As companies approach insolvency, shareholders and creditors challenge actions taken by the company that led to its financial condition. Directors and officers must head off such claims, because a breach of duty by directors and officers can lead to lawsuits against the corporation.
Case law, including the seminal Delaware case, Bridgeport Holdings Inc. Liquidating Trust v. Boyer, provides guidance on the fiduciary duties of directors and officers of companies facing bankruptcy and steps for directors and officers to shield themselves from liability.
Legal battles arise in bankruptcy over whether the proceeds of a D&O policy belong to the estate or the individual directors and officers. Though they may have assumed they had adequate coverage, directors and officers may face significant out of pocket legal fees to establish their right to insurance proceeds