Former directors of failed auto parts business First Brands Group LLC may claim a portion of the company's $200 million directors' and officers' liability (D&O) insurance to cover their defense costs, the judge presiding over the company's bankruptcy case has ruled.
A group of former First Brands directors and officers, including founder and former CEO Patrick James, had sought access to the full D&O coverage but faced opposition from some of the company's creditors.
In a Jan. 7 order, US Bankruptcy Judge Christopher Lopez ruled that the proceeds and policies of First Brands' $100 million side A D&O cover, which only protects named directors and officers, are not part of the bankruptcy estate and are therefore not subject to an automatic stay on accessing First Brands' resources.
However, the judge denied the directors' request to lift the automatic stay on First Brands' $100 million combined side A, B and C coverage, which protects both the company and the named directors and officers, as First Brands has an interest in the proceeds, and he deemed it to be property of the bankruptcy estate.
Section 362 of Chapter 11 of the US bankruptcy code imposes an automatic block on claims against the assets of a company under bankruptcy protection, with certain exceptions.
The companies comprising the First Brands Group filed for Chapter 11 bankruptcy protection on Sept. 28, 2025. The bankruptcy case is being heard at the United States Bankruptcy Court for the Southern District of Texas. The group's failure, along with that of US subprime auto lender Tricolor Holdings LLC, sparked concerns about broader trouble in the private credit market and raised questions about the insurance industry's exposure to the failed companies and private credit overall.
Layers of cover
D&O insurance covers the costs that directors and companies incur when defending themselves against legal action. Side A D&O coverage pays directors' and officers' expenses that the company cannot or will not pay. Side B coverage reimburses the company for directors' and officers' expenses that the company pays, while side C coverage pays the company for expenses arising from actions taken against the company itself.
D&O coverage is often structured as a tower, with a primary policy absorbing the first losses and layers of excess coverage that kick in once the primary coverage is exhausted.
The contested D&O coverage in the First Brands case was issued to Mayfair Enterprises LLC, which is not part of the bankruptcy estate but is a parent of the First Brands Group. The coverage extends to all Mayfair's subsidiaries, including First Brands, and consists of both combined side A, B and C coverage and stand-alone side A coverage. Both types of coverage involved multiple insurers.
The group of former First Brands directors and officers asked for the automatic stay to be lifted on all D&O coverage, granting them access. The Official Committee of Unsecured Creditors and Katsumi Servicing LLC, a subsidiary of one of the large creditors in the First Brands case, filed objections. The creditors took issue in particular with directors' efforts to access the combined side A, B and C cover, arguing it would deplete the side C coverage available to the company.
Lawyers representing Patrick James, the unsecured creditors' committee and Katsumi did not respond to requests for comment.
The primary side A, B and C policy was underwritten by Berkshire Hathaway Specialty Insurance Co., part of Berkshire Hathaway Inc., bankruptcy filings show. The filings also indicate that other insurers provided combined A, B and C coverage on an excess basis.
The first stand-alone side A policy, with a coverage limit of $10 million, was underwritten by American International Group Inc., according to the filings. Several other insurers participated in the excess side A coverage. AIG was the lead underwriter of the stand-alone side A coverage, Robert Stark, partner at law firm Brown Rudnick, representing the Official Committee of Unsecured Creditors, told the Jan. 7 hearing about the D&O dispute. The combined side A, B and C coverage and the stand-alone side A coverage each had 10 participants, with each insurer taking a $10 million share, Stark told the hearing.
While the stand-alone side A coverage sits above the combined side A, B and C coverage, it contains a "drop-down clause" that allows directors and officers to claim on it if they are denied coverage under the combined A, B and C coverage, Stark told the hearing. This view is supported by lawyers representing Patrick James, email exchanges in the court filings show.
Berkshire Hathaway Specialty Insurance did not respond to a request for comment. AIG declined to comment.
