D&O insurance and distressed risk: Is your program bankruptcy ready?

Business bankruptcy filings totaling 23,043 through June 30, 2025 reflected a 4.5% increase year-on-year, having now eclipsed the number of filings in the pandemic year of 2020 (22,482). Chapter 11 filings through June 2025 (8,408), in particular, were 11% greater than in 2020 (7,568).

Numerous factors give rise to heightened figures. Among them are higher interest rates, inflation, slowing economic growth, tighter credit conditions, refinancing challenges and reduced government support. Tariffs and resulting supply chain challenges and government funding cuts, may contribute to prolonged conditions of distress (see our articles on the potential impact that tariffs and government funding cuts may have on D&O risk).

With business slowdowns and cash management concerns, bankruptcy filings may be inescapable for many organizations. Additionally, evolving financing structures, such as private credit, can intensify scrutiny and pressures on directors and officers, as higher leverage and lender-driven controls may sharpen stakeholder focus on management decisions in distress (see our article on identifying and managing private credit risks).

In this article, we examine how corporate bankruptcies can give rise to claims under D&O insurance policies. We also evaluate how these claims may prompt third parties, such as creditors, to assert interests in policies, and how coverage features and the Bankruptcy Code’s “automatic stay” provision can affect the outcome of those efforts and ultimately, the protection available to directors and officers. These dynamics, currently playing out in In re First Brands Group, LLC, Case No. 25-90399 (Bankr. S.D. Tx. 2025), highlight the importance of examining the adequacy of Side A-only limits within corporate D&O programs.

How business bankruptcy works: Chapter 7 and Chapter 11 explained

The most common forms of business bankruptcies in the United States are Chapter 7 and Chapter 11 filings. If a firm is filing under Chapter 7, it is ceasing operations. Chapter 7 is “liquidation.” In a Chapter 7 filing, the bankruptcy court appoints a trustee, who then identifies, collects and liquidates the debtor’s assets to pay off creditors to the extent possible. In doing this, the trustee may look to see where liabilities to the company may lie. They may then commence litigation to collect on those liabilities and, in some instances, bring suit against directors and officers.

In contrast, Chapter 11 is most often “reorganization.” In a Chapter 11 filing, the firm may not be liquidating or winding down. Instead, it is seeking protection from creditors as it restructures its debt. Chapter 11 provides the debtor with an opportunity to remain open and to operate as a debtor-in-possession. It does so subject to fulfilling obligations under a reorganization plan negotiated and approved in the bankruptcy process.

In a typical “free fall” Chapter 11, the debtor files without a negotiated restructuring framework and with uncertain exit capital structure. In contrast, in a “pre-arranged” bankruptcy, there is a general consensus among creditors that a Chapter 11 case should be filed, but an agreement on restructuring of debt cannot be achieved prior to filing. A “pre-packaged” filing, or “pre-pack,” involves a reorganization plan that the debtor prepares with its creditors in advance of its filing. Thus, with a pre-arranged or pre-pack filing, a filing is ultimately required, but the process can be cleaner and less protracted.

Companies most often file under Chapter 11, believing they can rehabilitate their affairs under a reorganization plan. Nevertheless, after filing, it may become apparent that rehabilitation is not likely to be successful. In this instance, the organization may convert its filing into a Chapter 7 liquidation.

Likewise, bankruptcy filings can be “voluntary,” as described in the examples above, or they can be “involuntary.” In an involuntary bankruptcy, creditors may commence a proceeding against the debtor, attempting to force it into a Chapter 7 or 11 bankruptcy. Courts may grant involuntary bankruptcy to the extent the company is generally not paying its debts as they become due (with exceptions).

Understanding the bankruptcy automatic stay and its impact

An important component of any bankruptcy is the automatic stay, a provision in Section 362 of the Bankruptcy Code which temporarily stalls most actions by creditors and others pursuing claims outside of the bankruptcy process. The stay takes effect immediately upon the debtor’s filing for bankruptcy and applies to both Chapter 7 and Chapter 11 cases.

The stay is typically understood as a means of preserving estate assets and maintaining the status quo. Subject to numerous exceptions, it may also limit a debtor’s ability to use or dispose of assets without court approval. For purposes of D&O liability and insurance, and absent court approval, the stay may restrict a debtor’s ability to advance or indemnify directors and officers for claims, including claims which may be asserted in connection with the bankruptcy.

How automatic stay affects D&O insurance coverage

Because traditional D&O policies providing Sides A, B and C coverage insure the debtor company as well as its directors and officers, the policies are often treated as property of the bankruptcy estate and subject to the stay. In contrast, Side A policies do not insure the company and instead provide coverage exclusively to non-debtor directors and officers. As a result, Side A-only policies are unlikely to be considered estate assets or subject to the stay’s restrictions.

In practice, this can create a complex process in which creditors attempt to assert an interest in the ABC policy (and corresponding follow form excess policies) and object to efforts to lift the stay to make payments on behalf of individual insureds. Where a company maintains additional Side A only coverage, however, a court is likely to be agreeable to issue a “comfort order,” lifting or partially lifting the stay and allowing at least the Side A insurer to pay certain D&O losses, such as defense expenses.

In the ongoing In re First Brands Group case, referenced above, directors and officers sought relief from the stay to access D&O insurance proceeds for defense costs. On January 7, 2026, the court lifted the stay relative to the Side A policies but not the ABC policies, at least not now. Although it is less common for courts to deny lifting the stay as to the entirety of an ABC policy, the outcome in First Brands does have precedent. See, In re Metropolitan Mortgage & Securities Co., 325 B.R. 851, 857 (Bankr. E.D. Wash. 2005), which concluded the debtors held legal interests in the insurance proceeds of the policies, "which interests are of value to the estate," and that the proceeds were property of the estates subject to the protections afforded by the stay. Metropolitan Mortgage relied in part on In re Circle K Corp., 121 B.R. 257 (Bankr. D. Ariz. 1990), which also held the policies and proceeds were property of the estate, reasoning that because they were indemnity policies, the debtor had a right to the proceeds.^[1]

Importance of Side A limits adequacy

Given the risk that third parties might assert an interest in a debtor’s ABC policies, companies should recognize that those limits may not be fully available to satisfy D&O claims. Engaging in discussions with their broker and its distressed risk coverage specialists can help them evaluate the limits of Side A-only coverage in their program and ensure maximum protection for directors and officers and their personal assets.

Types of D&O claims in bankruptcy

Claims against directors and officers of bankrupt organizations can take many forms. They often include the following:

• Breach of fiduciary duty: Failure to act in the company’s best interests, including creditor interests once insolvency looms (i.e., in the “zone of insolvency”), resulting in financial harm
• Deepening insolvency: Post-insolvency conduct that exacerbated the company’s financial decline
• Fraudulent trading or transfers: Improper asset transfers or preferential treatment benefiting insiders or favored creditors
• Mismanagement: Poor decision making or failure to address financial distress leading to insolvency
• Bad faith/corporate waste: Inadequate oversight, weak controls, or self-dealing that depleted company assets
• Misrepresentation: False or misleading statements to lenders, investors, vendors, or other stakeholders
• Private credit: Actions tied to private credit arrangements, including decisions affecting highly leveraged loans, covenant enforcement, or lender protections
• Securities claims: Public-company disclosure violations preceding financial distress
• Secured creditor claims: Impairment of collateral, unauthorized transactions, or financing-related misrepresentations
• Unsecured creditor claims: Inequitable treatment, preferential payments, or reliance on misleading solvency statements

Key D&O policy provisions to review in bankruptcy situations

Given application of the automatic stay in bankruptcy filings, indemnification protections on which directors and officers rely may not be immediately available. As a last line of defense, D&O coverage may be the only remaining protection.

Coverage for foreseeable claims is generally contemplated within a market-standard D&O policy. Nevertheless, where there may be competing claims to policies and their proceeds, certain provisions can convey insurer/insured intentions to preserve limits for the benefit of directors and officers. Those provisions include the following, among others:

• Bankruptcy waiver: A policy’s bankruptcy clause may protect a director or officer’s personal assets by specifying that
  1. A bankruptcy filing will not relieve the insurer of its coverage obligations
  2. The policy is intended to benefit individual insureds as a matter of priority
  3. The parties will not oppose or object to efforts to obtain relief from the automatic stay to pay defense costs and satisfy indemnity obligations
• Change in control: Some, but not all policies provide that the appointment of a receiver, liquidator, trustee, or any comparable authority shall constitute a change in control, ceasing go-forward coverage at that point and converting the policy into runoff, or tail, coverage through the end of the policy period. Attention to change in control wording is essential to avoid surprises, and alternative wording is widely available and often desirable.
• Order of payments: An “order of payments,” or “priority of payments” provision may specify that the insurer is bound to prioritize claim payments under Side A before paying losses under Side B or C. In some cases, the clause may authorize the organization to advise the insurer to delay payments under Sides B and C in deference to future Side A payments.
• Entity vs. insured/insured vs. insured exclusion: In the context of bankruptcy, claims may be asserted against directors and officers by trustees, receivers, the company itself as a debtor-in-possession and other bankruptcy constituencies. To protect against application of the exclusion, companies should seek to exempt such claims from the exclusion. Additional exclusion carvebacks should be considered and sought.
• Definition of “company”/”organization”: The definition often includes the organization itself and all subsidiaries, as well as any such organization as a debtor-in-possession.

Additional terms that can bear on distress-related claims should be scrutinized:

• Conduct exclusion: Claims may be excluded where the alleged wrongdoing is proven in a final, non-appealable adjudication. Policy wording specialists may be able to strengthen the exclusion’s conditions to ensure its limitations do not inadvertently and prematurely trigger.
• Definition of “loss”: Coverage may be limited with respect to some forms of non-compensatory relief (such as disgorgement of ill-gotten gain), as well as certain civil fines, penalties, taxes and unpaid wages. Broker support should be engaged to strengthen what items constitute “loss” and to maximize efforts to remove or mitigate other limitations in the definition. Furthermore, Side A carve-outs may be obtainable.

D&O insurance is, first and foremost, a policy designed to cover third-party liability exposures. Nevertheless, the policy often includes first-party coverages that could be beneficial to companies that are insolvent or in the zone of insolvency:

• Crisis management: First-party coverage may be available for certain crisis management expenses to the extent a company has experienced a “crisis,” as defined in the policy. Events that may trigger coverage include negative earnings announcements, financial restatements and the elimination or suspension of dividends. In some policies, the filing of bankruptcy itself may constitute a crisis. The coverage is customarily subject to a sublimit of liability.
• Reputational risk: Similar to crisis management coverage, some policies include first-party coverage for a director or officer’s “reputation” risk. Also traditionally sublimited, the coverage may be applicable to insured persons to the extent their reputations are adversely impacted in a crisis. The triggers may be narrow and could require the act of an enforcement authority.

In 2026, D&O insurers are pressing for greater rate stabilization, so they may be less agreeable to premium reductions. Through effective brokering, insurers should be pressed to differentiate their offerings with other areas of value, such as enhanced coverage. Overall, but especially in the context of distressed risk, improvements to consider include:

• Broadened definition of “insured person”: Where clarity may be required to ensure certain individuals, such as finance officials, CISOs and others, fall within coverage, an enhanced, more modern definition could be a benefit. See our article, Who is an “officer?” It’s time to address this.
• Narrower lead-ins to policy exclusions: In most cases, excluding certain exposures may be customary and reasonable, but the words matter. Brokerage support should be sought to seek opportunities to narrow the reach and scope of exclusions where warranted.
• (Side A DIC) Enhanced discovery period: A discovery period of unlimited duration may be available for (1) insured persons upon entry of a final order of dissolution in a bankruptcy proceeding involving the company and (2) former executives.
• Definition of “wrongful act”: The definition may be expanded to include insured persons in a controlling shareholder capacity, i.e., to address exposures that insured controlling shareholders may owe to minority shareholders, as well as selling shareholders.

With advancements that Willis has achieved in coverage analytical modeling, several additional areas of policy and program improvements are possible.

Conclusion

Understanding the D&O coverage implications of distressed risk and corporate insolvency will help risk professionals anticipate internal questions in a more focused manner. As annual program renewals approach, it is essential to address program structure (particularly with respect to Side A coverage), to model and scrutinize limits adequacy and to enhance coverage breadth as much as possible with distressed risk exposures top of mind.

Footnote

1. There is also legal authority applicable to ABC policies that distinguish between ownership interests in the policy, on the one hand, and the proceeds of the policy, on the other hand. The nuance can be important in the context of specific cases, but is beyond the scope of this article. Return to article undo

Author

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John M. Orr

D&O Liability Product Leader, FINEX NA

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