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D&O Insurance Issues in Bankruptcy

By Heidi Lawson

In a D&O policy, the definition of “Claim” can significantly affect the scope of coverage provided under that policy. The breadth of the definition, moreover, can differ significantly from one carrier's form to another. Forms also vary considerably with respect to the extent to which administrative or regulatory investigations are included within the definition of Claim. Unless specifically negotiated and carefully worded, many D&O policies will not automatically cover investigations, or at best, will provide very limited coverage. The insured needs to make certain that the formal triggers providing for investigative coverage are not unnecessarily restrictive. The definition of Claim must also take into account the types of litigation and investigations that may occur across a wide variety of jurisdictions, in order for coverage to apply.

For companies with U.S. securities exposures, another important issue is whether the D&O policy specifically includes coverage of damages that fall under Section 11 of the Securities Act of 1933 within the definition of “Loss.” Courts in certain jurisdictions have held that in the absence of such express language, Section 11 damages are restitutionary in nature and are therefore not “Losses” as provided for under a D&O policy. In order for coverage to apply, wording should be carefully drafted and negotiated.

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