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An increase in U.S. business bankruptcies and the expansion of entity coverage in directors & officers (D&O) policies is having a particularly troubling, yet unintended consequence: creating the vulnerability of the bankruptcy estate “hijacking” the policy’s proceeds, putting corporate directors and officers at risk, in spite of coverage.

The existence of entity coverage in D&O policies has caused bankruptcy courts to hold that the D&O policy and the policy’s proceeds are, in some cases, assets of the bankruptcy estate, and since the assets of the bankruptcy estate are subject to an automatic stay, the directors and officers may be prohibited from gaining access to policy proceeds. This is not universally the case, and bankruptcy court decisions have varied. But the danger exists.

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