Bankruptcy is considered a high-stress event for a company, and having the proper amount of coverage under a directors and officers liability policy is crucial to protect the business and individuals in the boardroom, legal experts say.
Unlike bankruptcies resulting from mass tort liabilities that will involve general liability insurance coverage, bankruptcies resulting from a company's financial duress or poor performance often involve a different basket of issues that are subject to D&O policies.
William Passannante of Anderson Kill PC said some companies look at D&O coverage as solely intended to protect individuals and will often purchase only Side A coverage in order to attract board members.
"One of the first things a board member asks is if they have D&O insurance and how much," he said. "So, if you want to have good board members, ordinarily you need good coverage."
Conversion of Thinking
Passannante, who represents policyholders, said the "unwelcome event" of bankruptcy in and of itself can give rise to D&O claims. Filing for bankruptcy can light the fuse for classic stock-drop cases as the announcement of insolvency or reorganization can cause stock prices to plummet, he said.
"Bankruptcy is a stress event on an organization, and D&O policies cover claims in the broadest sense for wrongful acts by management and the board," Passannante said. "When there are stress events, you have more claims."
He went on to say that bankruptcy can spark tension between a company and its board members, explaining that the event changes the obligations to debt holders and other creditors.
Bankruptcy, he said, creates a whole new playing field between a company and its directors.
"The standard mantra of a director is, 'I make decisions in the best interest of shareholders,"' Passannante said. " In the lead-up to a bankruptcy, loyalties change, and directors could end up with an obligation to debt holders. So that's a different way of thinking than the standard director or the standard everyday operating situation that directors find themselves in." ...
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