D&O INSURANCE POLICIES, PROCEEDS AND THE AUTOMATIC STAY: WHO OWNS WHAT IN BANKRUPTCY?

When a company files for bankruptcy, insurance coverage can quickly shift from a risk management backstop to a contested asset. Directors and officers (D&Os) may seek defence funding while debtors and trustees attempt to marshal proceeds for the estate and co-insureds, and claimants stake competing claims.

These conflicting tensions force bankruptcy courts to parse the bankruptcy estate’s interests in the policy and its proceeds, the rights of insureds and how those interests interact with the automatic stay.

This article distills key frameworks of ownership of insurance policies and proceeds in bankruptcy, highlights the special complexities of D&O insurance and explains how the Bankruptcy Code’s automatic stay operates in these disputes.

Policy versus proceeds: the threshold distinction

Section 541(a) of the Bankruptcy Code brings into a debtor’s estate “all legal or equitable interests of the debtor in property as of the commencement of the case”. Courts consistently treat a debtor’s insurance policies as estate property. However, disputes often arise as to whether policy proceeds are also estate property.

Courts addressing this issue focus on whether a debtor has a right to receive and keep proceeds when an insurer pays on a covered claim – a question answered by looking primarily to the policy’s language and structure. If the debtor is an insured entitled to payment under the policy at issue, such as for entity coverage or reimbursement of indemnification obligations, proceeds are more likely to be treated as estate property and subject to the automatic stay.

If the policy provides only direct coverage to other insureds, such as D&Os under Side A coverage, proceeds are generally not estate property, even though the debtor owns the policy and payment of proceeds may indirectly benefit or affect the debtor. This proceeds-versus-policy distinction is foundational, as it prevents section 541 from expanding a debtor’s rights beyond those the debtor held prebankruptcy.

Jan-Mar 2026 issue

King & Spalding LLP