Bankruptcy Consultants Warned Of D&O Coverage Issues

Consultants who help firms through bankruptcy may be surprised to learn that their client's directors and officers liability insurance coverage excludes them, according to a brokerage's experts.

During a Web seminar yesterday, professionals from Chicago-based Aon described some coverage pitfalls that unwary consultants, lawyers, lenders and accountants fall into when they're moving companies through bankruptcy processes.

David Payne, senior vice president of Aon Financial Services Group, said such turnaround professionals may be diligent enough to ask whether they are named insureds under a client D&O policy. That's often not enough, however, because "every D&O policy is going to have an E&O [errors and omissions] exclusion," he said, explaining that a lot of services provided by bankruptcy professionals will fall into the category of services excluded by that clause.

Problems arise, the Aon experts said, mainly because the stress of managing all the activities related to a bankruptcy means the professionals fail to focus on insurance issues.

Coverage issues can be further complicated by conflicting interests of debtors and creditors and by changing coverage needs before and after a petition for bankruptcy, Aon's experts said.

Lack of attention by insurance brokers makes it even more likely that turnaround professionals won't have appropriate coverage, they said.

"It's not that they're evil," said Michael Toner, chief executive of Aon's Turnaround and Restructuring Practice. Instead, he explained that typical brokers may only see one client go through bankruptcy in their whole careers.

Insurers and brokers behave very differently as a company moves through the turnaround cycle--from missed earnings to credit downgrades to the approvals of financial and operation restructurings.

Brokers, he said, become "passive advocates to the client restructuring" at a time when insurers are very focused on limiting their exposures--through lower limits, increased deductibles and price changes.

Describing the activity of the consultants during the early stages of the process as being similar to "operating with your hair on fire," Mr. Toner said, "Protecting the turnaround professional during that time of chaos is critical." He added that the insurance protection is a technically complex issue.

Matthew Gensburg, a member of the bankruptcy practice of the law firm Greenburg Traurig, said the bankruptcy planning stage is "an incredibly busy and stressful time, exacerbated when the debtor actually files."

The management team and consultants are stretched to their limits as they "focus in on tasks" like dealing with the company's cash needs, identifying assets and liabilities, creating a creditor matrix, as well as dealing with concerns of vendors, customers and employees, he explained.

"They are dealing with crisis management, and it's not perceived that D&O [insurance] issues rise to that level," Mr. Gensburg said.

The experts went on to discuss critical coverage issues that need to be addressed, such as the possibility that a bankruptcy filing or trustee appointment will trigger the "change of control" clause in many D&O policies, voiding coverage for wrongful acts.

Even the workings of the three basic parts of a D&O contract need to be made crystal clear, Mr. Payne said, noting that insurance proceeds paid under Side C of a D&O policy (the entity coverage section) are the property of the estate, while Side A is essentially a hedge against the personal assets of directors and officers and not the property of the estate.

Later, Mr. Payne said there are insurance policies available--"bankruptcy professional protection" policies--that have been specifically designed to protect turnaround professionals with dedicated limits just for personal asset protection of the turnaround team. These products, he said, react to the higher level of risk on the pre-petition side (court ratification of major decisions helps to reduce post-petition risk) and can deal with litigation issues that could arise two or three years after an engagement.

A rebroadcast of the Web seminar is available at www.aon.com/webseminars.