When a company experiences financial distress, senior leaders naturally focus on cash flow, creditors, and strategies to stabilize finances and operations. But this is also the time when individual directors and officers face the greatest personal liabilities and risks, including the potential for rapidly escalating legal costs.
During bankruptcy proceedings, directors and officers liability (D&O) insurance is an indispensable asset for both individual leaders and the corporate debtor. The details of this coverage are frequently overlooked and misunderstood, but two recent Texas bankruptcy court rulings serve as a reminder of their vital importance.
Here’s how organizations and senior leaders can make sure their D&O insurance provides valuable assistance when the stakes are at their highest.
Estate property vs. individual protection
In January, the U.S. Bankruptcy Court for the Southern District of Texas issued a ruling that allowed former First Brands executives to access $100 million in Side A D&O coverage for defense costs incurred in defending private and governmental claims. The court concluded that the Side A-only policies purchased by First Brands were not property of the bankruptcy estate because they insured only individuals and not the corporate debtor.
This ruling underscores the fundamental principle that Side A-only policies — those covering only nonindemnifiable loss incurred by directors, officers, and other individual insureds — are the most reliable form of personal asset protection during bankruptcy. Because the company has no direct financial interest in the proceeds of these policies, courts typically permit advancement of individual defendants’ defense costs from the first dollar (not subject to any self-insured retention).
Conversely, the First Brands court held that the separate ABC policies in the D&O program were estate property because the debtor was a coinsured. As a result, the court refused to lift the automatic stay with respect to the $100 million ABC tower. This standard order in bankruptcy proceedings prevents the distribution of money without the court’s permission, which means executives are not able to access those funds unless and until the stay is lifted.
A separate ruling in October by the same court — in a case involving Mountain Express Oil Co. — offers a powerful complement to the First Brands ruling. There, the bankruptcy court held that although Mountain Express’s ABC policy itself was estate property, the policy’s proceeds were not because no covered claims had been asserted against the debtor, and therefore Side C coverage was not triggered. As a result, the automatic stay did not apply, and insurers were permitted to pay senior executives’ defense costs.
Balancing Side A and ABC coverage
One of the most consequential decisions a board can make regarding its D&O insurance is the balance between Side A and Side ABC protection. During bankruptcy, these policies serve the needs of distinct stakeholders — individual defendants, corporate estates, and creditors — whose interests are often competing, as highlighted in the recent rulings.
Side A coverage is the last line of defense and is designed to protect individual directors and officers exclusively when there is no other source of indemnification available to them. It cannot be used to reimburse the company, is much more likely to be insulated from the bankruptcy estate, and often provides the swiftest and most direct path to defense cost advancement during insolvency.
Side ABC policies, on the other hand, provide broad coverage that includes entity protection in addition to coverage for individual insureds. Although an important part of most risk management programs, ABC policies can create competition for policy proceeds, are more vulnerable to claims that the policy is a corporate asset in bankruptcy and may lead to delays in defense expense reimbursement during a stay.
The structure of a D&O program — and how much dedicated individual protection it provides — becomes pivotal when creditors argue that all insurance should benefit the estate rather than the individuals making difficult governance decisions. The “priority of payments” clause is an important but commonly misunderstood feature of many D&O policies; when multiple insureds seek coverage from a tower with finite proceeds, the priority of payments clause determines who gets paid first.
A strong priority of payments provision typically:
Explicitly prioritizes Side A (individual protection) over all other coverage parts.
Mandates immediate advancement of defense costs for insured individuals.
Reduces ambiguity in bankruptcy by clearly separating individual coverage rights from corporate reimbursement rights.
Unclear priority of payments language — or the absence of it entirely — can lead to litigation, delayed payments, and conflicting interpretations precisely when directors and officers most need certainty.
What boards should be doing now
Through Dec. 14, 2025, 749 companies had declared bankruptcy (opens a new window), 8% more than declared bankruptcy in all of 2024 and the most bankruptcies in any year since 2010, according to S&P Global Market Intelligence. Given this troubling trend — and the growing volume of insolvency‑driven disputes involving D&O policies — boards and executive teams must be proactive.
Forward‑looking boards are beginning to treat D&O protection as a strategic asset rather than a compliance-driven purchase. To ensure coverage responds as expected and when needed by all parties involved, corporate leaders and the entities they serve should consult with their trusted risk advisors to:
Stress‑test existing D&O towers for bankruptcy scenarios.
Assess whether Side A limits are adequate.
Evaluate priority of payments language for clarity and enforceability.
Understand who controls a policy if the company enters bankruptcy.
Review lessons emerging from recent cases that interpret the extent to which D&O proceeds are estate property.
These steps help ensure that, when an organization faces financial turbulence, leadership remains protected and empowered rather than constrained and distracted by uncertainty over access to their insurance.
To learn more about strengthening your D&O protection in bankruptcy scenarios, visit our corporate restructuring insurance solutions page (opens a new window) or contact our team directly (opens a new window).
