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What’s under the glass?

Will protection be there when directors and officers need it?

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  • Written by  Joseph M. Saka, Lowenstein Sandler LLP
What’s under the glass?

Directors and officers liability insurance coverage is widely understood as a critical protection for those serving as members of the board or as officers of financial institutions. D&O insurance provides coverage for “loss” resulting from “wrongful acts” committed or allegedly committed by directors or officers in the course of their duties. “Wrongful acts” is generally a broadly defined term in D&O insurance policies. For example, one policy defines “wrongful acts” as “any act, error, misstatement or omissions, neglect or breach of duty.” 

Given this broad definition, an insured director or officers might assume that he or she is protected for a wide range of exposures, including those arising out of a bankruptcy or insolvency.

Unfortunately, notwithstanding the broad coverage provided by D&O insurance, D&O insurers have sought to limit the scope of coverage for directors and officers for claims following the bankruptcy of holding companies or the failure of financial institutions.

Two of the more common defenses that are asserted by insurers are the insured versus insured exclusion and a late notice defense.

Insured versus insured exclusion

Some insurance companies have refused to provide coverage for claims in bankruptcy and insolvency scenarios relying on the insured v. insured exclusion. The precise language of these exclusions vary, but they commonly preclude coverage for claims “by, on behalf of, or at the behest of the” insured company or any insured person against another insured.

These exclusions became common in D&O insurance policies in the 1980s following several collusive lawsuits brought by insured companies against their own directors and officers.1 After the savings and loan crisis of the 1980s, some insurance companies attempted to extend the exclusion beyond its original purpose to bar coverage for claims by FDIC and other third parties against failed financial institutions’ directors and officers. This position was largely rejected by the courts. 2 

Following the financial crisis of 2008, several insurance companies have asserted the insured v. insured exclusion as a bar to coverage for claims brought by bankruptcy trustees of insolvent bank holding companies or by FDIC against failed financial institutions’ directors and officers.

The insurers argue that the trustee or FDIC are asserting claims on behalf of the bankrupt holding company or failed bank. With respect to claims brought by bankruptcy trustees, the case law is not unanimous, but the majority of courts have held that the exclusion does not bar coverage for claims brought by a bankruptcy trustee against failed financial institutions’ directors and officers. 3  These courts have expressed numerous rationales, including that trustees are separate entities from debtors; trustees are adverse to the debtors; and trustees represent the interests of creditors or the estate and not those of the failed entity.

Similarly, in the context of FDIC claims, insurance companies have not been successful in asserting the insured v. insured exclusion. Expressing various rationales, courts from this crisis uniformly have rejected the typically worded insured v. insured exclusion as a bar to coverage for claims brought by FDIC. 4  

Among other rationales, courts have reasoned that FDIC as receiver acts in multiple capacities under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and claims by FDIC, therefore, are not “by” or “on behalf of” the failed financial institution.

Other courts have held the claims are akin to shareholder claims and fall within an exception to the exclusion. Courts also have reasoned that the insurance industry has a specific exclusion it uses to bar coverage for claims by FDIC in any capacity (i.e., the regulatory exclusion) 5   and, at a minimum, the exclusion is ambiguous in the context of post-failure claims. 6 

During the underwriting and purchase of D&O insurance, directors and officers should seek affirmative representations or endorsements from the insurer that the insurer will not invoke the insured v. insured exclusion for claims by trustees or the FDIC in the event of bankruptcy or insolvency.

While the insured v. insured defense should not be an obstacle to coverage for directors or officers based upon the significant body of case law finding the exclusion inapplicable, it is beneficial to seek that clarification at the time of purchase or renewal.

This avoids the time and expense of forcing the insurer to follow the well-developed case law on the exclusion.

Notice provisions under D&O insurance policies

D&O insurance is commonly written on a “claims-made” basis. This means that the policy provides coverage for “claims” made during the policy period—regardless of when the alleged wrongful acts took place.

Because the definition of “claim” differs from policy to policy, it is important to be aware of how it is defined. The term “claim,” for instance, often is not limited to the filing of the lawsuit, but may include the service of subpoena, a written or oral demand for monetary damages or equitable relief, or even a request to toll the statute of limitations. [Editor’s note: To “toll” the statute of limitations is to temporarily suspend it.]

D&O policies require notice of a claim to be provided to the insurance company. Directors and officers should familiarize themselves with policy terms and conditions regarding notice requirements in the event a claim is made, and comply with those terms and conditions. Insurers argue for strict compliance with notice provisions, and special attention should be given to the terms of the notice provision. 

Additionally, under many D&O policies, there are two important alternatives to providing notice of a claim during the policy period:

1. A notice of potential circumstances; and

2. An extended reporting period.

In the context of bankruptcy and insolvency, there are frequent disputes about these provisions. A “notice of circumstances provision” allows the insured to give notice of circumstances that might give rise to a claim in the future. If a claim is later made that arises out of the circumstances that were reported, there will be coverage.

Oftentimes in situations involving bankruptcy or insolvency, there is a strong belief that numerous lawsuits will be, or could be, filed in the future. Indeed, for bankrupt holding companies, because the discharge of the debtor’s obligations in bankruptcy proceedings may not release non-debtors from debt or liability, directors and officers may face lawsuits even after the company emerges from restructuring. 7 

In providing a notice of circumstances, policyholders should attempt to be detailed, complete, and comprehensive, so as to avoid any dispute regarding the sufficiency of the notice and to capture as many potential claims as possible. 8 

Insurers have denied coverage based on the failure to provide sufficient details in the notice of circumstances. Therefore, the notice of circumstances should be detailed and made after a review of the recent cases that help define the scope of sufficient notice. Importantly, in many states, to the extent an insurer believes a notice of circumstances to be deficient, it must notify its policyholders of specific deficiencies or risk waiving any such complaint.9 

Most D&O policies also provide the insureds with an extended reporting period and/or provide the insured the opportunity to purchase a supplemental reporting period. An extended reporting period allows policyholders to report claims that are made and reported during the extended period with respect to wrongful acts that occurred prior to the expiration of the policy. 10 

The purchase of the extended period can be particularly important in the context of a bankrupt holding company or failed financial institution, because many claims may be submitted after the expiration of the policy period when there is no coverage or a substantially narrowed replacement policy.

Insurers will follow the terms of the policy strictly, with respect to extended reporting periods, and policyholders should be diligent to ensure compliance.

About the author

Joseph Saka is counsel in Lowenstein Sandler LLP’s Washington, D.C., office. He represents insureds in disputes with their insurance companies and helps clients maximize the value of their insurance assets. The views expressed in this article are his own, and are not necessarily the views of the firm or any of its clients.


1. See W Holding Co., Inc. v. Chartis Ins. Company–Puerto Rico, 904 F. Supp. 2d 169, 184 (D.P.R. Oct. 23, 2012) (citing Michael D. Sousa, Making Sense of the Bramble-Filled Thicket:  the “Insured v. Insured” Exclusion in the Bankruptcy Context, 23 BANK. DEV. J. 365, 391 (2007)).

2. See, e.g., Am. Cas. Co. of Reading, PA v. Sentry Fed. Sav. Bank, 867 F. Supp. 50, 60 (D. Mass. 1994); FDIC v. Zaborac, 773 F. Supp. 137, 143-44 (C.D. Ill. 1991), aff’d on other grounds sub nom, FDIC v. Am. Cas. Co. of Reading, Pa., 998 F.2d 404 (7th Cir. 1993); Fidelity & Deposit Co. v. Zandstra, 756 F. Supp. 429, 433 (N.D. Cal. 1990); Branning v. CNA Ins. Co., 721 F. Supp. 1180, 1184 (W.D. Wash. 1989); Cont’l Cas. Co. v. Allen, 710 F. Supp. 1088, 1098 (N.D. Tex. 1989).

3. See, e.g., Yessenow v. Exec. Risk Indem., Inc., 953 N.E.2d 433, 444 (Ill. App. Ct. 2011); Grafenauer v. Mukamal (In re Laminate Kingdom, LLC), Bankr. No. 07-10279-BKC AJC, 2008 Bankr. LEXIS 805, at *8-13 (Bankr. S.D. Fla. Mar. 13, 2008); compare Reliance Ins. Co. v. Weis, 148 B.R. 575, 580 (E.D. Mo. 1992).

4. See, e.g., St. Paul Mercury Ins. Co. v. Miller, No. 13-14228, 2014 WL 7172472, at *7-8 (11th Cir. Dec. 17, 2014) (“Miller”) (reversing summary judgment for Travelers); St. Paul Mercury Insurance Co. v. Hahn, No. 8:13-cv-424-AG, 2014 WL 5369400, at *5 (C.D. Cal. Oct. 8, 2014) (“Hahn”) (granting summary judgment to FDIC as receiver); Progressive Cas. Ins. Co. v. FDIC as Receiver for Vantus Bank, 12-4041-MWB, 2015 U.S. Dist. LEXIS 7805 (N.D. Iowa Jan. 23, 2015) (“Vantus”) (granting summary judgment to FDIC as receiver).

5. See, e.g., Hahn, 2014 WL 5369400, at *4.

6. See, e.g., Hahn, 2014 WL 5369400, at *3; Progressive Cas. Ins. Co. v. FDIC, 926 F.Supp.2d 1337, 1339–40 (N.D. Ga. 2013).

7. See In re Washington Mut., Inc., 442  B.R. 314, 351 (Bankr. D. Del. 2011) (citing to In re Continental Airlines, 203 F.3d 203, 212 (3d Cir. 2000)); In re Exide Technologies, 303 B.R. at 72 (“non-consensual releases by a non-debtor of other non-debtor third parties are to be granted only in ‘extraordinary cases’.”). 

8. See, e.g., FDIC v. BancInsure, Inc., 2014 U.S. Dist. LEXIS 82892 (C.D. Cal. June 16, 2014).

9. See, e.g., Zurich Specialties London Ltd. v. Vill. of Bellwood, Ill., No. 07 CV 2171, 2011 WL 248444, at *13-14 (N.D. Ill. Jan. 26, 2011); Fed. Sav. & Loan Ins. Corp. v. Burdette, 718 F. Supp. 649, 653–54 (E.D. Tenn.1989).

10.  See, e.g., CheckRite Ltd. v. Illinois National Insurance Co., 95 F. Supp. 2d 180 (S.D.N.Y. 2000).

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