There are many ways that the insolvency of an insured may impact their Directors and Officers Coverage. These issues may ultimately force insurance companies to forfeit their contractual rights, and, directors may potentially find themselves paying for their own defense costs.
The main issue revolves around the retention and which coverage (Side-A or Side-B) is triggered. So, lets examine this issue a bit further. In the event of a bankruptcy, Side-A coverage may be triggered- which is not subject to retention. In this case, insolvency may circumvent the applicable retention. This is important since the policy terms may require an insured to pay the retention as a condition precedent to the insurance coverage. On the other hand, if the D&O policy allows for presumptive indemnification in which the Side-A coverage is not married to the indemnification, Side-B coverage may be triggered. And, this may leave the directors and officers to fund the retention personally.
As such, courts tend to focus on the retention language in the policy, as well as the statutory laws governing liability insurance.
