Two D&O insurers have asked the U.S. Bankruptcy Court for the District of Minnesota to lift an automatic stay in a bankruptcy proceeding pending against their insureds so that the insurers can pursue their coverage defenses as counterclaims against the insureds in a pending declaratory judgment action.  In Re Petters Company, Inc., et al., Case No. 08-45257 (Bankr. D. Minn.).

In March 2009, investment firms Petters Group Worldwide, LLC, Petters Company, Inc. and Thomas Petters, Inc. and certain of their officers and directors filed a declaratory judgment action against two of their insurers in the District Court of Minnesota, seeking a declaration that the insurers are obligated to provide coverage for a number of noticed matters.  Petters Group Worldwide LLC et al. v. Greenwich Insurance Co. et al., No. 09-00603 (D. Minn.).  The noticed matters include a criminal compliant and various civil complaints filed by investors against the investment firms and their officers and directors, generally arising from  the insureds’ involvement in an alleged fraudulent investment scheme.

According to the declaratory judgment complaint, by letter dated December 19, 2008, the insurers issued coverage letters reserving rights and/or partially denying coverage for the noticed matters.  The insureds filed the declaratory judgment action seeking a declaration that the insurers owed coverage for their defense costs and indemnification.  On May 20, 2009, the insurers answered the complaint listing the reasons why they do not have a duty to defend  the insureds, including that: (1) the insureds had failed to disclose the wrongdoing alleged in the underlying actions in the  application for insurance; (2) the intentional acts exclusions bar coverage; and (3) the damages sought do not constitute “Loss” as defined by the policies.

In light of the entity insureds’  bankruptcy filing, an automatic stay is in place barring all actions from proceeding against the insured debtors.  Accordingly, the insurers have requested relief from the automatic stay to both allow payment of certain Defense Expenses subject to a full reservation of their rights, and to assert counterclaims against  the insureds  in the declaratory judgment action in order to pursue the various coverage defenses.  On August 4, 2009, the bankruptcy court granted the insurers’ request to lift the automatic stay to allow payment of certain Defense Expenses.  The bankruptcy court has not yet issued a ruling on the insurers’ request to lift the automatic stay to allow the assertion of counterclaims.