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Articles

Who Gets Paid When the D&O Insurance Is Not Enough?

Risk Management Magazine

  • Published On: December 20, 2023

When Sam Bankman-Fried was found guilty of seven counts of criminal activity associated with the downfall of the cryptocurrency exchange FTX, his conviction made front-page news. But while it may not have made headlines, SBF’s battles were not limited to fighting prosecutors from the Southern District of New York: The former crypto king also filed suit against one of FTX’s excess directors & officers insurance companies in the Northern District of California, alleging that it had wrongly denied coverage and failed to cover his legal expenses. Shortly after, Daniel Friedberg, FTX’s former general counsel and chief regulatory officer, sought to join the lawsuit, alleging that the depletion of the company’s $20 million D&O policy by other executives such as SBF was unfair and left nothing for his own defense.

While Bankman-Fried ultimately dismissed his lawsuit, Friedberg’s situation presents a crucial question applicable to D&O insurance and insurance in general: How should funds be allocated among policyholders under a D&O insurance program when multiple policyholders have claims under the same policies that exceed the available limits of liability?

D&O policies typically contain a priority of payments provision, favoring directors and officers over the company. However, different jurisdictions apply different rules with regards to the payment and potential exhaustion of D&O policies. These include, primarily: 1) the first judgment rule, 2) the first to settle rule and 3) equitable allocation. For each claimant to D&O insurance proceeds, understanding these rules and how they impact potentially competing policyholders facing non-global settlement (or fighting over limited limits available for defense costs) may be the difference between obtaining satisfactory coverage and losing out to former colleagues or the corporate entity.

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