Directors and Officers Insurance Policy Proceeds as Estate Assets in Bankruptcy

Directors and officers of corporations take great comfort in having corporate insurance to protect challenges to their decision-making or allegations of failing to act–but are those policies cold comfort if the corporation goes bankrupt?

Bankruptcy courts saw an 11% increase in filings last year, with business bankruptcy filings rising 7.1% for the 12-month period ending December 31, 2025. Directors and officers of insolvent companies can face unique liability risks when it comes to bankruptcy. A Chapter 11 filing shifts control of corporate causes of action from the company’s directors and officers to trustees, creditors’ committees, or liquidating trusts–all of which act as fiduciaries to the company’s creditors.

Estate fiduciaries regularly name directors and officers in lawsuits seeking to recover on the estate’s behalf. Once a company enters the “zone of insolvency,” directors are subject to heightened duties that expand beyond the corporation itself to include the interests of creditors. With 20/20 hindsight, pre-bankruptcy transactions and strategic decisions are heavily examined. Indeed, bankruptcy can give rise to the “deepening insolvency” theory of breach of duty, subjecting directors to allegations of misfeasance for prolonging insolvency and increasing creditor losses.

An insolvent company often involves limited or encumbered assets, and D&O insurance towers often are one of the few sources of unencumbered funds available for creditor recoveries. As the estate typically cannot indemnify directors during bankruptcy proceedings, these actions are almost certain to impact the proceeds of a company’s directors and officers insurance policy.

Bankruptcy creates a unique circumstance in which a single fiduciary asserts an ownership interest in D&O policy proceeds as property of the estate while simultaneously seeking to recover those same proceeds from the directors and officers as damages. Compounding the issue, D&O policies are typically “wasting” policies, meaning that every dollar spent defending directors and officers against the trustee reduces the funds ultimately available for recovery by the estate if the trustee prevails.

To access funds from the D&O policy, a director generally does not need to seek bankruptcy court approval unless the policy proceeds are considered estate assets. Where insurance policy proceeds are estate assets, directors must seek court approval with a “comfort order” subject to the approval of the bankruptcy court. This provides creditors and estate fiduciaries–some of whom may be competing for those same funds in order to assert claims against the directors themselves–the opportunity to object. This can significantly delay a director’s access to defense funds, often creating protracted litigation to determine the parties’ respective rights to the policy.

‘The bankruptcy courts are in disagreement as to whether the proceeds of Side B and Side C policies are estate assets.’

A, B, or C Coverage

The Ninth Circuit’s decision in In re Minoco Grp. of Companies, Ltd. (1986) established a rather bright-line rule wherein a debtor’s insurance policies are estate assets, notwithstanding the fact that any resulting payments are made to third-party claimants rather than to the estate. However, In re Louisiana World Exposition (Fifth Circuit, 1987) departed from the standard set forth in Minoco by reframing the inquiry: The relevant question is not who owns the policy, but who owns the policy proceeds–and to whom those proceeds are payable–in determining whether the policy constitutes an estate asset. The Louisiana World court ultimately held that insurance proceeds payable directly to company directors and officers are not estate property.

Drawing on the reasoning of Minoco and Louisiana World, the Bankruptcy Court for the District of Delaware in In re Allied Digital Technologies Corp. (2004) articulated the modern analytical framework in assessing whether D&O policy funds constitute estate assets. The analysis under this framework typically turns on whether the policy provides Side A, Side B, or Side C coverage.

Bankruptcy courts largely agree that proceeds of a debtor’s Side A policy do not constitute estate property, given that the debtor lacks any legal entitlement to those proceeds and does not receive a benefit or reduction of estate liabilities from their payment.

In addition to standard Side A coverage, companies typically opt to purchase excess Side A Difference-in-Conditions (DIC) coverage, which provides an additional layer of protection for directors in the event that the underlying D&O insurance is depleted. A key feature of a Side A DIC policy is the “drop-down provision” allowing the Side A coverage to step in and provide coverage to directors where they are unable to secure coverage from the ABC tower.

The bankruptcy courts are in disagreement as to whether the proceeds of Side B and Side C policies are estate assets. Where Side B coverage permits the debtor to obtain reimbursement for indemnification expenses incurred on behalf of directors and officers, and Side C coverage affords direct coverage to the company, the debtor may, in each case, assert a colorable interest in the proceeds such that the policies are brought within the estate.

To address this issue, the court in Allied Digital focused on whether payment of the insurance proceeds would cause the debtor to suffer a direct financial loss. If use of the proceeds to fund directors’ and officers’ defense costs would diminish an asset otherwise available to the estate, then the proceeds may be treated as property of the estate.

Post-Allied Digital, bankruptcy courts have expanded on this framework by incorporating equitable considerations which address the practical realities of disallowing access to defense costs. As such, bankruptcy courts have considered the hardships directors may face without policy funds and the administrative efficiency in avoiding prolonged motion practice and litigation over the use of proceeds. Courts have also highlighted that depriving directors and officers of their contractual rights to coverage may deter individuals who would otherwise have elected to serve as directors and officers.

In an attempt to balance the equities, some courts have adopted a modified lifting of the stay in order to permit director access to funds. For example, courts have agreed to lift the stay so long as the directors agreed to regular reporting on policy erosion.

Courts also look to whether the insurance policy contains a priority of payments provision to determine the parties’ respective rights. The court in In re MF Glob. Holdings (Bankr. S.D.N.Y. 2014) held that the ABC policy’s proceeds were not estate assets where there were no present claims against the entity, making any future indemnification obligations speculative. Further, the company was bound by the policy’s “priority-of-payments” provision which required priority advancement of policy funds to directors. More recently, this holding was reaffirmed in In re Mountain Express Oil Co. (Bankr. S.D. Tex. 2025), where the court held that insurance proceeds are only estate property where a debtor has the right to receive the proceeds upon payment of a claim.

A similar priority of payments provision was relied on by the Southern District of New York in In re SVB Financial Group (2023), where the directors of Silicon Valley Bank faced class action lawsuits and regulatory investigations for which they sought the advancement of funds from the debtor’s ABC policy. The court saw no need to proceed to the question of whether the debtor’s side ABC proceeds were estate assets, because the plain language of the policy’s priority of payment provision provided the directors the first rights to the proceeds. Even if the directors’ defense costs would deplete the remaining ABC policy limits, the debtor was last in line for the proceeds.

Importance of Side A

The classification of D&O insurance policy proceeds as estate assets can materially affect a director’s ability to mount a defense, as such a determination may substantially restrict–or entirely foreclose–access to defense funds. Although bankruptcy courts frequently agree that ABC policy proceeds constitute estate property, the inquiry requires the court to conduct a fact-specific analysis, leaving open the possibility that directors will face protracted litigation and, ultimately, the risk of having no access to policy proceeds.

Even where policies contain protective features, such as unambiguous priority of payment provisions, the treatment of ABC policies in bankruptcy remains uncertain, underscoring the importance of maintaining robust Side A towers, as there is little dispute among the courts that Side A policies are not estate property.

Kennell is the co-managing partner of Kaufman Dolowich’s New York City office. A directors and officers (D&O) and professional liability litigator, he represents companies, boards, executives, and professionals in courts throughout the U.S. Email: pkennell@kaufmandolowich.com. Drouin is an associate in Kaufman Dolowich’s New York City office, who works within the firm’s directors and officers’ liability and insurance coverage practices.