Securities Litigation And Insolvency: The Case For The Director And Officer Insurance Proceeds

The availability of director-and-officer – or “D&O” – insurance has for many years been one of the primary financial protections for individuals serving as directors and officers.  The recent spate of failing companies has highlighted the importance of D&O insurance, a very real threat to the availability of D&O insurance proceeds has materialized.  This threat manifests itself when companies file for bankruptcy protection and parties to the proceeding -- trustees, creditors or estate representatives -- claim the proceeds of the D&O insurance are assets not of the directors and officers, but rather, of the debtor’s bankruptcy estate.  A finding that the proceeds are the property of the estate can have devastating consequences for individual directors and officers.  Assets that are the property of the estate can be frozen indefinitely pending resolution of the bankruptcy proceeding.  This results in a strong disincentive to talented and competent individuals serving as directors and officers.  This article describes the current state of the law on this issue, assesses the strength of the various positions taken by the courts addressing the issue and suggests the proper analytical framework within which such cases should be decided.