An increase in U.S. business bankruptcies and the expansion of entity coverage in directors & officers (D&O) policies is having a particularly troubling, yet unintended consequence: creating the vulnerability of the bankruptcy estate "hijacking" the policy's proceeds, putting corporate directors and officers at risk, in spite of coverage.

The existence of entity coverage in D&O policies has caused bankruptcy courts to hold that the D&O policy and the policy's proceeds are, in some cases, assets of the bankruptcy estate, and since the assets of the bankruptcy estate are subject to an automatic stay, the directors and officers may be prohibited from gaining access to policy proceeds. This is not universally the case, and bankruptcy court decisions have varied. But the danger exists.

U.S. business bankruptcy filings increased 52 percent from 2008 to 2009, according to the federal court system's fiscal year statistics. The Web site www.uscourts.gov reports that there were 58,721 business bankruptcy filings during the federal judiciary's fiscal year ending September 30, 2009, compared with 38,651 filings for fiscal 2008. Filings have continued to increase during the current fiscal year. While the economic climate is troubling enough, corporate directors and officers may be even more concerned to learn that insurance protection under D&O liability policies may be severely restricted in the event of corporate bankruptcy.