current environment using the comment feature to add their views to this post.
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