A case decided last week by the Sixth Circuit illustrates the importance of seeking bankruptcy claim policy amendments when placing D&O coverage. Indian Harbor Ins. Co. v. Zucker (6th Cir. Jun. 20, 2017) involved the application of the insured-vs.-insured exclusion and specifically, whether the policy’s insured-vs.-insured exclusion precluded coverage for a claim brought by a company’s liquidating trust, to which the company’s claims had been assigned by the company as debtor-in-possession after the company filed for bankruptcy. After the company’s claims were assigned to the liquidating trust, the trustee sued several of the company’s former executives for breach of fiduciary duty.
The company, Capitol Bancshares, had purchased a management liability policy prior to filing for bankruptcy. The policy included a standard provision that excluded from coverage “any claim made against an Insured Person … by, on behalf of, or in the name or right of, the Company or any Insured Person,” except for derivative suits by independent shareholders and employment claims. The Sixth Circuit held that coverage for the trustee’s claims against Capitol’s former executives was precluded by the policy’s insured-vs.-insured exclusion, specifically because “[a]s a voluntary assignee, the Trust stands in Capitol’s shoes and possesses the same rights subject to the same defenses.” Accordingly, said the Sixth Circuit, the trust had filed the lawsuit “in the … right” of Capitol, which was an insured, against the former executives, who also were insureds. The court found that the Bankruptcy Code did not change application of the exclusion: “The relevant bankruptcy provisions do not support [the trustee] and the [executives’] contention that the debtor in possession and pre-bankruptcy company are necessarily distinct legal entities—at least for purposes of the insurance contract.”
This outcome could have been avoided at the time the insurance policy was placed by inserting standard bankruptcy claim amendments, including carve-outs for (1) claims brought by a bankruptcy trustee or receiver and (2) claims brought by a debtor-in-possession after a trustee or receiver has been appointed. These bankruptcy claim provisions, and others, are designed to protect D&O liability coverage for individual insureds in the event of the company’s bankruptcy and/or claims asserted by a trustee or other company assignee after bankruptcy filing. Company officers, directors and other individual insureds should confirm—at the time coverage is placed—that those protections are in management liability policies insuring them.