Bankruptcy Judge Lets Directors of Failed Bank Tap into D&O Insurance

A bankruptcy judge is allowing current and former officials with the parent company of Silicon Valley Bank to tap into the $210 million in insurance coverage available through directors and officers liability policies to defend themselves against litigation that followed the collapse of the bank.

The Committee of Unsecured Creditors for the SVB Financial Group bankruptcy had objected to the expense, saying any insurance money spent on defending the directors and officers would not be available for other potential litigation or any settlements or judgments. The committee argued that the directors and officers aren’t entitled to any of the insurance proceeds because their own mismanagement caused the collapse of the bank.

But Martin Glenn, chief bankruptcy judge for the Southern District of New York, said the insurance policies themselves state that the banks directors and officers get first dibs on any proceeds from the D&O policies.

“Even if it is true that the directors and officers do have liability, that is precisely why such insurance exists,” Glenn said in an opinion released Monday. “The Committee cites no legal authority for the proposition that directors and officers need to be ‘blameless’ to access insurance that is specifically intended to cover their defense costs and liability in these situations.”

California state regulators closed Silicon Valley Bank on March 10 after a run on deposits threatened the bank’s solvency. The Federal Deposit Insurance Corp. took control of its operations and SVB Financial Group filed for Chapter 11 bankruptcy.

On May 3, 16 of SVB Financial’s current and former directors and officers asked the bankruptcy court for an order that essentially would give its insurers permission to defend them against the seven putative class-action lawsuits that have already been filed against the banks and its directors. The bank had purchased a $10 million primary claims-made D&O liability policy and 20 excess policies, each with a $10 million limit.

The Committee of Unsecured Creditors filed an objection. They committee argued that any payments from the insurers would diminish the amounts available to defend against other litigation against the bank, as well as any settlements or judgments. The creditors said the D&O policies are “wasting” policies, which means any amount spent on legal fees is taken out of the coverage limit. The committee’s motion said the court should now allow “culpable parties” to draw down the amount available without “appropriate limitations and oversight.” They suggested that if the court allows any insurance money to be spent, the court establish a “soft cap” to limit the amount.

Judge Glenn said the alleged misdeeds by directors and officers is precisely the reason the bank purchased the D&O policies. He declined to establish a cap on the amount spent, saying the insurers themselves would guard against unreasonable expenditures.

The judge noted that the directors and officers who asked for access to the insurance coverage had offered to file regular reports on their expenses. He said that the suggestion was reasonable and made those reports a condition of his approval of the motion.

Glenn said in his order that the D&O policies include a provision that state if there are competing demands for the insurance proceeds, the defense of the directors and officers has priority.

“Further, because of the oversight of the insurance companies, the quarterly reporting, and the need for court approval to settle a claim with policy funds, the court is satisfied that that there is enough oversight to prevent a wasteful depletion of the funds,” the opinion states.

Top photo: Security guards let individuals enter the Silicon Valley Bank’s headquarters in Santa Clara, Calif., on Monday, March 13, 2023. The federal government intervened Sunday to secure funds for depositors to withdraw from Silicon Valley Bank after the banks collapse. Dozens of individuals waited in line outside the bank to withdraw funds. (AP Photo/ Benjamin Fanjoy)