Due to a continuing tight credit market and depressed asset values, bankruptcy trustees, debtors in possession and creditor constituencies, such as creditors committees, are hard-pressed to generate returns over and above the liens encumbering an estate’s assets in many bankruptcy cases. In light of the greater scrutiny of the performance of corporate executives, directors and officers (D&O) liability insurance is of growing interest in bankruptcy cases. In particular, a July decision by the U.S. Court of Appeals for the 9th Circuit suggests that trustees and Chapter 11 debtors must exercise great caution in connection with preserving and pursuing D&O claims.
Even if there is reason to believe that D&O claims exist, litigants should pay close attention to provisions in the insurance policy that limit the parties that can bring a D&O claim and trigger the policy’s coverage in a bankruptcy case. A recurring issue is whether a claim against the bankrupt’s directors and officers runs afoul of the so-called “insured v. insured” exclusion (insured exclusion) found in most D&O insurance policies. This exclusion generally bars claims against directors and officers brought by or on behalf of the company.
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