Implications of Corporate Bankruptcies on D&O Insurance Risks
Understanding the Implications of Corporate Bankruptcies on D&O Insurance
Business bankruptcy filings reached a significant total of 23,043 by mid-2025, marking a 4.5% rise from the prior year. This increase exceeds the pandemic year of 2020, which saw 22,482 filings. Notably, Chapter 11 filings jumped by 11%, increasing from 7,568 in 2020 to 8,408 in 2025. These figures underscore the growing impact of economic factors on D&O insurance risk.
Elevated interest rates, inflation, and slower economic growth contribute to the rise in bankruptcy filings, further complicated by rigorous credit conditions and refinancing challenges. Tariffs and reductions in government funding also aggravate these issues, impacting the regulatory compliance requirements associated with Directors and Officers (D&O) insurance risk.
Corporate bankruptcies often lead to D&O insurance claims, encouraging third parties like creditors to assert their interests. The resolution of these claims is influenced by coverage features and the automatic stay provision in the Bankruptcy Code. This poses a complex scenario for regulatory compliance within the industry.
The ongoing case of In re First Brands Group, LLC highlights the importance of evaluating Side A-only limits in D&O insurance programs. On January 7, 2026, the court partially lifted the stay for Side A policies, impacting the ability of directors and officers to access insurance proceeds for defense costs.
Key Differences in Bankruptcy Proceedings
Understanding Chapter 7 (liquidation) and Chapter 11 (reorganization) bankruptcies is crucial for the insurance industry. Chapter 11 lets companies restructure debt while continuing operations, unlike Chapter 7, which leads to liquidation. These distinctions are vital for underwriting and claims management under regulatory compliance requirements.
The automatic stay, a key part of Section 362 of the Bankruptcy Code, halts creditor actions upon filing. It protects estate assets, though it restricts a debtor’s ability to indemnify directors and officers without court approval. Typically, traditional D&O policies (Covering Sides A, B, and C) are part of the bankruptcy estate and subject to the stay, while Side A-only policies are not.
In complex scenarios, creditors may claim interest in a company’s D&O policy. Where Side A-only coverage exists, courts often permit insurer payments for defense expenses. Such dynamics were evident in legal cases like In re Metropolitan Mortgage & Securities Co. and In re Circle K Corp., illustrating the intricate risks associated with these claims.
Risk Management and D&O Insurance Strategy
Companies must evaluate their D&O insurance, particularly Side A coverage, to ensure protection in bankruptcy scenarios. Consulting with brokers specializing in distressed risks can optimize coverage benefits. This strategy is crucial for managing underwriting and maintaining a comprehensive risk management plan.
D&O claims arising from bankruptcies challenge the indemnification provisions directors rely on. As a result, D&O insurance becomes essential protection, highlighting the need for industry-standard carrier guidance. Amid current market conditions, insurers seek rate stabilization, with reduced flexibility on premium adjustments.
Brokers should negotiate for better coverage options, focusing on enhancements in distressed risk management. Willis Towers Watson advises close attention to D&O insurance during annual renewals, especially in assessing adequacy and structure of Side A coverage. This approach optimally supports directors and officers facing distressed risks.
This information serves as a resource for insurance industry professionals and is not legal advice. For detailed consultations, contact Willis Towers Watson's licensed entities in North America.