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Berkshire Hathaway, Chubb and AIG are among a group of more than a dozen insurers that provided directors’ liability insurance to First Brands, the bankrupt car parts maker suing founder Patrick James for fraud.
First Brands’ policies could pay out $200mn to cover the legal defences and liabilities that James and other executives face as part of the company’s collapse, which has also drawn the scrutiny of the Department of Justice and Securities and Exchange Commission.
The policies draw in some of the biggest names of the insurance industry into a messy bankruptcy that has consumed corporate credit markets and raised concerns about the risks of esoteric financial products like invoice-backed financing.
A filing with the Houston, Texas, bankruptcy court shows that Markel, Allianz, Zurich, AXA, Hartford and Liberty also agreed to provide insurance to First Brands’ executives.
Several creditors have objected to the request by James and other First Brands directors to use the insurance. A committee of unsecured creditors and Katsumi Global, a Michigan-based invoice finance group, have argued that the insurance should be safeguarded to pay out liabilities First Brands creditors are ultimately owed.
“One can reasonably conclude that this tower [insurance policy] was purchased, not to protect an earnest and ethical management team, but rather as a sort of fortress — protecting Mr James and his cohorts once the jig is up,” lawyers for the creditor group wrote in their objection.
Lawyers for James called the creditors’ argument “inequitable” and “illogical”, adding that the group “hope[d] to recover money from claims against former directors and officers of the Debtors but deny those directors and officers insurance proceeds to cover the costs of defending themselves against such claims”.
James has denied any allegations of fraud.
Companies use directors and officers, or D&O insurance, to protect executives from personal liability when they or the company are sued. The policies typically exclude liability related to fraud and crime committed by directors, but some cover legal expenses incurred defending against those claims.
A person familiar with the D&O insurance market said that First Brands’ coverage, which was implemented by New York-based broker Marsh, was unusually large for a private company of its size. First Brands had close to $12bn in conventional loans and off-balance sheet financing.
A D&O policy worth hundreds of millions of dollars would be more common for a Fortune 250 company with tens or hundreds of billions of dollars of assets, the person said.
The First Brands fight is already shaping up to be an expensive battle, with many of the biggest names in the legal industry stepping in for what may be one of the most dramatic bankruptcy cases of the year.
Lawyers at Brown Rudnick and Cole Schotz — who represent one committee of creditors — this week requested to have more than $13mn of legal fees and expenses approved by the court.
Berkshire Hathaway, AIG, Chubb and Marsh declined to comment.
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