Grounding Personal Liability Risks in Distressed Corporate Workouts
Grounding director liability in distressed workouts requires strict cash tracking, segregated statutory tax accounts, clear CRO deeds, and pre-funded Side A D&O tail coverage.
Severability Endorsement
Meaning
Insurance policy amendments ensure that the negligent actions or misrepresentations of one insured party do not invalidate coverage for other innocent co-insured parties under the same policy. By applying a severability endorsement, a business protects its innocent directors or partners from losing liability protection due to a colleague’s fraud. This addition is standard in directors and officers liability policies, where multi-party coverage is common.
Innocent Protection
Standard insurance contracts can be completely canceled if any policyholder makes a false statement during the application. Including a severability endorsement stops this cancellation from affecting colleagues who had no knowledge of the lie. This protection keeps coverage active for the innocent parties.
Policy Validity
Insurers can dispute claims if there is evidence of fraud within the covered company. The endorsement treats each insured person as having a separate policy, meaning one director’s misconduct cannot be imputed to another. This separation preserves the policy’s validity for the rest of the board.
Coverage Separation
Claims involving multi-party litigation become complex when one party is found guilty of deliberate fraud. The severability clause separates the coverage of the guilty party from the innocent ones. This separation ensures defense fees are paid for the innocent.