Four Insurance Pitfalls That Every Bankruptcy Lawyer Should Avoid

When a company is in bankruptcy, insurance policies are a critical, but often overlooked, asset of the estate. For instance, policy proceeds may be significant, and possibly the only, source of recovery for some creditors. For debtors, company executives increasingly need to rely on the protections of directors and officers (D&O) insurance to defend and resolve creditors’ claims that their mismanagement drove the company into bankruptcy.

Unlocking the benefits and protections of insurance often presents challenges. Insurers do not just ‘open their checkbook,’ and they often insist on strict compliance with policy terms and conditions, particularly if doing so allows them to deny coverage. Therefore, bankruptcy practitioners must carefully navigate the road to coverage, avoiding pitfalls along the way that could lead to a claim denial. While there are many potential pitfalls, there are four common ones for every bankruptcy lawyer to be aware of: 1) the assignability of insurance proceeds; 2) the impact of a broad release provided to directors and/or officers; 3) the characterization of allegations against an insured and settlement payments, and 4) judicial limitations on executives’ access to defense coverage.

This article was originally published in the February 2019 issue of New Jersey Lawyer magazine, a publication of the New Jersey State Bar Association, and is reprinted here with permission.