As Covid-19 and the faltering economy continue to create financial stress on companies across a myriad of sectors, bankruptcies are expected to rise sharply. Executive liability insurers are responding by underwriting cautiously and more aggressively. As a result, the c-suite is likely to encounter rising premiums and more restrictive terms. One such example…the application of an insolvency and/or creditor exclusion. This generally rare exclusion is now appearing more frequently, affecting both public and private companies with weaker financials and those operating within certain sectors (such as the energy, oil & gas, and retail). So what can corporate officers do when anticipating or addressing an insolvency exclusion?

Be Prepared & Proactive: When approaching a D&O placement (or renewal), start the process as early as possible, and respond to requests for additional information with urgency. This is sound advice for all D&O coverage placements. When corporate directors are backed up against an impending date, insurers have more leverage over terms and pricing and may decline coverage extensions, effectively forcing the policyholder to place coverage with less favorable terms. It’s also recommended to get ahead of any potential financial underwriting questions pre-emptively. Proactively providing explanations and plans for future profitability will only work in the policyholder’s favor and may be enough to bypass an insolvency exclusion. It may be easier to try and bypass the application of such an exclusion altogether than it would be to try and remove it after its been applied.

Provide A Thorough Explanation & Future Forecast. When presented with a D&O proposal that contains an insolvency exclusion, the first thing corporate officers should do is assess their own financials. Are they giving a truly accurate picture of the prior and next 12 months or is there more to the story that may be missing? Are there any particulars that can help explain the corporate debt or any upcoming events that may significantly improve those financials in the immediate future such as spin offs, large contract acquisitions, equity raises, etc. It’s critical that these are communicated to your broker and all respective underwriters. Consider scheduling a conference call with the underwriter(s) to provide a deeper explanation of the company’s financials – when provided with positive outlooks, we’ve seen underwriters reverse their stance and agree to remove such exclusions. In the age of Covid, policyholders should also be ready to address Covid specific risk mitigation questions which will likely arise.

Review Terms & Exclusions Carefully: When all else fails and insolvency exclusions are entirely unavoidable, insureds should attempt to negotiate softer language where able. For example, for policies that exclude any claims “for, based upon, arising from or in any way related to the bankruptcy, insolvency, liquidation, or rehabilitation of the assured”, directors should ask for the preamble to be amended solely to “for” such claims. When performing policy reviews, corporate directors, and their counsel should also remember to review all policy terms carefully - just because a policy doesn’t include a scheduled insolvency exclusion doesn’t mean coverage is in-tact. While such endorsements are easier to identify, additional restrictive policy terms can be equally problematic, such as:

• The insured vs insured exclusion not containing adequate carve-backs for claims brought by any debtor in possession, examiner, bankruptcy trustees, receivers, liquidators or equivalent parties.
• Overly broad regulatory exclusions that may include receivers, liquidators (and similar parties) as defined “regulators”
• Change in control provisions that are triggered by the appointment of receivers, trustees, etc.
• Limited ERP (extended reporting provision) options. Policies that offer only limited ERP options can severely jeopardize the insured. Should the organization's financials further decline there is a great possibility that the carrier may decide to fully non-renew the following year. Having pre-negotiated pricing and guaranteed options for long extended reporting provisions ensure that, at the very least, the policyholders have the option of purchasing extended coverage for prior wrongful acts should there be no alternative options later.
   

Consider Alternative Side A: Companies that are unable to obtain full A-B-C D&O policies without a bankruptcy exclusion should attempt to obtain separate proposals for Side A coverage only. Since the organizations' solvency is the main underwriting concern, this may prove difficult, however each underwriter has their own perspective when it comes to providing terms and there's always a possibility that carving out corporate reimbursement and entity coverage may persuade an insurer or 2 to offer Side A only coverage. This is particularly true for companies that may have slightly distressed financials combined with other underwriting concerns such as prior or pending litigation or investigations. Because Side A DIC policies provide so many benefits, and due to the fact that Side A policies are unable to be seized by the courts as proceeds of the bankruptcy estate, all companies should be incorporating some element of separate Side A coverage today.

Consider Increasing Policy Limits: Some directors and officers may initially perceive insolvent and creditor excluded D&O policies as not providing any meaningful coverage of their assets. While it is true that the policy may not be offering direct protection against claims brought by creditors or those brought during insolvency, the policy is providing "indirect" coverage for such claims. Protection of the entity and its balance sheet, effectively lessens the likelihood of insolvency. An organization with already distressed financials that sustains a claim totaling 5-10 Mill may be enough trigger insolvency/creditor claims. Having a D&O policy with a 5 Mill limit in this case ensures that the organization is still able to remain financially afloat, allowing the directors to rely on their corporate indemnification if and when lawsuits are brought against them individually. For this reason, while it may seem counterintuitive, it may also make sense to consider increased policy limits when presented with insolvency exclusions. Because corporate indemnification will be the only form of direct protection for the corporate officers, it’s particularly critical that directors and officers ensure the organizations' indemnification agreements are as broad as possible.

Despite An Exclusion, There May Still Be Coverage: Lastly, even if a policy does contain an exclusion and claims arise, coverage may still be available. A few prior rulings have ruled insolvency exclusions were unenforceable due to violating specific sections of the bankruptcy code (as discussed more in depth here). This is even more likely to be the case where policy language is ambiguous. The broader message here, is that claim denials should not be taken at face value despite the application of such exclusions.