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BANKRUPTCY EXCEPTION TO THE INSURED VS INSURED EXCLUSION IN THIS DIRECTORS & OFFICERS LIABILITY INSURANCE POLICY APPLIED TO THE CREDITOR TRUST FORMED TO PURSUE THE BANKRUPTCY ESTATE’S LEGAL CLAIMS ON BEHALF OF UNSECURED CREDITORS (FIRST DEPT).

The First Department, reversing Supreme Court, in a full-fledged opinion by Justice Renwick, in a matter of first impression, determined the bankruptcy exception to the insured vs. insured exclusion applied to the Directors & Officers (D & O) liability insurance policy:

Plaintiff Westchester Fire Insurance Co. … commenced this action seeking a declaration that it has no coverage obligations to defendants insureds, arguing primarily that the “insured versus insured” exclusion of a Directors and Officers (D & O) liability insurance policy, procured by RCS Capital Corporation (RCAP), bars coverage of claims asserted against defendants, … RCAP’s former directors and officers. Defendants insureds contend, among other things, that coverage exists under the bankruptcy exception to the insured vs. insured exclusion. The claims, herein, arose after RCAP’s bankruptcy.

The Creditor Trust was formed, pursuant to the reorganization plan, to pursue the bankruptcy estate’s legal claims on behalf of the unsecured creditors … . …

This appeal raises an issue of apparent first impression of whether a D & O liability policy’s bankruptcy exception, which allows claims asserted by the “bankruptcy trustee” or “comparable authority,” applies to claims raised by a Creditor Trust, as a post-confirmation litigation trust, to restore D & O coverage removed by the insured vs. insured exclusion. For the reasons that follow, we find that the bankruptcy exception to the insured vs. insured exclusion, applies to restore coverage. Specifically, we interpret the broad language “comparable authority” to encompass a Creditor Trust that functions as a post-confirmation litigation trust, given that such a Creditor Trust is an authority comparable to a “bankruptcy trustee” or other bankruptcy-related or “comparable authority” listed in the bankruptcy exception. Westchester Fire Ins. Co. v Schorsch, 2020 NY Slip Op 04627, First Dept 8-20-20

 

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