But, with a corporation's filing for bankruptcy protection, the game can change in material respects.
In particular, the playing field can include challenges for directors and officers such as expanded duties, some or no opportunity to limit liability, burdens associated with establishing the allowance of claims for advancement or indemnification and establishing the priority of those claims, and no or limited access to D&O insurance and the policy's proceeds.
The duty of care and skill, for example, is a common law duty requiring directors to act with “the care an ordinary man would take in the same circumstances on his own behalf”, and with the skill expected from someone with his particular knowledge and experience.
The duties of directors and officers has been established through statutes, regulations and case law and can be broken down into various areas.If the claim is allowed, the court then will determine what priority to give the claim pursuant to section 507 of the Code, if any. Only claims against the bankruptcy estate that are deemed "allowed" will be paid in whole or in part. "We believe that D&O directors and officers insurers' concerns about their exposure to option-grant claims will have a significant impact on the current D&O insurance cycle for all public companies," says John Doernberg, the senior managing director of Carpenter Moore, an insurance brokerage owned by the Nasdaq, in a note to clients last week.Directors and officers' policies typically cover payouts for shareholder lawsuits, and even regulatory fines.How would a director or officer fund the legal costs necessary to defend themselves and to meet any awards made against them?The cover is also tax effective as Directors and Officers liability insurance it is purchased by the Company and is a business expense.Amid the scrutiny and uncertainty, the broader market plunged, and some analysts have blamed this in part on the scandal.Now comes the hint of a possible aftereffect: greater scrutiny from the insurance industry.There are also many statutes that affect the conduct of directors and officers, including the Companies Act 1985, Insolvency Act 1986, Financial Services Act 1986, Environmental Protection Act 1990, Health and Safety at Work Act 1974, to name a few.If a Director or Officer is perceived to have failed in any of their duties, then a claim could come from any number of third party sources, including shareholders, creditors, regulatory bodies, the Health and Safety Executive, employees, auditors, liquidators, customers and suppliers.