In the wake of the subprime mortgage crisis and the now unfolding unprecedented global credit crisis, the public has been exposed to severe weaknesses in the global financial system. With the liquidity crisis of American International Group and high-profile bank failures, the vulnerability of seemingly unsinkable financial institutions has become all too apparent.
Repercussions of heightened regulatory scrutiny and huge market cap losses will include additional shareholder litigation, potentially implicating policies issued to directors and officers of companies directly and indirectly impacted by the crisis. We are already witnessing insolvency-related changes in control that are reminiscent of the savings-and-loan crisis of previous decades.
There are several ways in which the insolvency of an insured company may impact D&O coverage, potentially forcing carriers to forfeit their contractual rights or disallowing insureds' recovery of policy proceeds. Accordingly, directors and officers may find themselves having to personally fund defense expenses.
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