Financially distressed companies often can only obtain D&O insurance coverage on a policy with a bankruptcy or insolvency exclusion precluding coverage for bankruptcy-related claims. The enforcement of these exclusions in the wake of a subsequent bankruptcy can produce harsh results, and insureds often argue that the exclusion does not apply or even that the exclusion
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.
Continue Reading A Current Hot D&O Insurance Question: Are Bankruptcy Exclusions Enforceable?
One way or the other, I have been doing D&O for more than 35 years. One of the reasons I love what I do is that there is always something new and so I am always learning. This week’s new thing is a recent ruling by a federal district court ruling that a debtor’s insurer could not rely on a bankruptcy exclusion in the debtor’s D&O policy to deny coverage for an underlying claim because the exclusion violates the bankruptcy code’s probation against ipso facto provisions in executory contracts. In all my years, I don’t believe I have ever run across the bankruptcy code’s ipso facto provision prohibition, so the district court’s ruling in this case was a learning opportunity for me – and I suspect it will be for most readers as well.
Continue Reading D&O Policy’s Bankruptcy Exclusion is a Prohibited Ipso Facto Provision and Unenforceable