More public companies going bankrupt means more problems for directors and officers. If you find yourself in a litigation storm, specialized insurance solutions can be a lifesaver. Additional policies may offer more protection than just a directors and officers (D&O) policy. With bankruptcies on the rise, getting your protection right is more important now than ever.
Contributors to Rising Bankruptcy Rates
The recent surge in bankruptcies stem from several factors, including:
- Increased debt burdens: Many companies, both public and private, were highly leveraged. Pre-pandemic, corporate debt had been on an upward trend since 2010. Low interest rates incentivized borrowing, and some large companies took on significant debt. This made them vulnerable when the pandemic struck and earnings dropped.
- Inability to service debt: Some businesses found it challenging to meet their debt obligations, as there was no commensurate increase in revenue to service the debt load. This led to defaults and breaches of debt covenants.
- Rising interest rates: As the Federal Reserve ramped up interest rates, it put additional balance sheet pressure on companies, particularly those already struggling with high levels of debt.
- COVID-19’s impact: The pandemic significantly affected businesses, causing disruptions in supply chains, reducing consumer spending, and leading to financial losses. This was especially true for companies in areas heavily impacted by lockdowns.
- Inflation: Partially exacerbated by economic responses to COVID-19, inflation contributed to financial strain on businesses.
- Failure to bring viable products or services to market: Some startup tech companies, despite having innovative technologies, faced challenges in bringing their offerings to market. Workforce reductions hampered innovation and slowed down product launches, further dampening demand. This made it difficult to generate revenue and sustain businesses.
Accountability of Management
When a business struggles financially, stakeholders, including shareholders and employees, seek accountability for management’s decisions. Lawsuits may arise from dissatisfaction with the outcomes. You could be subject to litigation alleging breaches of fiduciary duty, mismanagement, failure to comply with contractual obligations, and more. Having the right insurance policies can play a vital role in mounting an effective defense.
Benefits of Side A policies for individual Directors and Officers (D&O)
Side A policies play a crucial role in protecting individual directors and officers during corporate crises or bankruptcies. Unlike traditional policies, Side A coverage is dedicated solely to individual executives and does not get diluted by claims against the entity. This means it remains intact to fund defense, settlements, or judgments for the personal liability of directors and officers.
Due to cost-effectiveness and broader coverage, Side A policies have gained popularity. In situations where budget constraints are a concern, Side A coverage offers a viable solution. Savvy attorneys know: a well-structured D&O program protects both the company and directors. Adding Side A coverage enhances individual protection — its limits are competitively priced with fewer exclusions compared to full programs.
For the uninitiated, the difference between professional liability and management liability is often missed. Education and awareness are crucial in bridging this knowledge gap to assure coverage is proper and complete.
Safeguarding for tomorrow
Robust insurance solutions are a great line of defense, but you must adapt your insurance strategy in parallel with the current bankruptcy landscape. Work closely with an experienced broker, claims advocacy group, and carriers to develop a well-rounded support plan. Understanding the nuances of bankruptcy scenarios is vital. As the industry navigates these challenges, embracing specialized coverage can make a significant difference.
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Connect with the Risk Strategies Management Liability team at MLPG@risk-strategies.com.
